Next Fifteen Communications Transition To Digital Continues Apace

Next Fifteen’s (NFC.L) FY12 results show good progress with a 14% rise in normalised pre-tax profit helped by an increase in operating margin to 11.0% from 10.3%. Normalised EPS rose 15.2% to 10.07p from 8.74p. Group revenues rose 6.4%, reflecting the acquisitions made in FY11 and FY12 and 1% organic growth. While technology PR (66% of revenues) remains the largest part of the group, the increasing focus on the move to digital marketing communications and a strong performance from the FY11 addition of Blueshirt are reaping reward. We are raising our FY13 EPS estimate by 0.8p to 10.6p, and initiating an 11.3p FY14 EPS estimate.

Good FY12 results: EPS up 15.2%
The good normalised FY12 results benefitted from increased operating margins in the majority of the group’s sectors (up: tech, corporate communications, digital; down: consumer) and geographic segments (up: North America, UK, Asia Pacific; down: Europe). The adjustments from reported to normalised pre-tax profit are dominated by the impact of a $2.8m (£1.8m) fraud in Bite’s San Francisco office discovered during the FY12 audit – in light of this, the group has decided to strengthen its internal financial controls. While this is a significant sum, management says “this regrettable event will not impact operational performance or the ability to make planned investments”.

Transition to digital continues apace
Next Fifteen is placing significant emphasis on the transition to digital with CEO Tim Dyson’s FY12 business review almost entirely focusing on this. Last year, he described this transition in the marketing services industry as “the biggest, most exciting industry transition we have ever seen”. Now, one year later, he says “the pace and energy surrounding this transition has not decreased”. We recommend reading his thoughts on this transition.

Valuation: Fair rating in current environment
Our projected 6% pa EPS growth rate over the next two years recognises continuing low global economic growth prospects, although these estimates do not include any future acquisitions that the group has the resources to complete. A prospective 9.6x P/E would seem to be a fairly undemanding rating for a leading player in transition to the fast growing digital communications market at a time of low global economic growth.

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