|Shares Out. (in M):||60||P/E||8.2x||7.5x|
|Market Cap (in $M):||62||P/FCF||11.8x||6.9x|
|Net Debt (in $M):||-2||EBIT||11||12|
Why is Creston PLC interesting?
Lowest valuation among 14 public peers. Selling for 8x forward EPS and 7x FCF despite no debt. NOTE ALL DOLLAR AMOUNTS SHOULD BE IN UK DOLLARS.
Track record of significant free cash flow generation over past decade and stable competitive position. Solid balance sheet.
Like most conglomerate ad agencies, Creston operates a low capex business model, with mostly variable costs in the form of labor, leases and other G&A. Operating margins tend to run in the 13% to 18% range. Creston's margins have eroded since 2008 and were hurt more recently by the 1H/13 loss of Sanofi, a large long-time client. Margins appear to be stable now and management is rightsizing the business by combining some real estate sites. Creston currently sells for 8x EPS with a debt free balance sheet. Peers sells for 12-16x EPS. Creston has landed in the temporary penalty box due to soft performance stemming from a large client loss, poor margin performance since 2008, and five years of sluggish UK ad spend. We believe all three of these headwinds/factors are set to abate in the next year and interestingly, Havas, a much larger publicly traded peer (€2.4bn market cap) bought 6% of Creston PLC in the open market in mid-2012. Management would not respond when asked why. Havas has a long history of buying smaller ad agencies. Havas sells for valuation metrics 2x higher than Creston and Creston has corporate expenses = 25% of profits such that one would think an acquisition would be highly accretive. Creston also pays a 3.8% dividend yield which is well covered and has increased each year since 2008.
Ad agencies perform numerous roles for clients, including ad buying, brand planning, media relations, promotional marketing, PR, digital marketing. Creston's website lists about 20 different activities under each of its business units. At the end of the day, ad agencies are generally paid under contracts which call for hourly rates -- these rates usually work out to a mid-teens margin level. For more information on the advertising environment in general, look up Interpublic in VIC and read the well documented background on the industry.
The UK ad market is the 5thlargest (U.S. is largest). Industry estimates call for global ad spend of $500bn, +4% YOY, led by Asia. Companies use these ad agencies to help them plan marketing strategy, come up with ads, measure results and work with their internal teams. e industry is dominated by large publicly traded agencies (WPP, Omnicom, Publicis, Interpublic). Advertisers are increasingly looking to their ad agencies to help them “find the customer” which means looking at mobile, social networking, etc.
|Subject||Organic results turning up and stock remains 10x EPS|
|Entry||06/10/2015 01:55 PM|
Creston reported full year results yesterday and comps have finally turned solidly positive (+3% YOY ex-currency, 2% incl currency). CRE LN is selling for 10x run rate EPS despite having a debt free balance sheet and margin leverage as sales growth continues.