Creston PLC CRE LN
March 10, 2014 - 4:42pm EST by
rab
2014 2015
Price: 1.05 EPS $0.13 $0.14
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 $M): -2 EBIT 11 12
TEV ($): 60 TEV/EBIT 5.8x 5.3x

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  • Discount to Peers
  • Competitive Advantage
  • Potential Takeover Target
 

Description

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.

  • FCF/sales has averaged 12%-15% and company has generated £87mm of FCF, or 150% of current Enterprise Value, in past 10 years.
  • Takeout candidate.  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.
  • Dividend yield >3.5% and has increased each year since 2008 despite delivering and no net debt.
  • Management Change.  Long-time CFO / COO becomes the new CEO in March 2014.  CEO is older and was expected to step down.
 
Creston PLC (CRE LN) is a thinly traded UK microcap that operates a much smaller version of ad agency rollups a la Omnicom, Interpublic, Publicis, among others. 

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. 

 
Background on Creston PLC
Creston was formed in 2001 by CEO Don Elgie and CFO/COO Barrie Brien and trades on the London Stock Exchange.  Management owns 4%.  All employees and directors own 15%. With 817 employees, Creston is a holding company that owns ~22 small advertising, public relations, and marketing service agencies, mostly in the UK.  The company was built via acquisition from 2001-2006.  Acquisitions were financed via debt, equity and earn-outs.  Post 2006, Creston began to slow down its acquisition pace, conducting only 3 small acquisitions from 2010-2012 and one sizable divestiture. 
 
Creston operates three business segments as shown below:
 
1) Communications: 50% of earnings.  11 agencies focused largely on traditional media
2) Health: 33% of earnings.  Focused on healthcare companies.  Half of revenues come from the U.S.
3) Insight: 17% of earnings.  Consists of 2 agencies, largely market research-oriented
 
Revenues are 2/3rds UK, 15% U.S. and 15% rest of world.  Approximately 50% of Creston's revenue comes from top 20 clients.  Importantly, the company's average client tenure is 10 years, indicating a fairly sticky customer base. 
 
Also important is Creston's significant progress in the digital channel.  Advertising is increasingly moving to non-traditional mediums and companies (clients) are willing to pay for expertise around all things digital.  Creston derives over 50% of its sales from digital initiatives and appears to be somewhat of an early mover in this area. 

 

Ad Agency Overview

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.

 

Key Risks

  • Macro -- Highly tied to UK ad spend and business sentiment.    
  • Customer risk.  Despite lengthy client relationships, there is always the risk that a client leaves (e.g., Sanofi).
  • Competition
  • Poor capital allocation.  Creston used to be highly acquisitive.   

 

 

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Acquisition by Havas (which already owns 6% of Creston PLC shares).
Stabilization of margins and revenues post the loss of Sanofi.
Resumption of growth of UK-based advertisting market.
Continued penetration of digital channel.
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    Description

    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.

    • FCF/sales has averaged 12%-15% and company has generated £87mm of FCF, or 150% of current Enterprise Value, in past 10 years.
    • Takeout candidate.  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.
    • Dividend yield >3.5% and has increased each year since 2008 despite delivering and no net debt.
    • Management Change.  Long-time CFO / COO becomes the new CEO in March 2014.  CEO is older and was expected to step down.
     
    Creston PLC (CRE LN) is a thinly traded UK microcap that operates a much smaller version of ad agency rollups a la Omnicom, Interpublic, Publicis, among others. 

    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. 

     
    Background on Creston PLC
    Creston was formed in 2001 by CEO Don Elgie and CFO/COO Barrie Brien and trades on the London Stock Exchange.  Management owns 4%.  All employees and directors own 15%. With 817 employees, Creston is a holding company that owns ~22 small advertising, public relations, and marketing service agencies, mostly in the UK.  The company was built via acquisition from 2001-2006.  Acquisitions were financed via debt, equity and earn-outs.  Post 2006, Creston began to slow down its acquisition pace, conducting only 3 small acquisitions from 2010-2012 and one sizable divestiture. 
     
    Creston operates three business segments as shown below:
     
    1) Communications: 50% of earnings.  11 agencies focused largely on traditional media
    2) Health: 33% of earnings.  Focused on healthcare companies.  Half of revenues come from the U.S.
    3) Insight: 17% of earnings.  Consists of 2 agencies, largely market research-oriented
     
    Revenues are 2/3rds UK, 15% U.S. and 15% rest of world.  Approximately 50% of Creston's revenue comes from top 20 clients.  Importantly, the company's average client tenure is 10 years, indicating a fairly sticky customer base. 
     
    Also important is Creston's significant progress in the digital channel.  Advertising is increasingly moving to non-traditional mediums and companies (clients) are willing to pay for expertise around all things digital.  Creston derives over 50% of its sales from digital initiatives and appears to be somewhat of an early mover in this area. 

     

    Ad Agency Overview

    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.

     

    Key Risks

     

     

    I hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Acquisition by Havas (which already owns 6% of Creston PLC shares).
    Stabilization of margins and revenues post the loss of Sanofi.
    Resumption of growth of UK-based advertisting market.
    Continued penetration of digital channel.

    Messages


    SubjectOrganic results turning up and stock remains 10x EPS
    Entry06/10/2015 01:55 PM
    Memberrab

    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. 

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