Outlook Unlimited
Creston Plc (LONDON:CRCRE) has delivered full year results slightly ahead of expectations, and with year-end cash of £7.5m (£5.7m after provisions for deferred consideration). Net new business of £8.6m was biased to H114, starting to deliver returns in H214, with online and digital revenues comprising over half group totals, a year ahead of schedule. The new board line up is now mainly in place, and a growth strategy is evolving, building on the progress already achieved in bringing together agencies and breaking down silos. Coupled with a growing top line, this should enable profits to break out of their current plateau. This highlights the wide discount to the sector on which the shares currently trade.
Agency group’ from ‘group of agencies’
In its earlier stages, the group was assembled through buy-and-build, with limited obvious benefit from operating and financial synergies. More recently, Creston’s agencies have been moved into a smaller number of locations, where they operate in a more integrated manner, cross-referring business and joint pitching, reporting in the three divisions of Communications, Health and Insight. This process is now taking a further step, with individual agencies adopting a common addition of ’Unlimited’ to their names, within a less rigid divisional structure (although reporting for now continues in its existing segmentation). This should help group cohesion without losing the individual flair and market positioning of the separate agencies, while allowing clients access to the broad range of expertise that they need across all platforms, driving the top-line growth. The proportion of revenue generated from clients shared across agencies and divisions has already reached 36%.
Moving off the earnings plateau
A combination of organic growth with infill acquisitions, leveraging the existing core digital competencies and cross-selling should enable the top line to move ahead. Boosted by the proposed share-buyback programme, this should now translate into a more straightforward earnings progression. The group has a strong balance sheet with net cash, which should increase further by the end of the financial year.
Valuation: Deep discount persists
The share price remains at a substantial discount to the sector of 34% on calendar 2014 P/E and 36% on EV/EBITDA, primarily a reflection of the group’s history and current earnings plateau. The clarified strategy for moving profits and earnings ahead is now in place. Delivery on market expectations as well as a continuing strong net new business win position will help close this valuation gap.
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