Creston plc CRE
September 17, 2014 - 4:10am EST by
andreas947
2014 2015
Price: 1.15 EPS $0.00 $0.00
Shares Out. (in M): 61 P/E 0.0x 0.0x
Market Cap (in M): 70 P/FCF 9.0x 7.0x
Net Debt (in M): -7 EBIT 6 6
TEV: 63 TEV/EBIT 0.0x 0.0x

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  • United Kingdom
  • Advertising
  • Potential Cost Reductions
  • Potential Future Acquisitions
  • Large Net Cash Position
  • FCF yield
  • Capital-light
  • Potential Acquisition Target
  • Operating Leverage
  • Potential Buybacks
 

Description

Creston plc (CRE.L)  

 

Summary

 

Our fund generally focuses on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields.  We are often seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.

 

We think Creston plc (ticker is CRE.L in GBP) is an attractive advertising agency and market research business based in London with a stable, cash-generative business model and an unleveraged FCF yield of about 14%.  CRE.L also has a “Ft. Knox” balance sheet with a net cash position of about 7m GBP at 3/31/14. CRE.L is a diverse group of advertising agencies and market research firms built through several acquisitions over the past ten years.  CRE.L has a strong focus on digital advertising, which represents over 50% of total revenues and has consistently increased its share over the past several years.  CRE.L operates in three divisions: Communications (about 50% of operating profits), Insight (20%), and Health (30%).  About 70% of revenues are generated in the U.K., where CRE.L is one of the top five digital advertising agencies, with 15% generated in the U.S and 15% in rest of world.

CRE.L has a very strong focus on FCF and a highly cash-generative business model.  In the past five years, CRE.L has close to a 100% conversion ratio of adjusted EBITDA into cash from operations.  Capital expenditures are modest (below 2m GBP per year).  CRE.L has consistently generated strong FCF over the past six years, despite the difficult U.K. economy.  From fiscal 2009 to 2014, cumulative cash from operations was about 65m GBP, or close to 100% of today’s EV (includes some operations disposed in fiscal 2010).  Even in the global recession of 2008-9, cash generation was solid, which speaks to the strong business model and “stickiness” of customer relationships.

 

CRE.L has an asset-light business model. CRE.L has limited fixed assets and its net working capital investment is small, as receivables are largely offset by accounts payable and inventories are almost zero.  Consequently, CRE.L has a business model with ROIC over 100%.  CRE.L’s primary asset is its employees and the Company had  about 810 employees at fiscal year-end 2014.

 

We believe that as the U.K economy continues to rebound from the recession, CRE.L’s advertising and marker research business should benefit.  We believe that during fiscal 2015 (ended 3/31) and fiscal 2016, cumulative FCF could result in a net cash position of 22m+ GBP at fiscal year-end 2016.  We also believe CRE.L could increase adjusted EBITDA to 15m GBP for fiscal 2016 and trade for 8x adjusted EBITDA or 120m GBP plus net cash of 22m+ GBP at fiscal year-end 2016 or a market value of about 142m GBP or 2.30 GBP per share, 100% higher than today’s price.

 

CRE.L provides marketing insights and communications services primarily in the United Kingdom, Europe, and internationally, with a strong overall focus on digital advertising.  The Insight division offers various services, including brand tracking and development, business and competitor analysis, category definition and segmentation, category management system, churn and retention, among many other services.  The Communications division provides a range of services, such as advertising, brand and communications planning, crisis and issues management, customer publishing, data planning and management, eCRM, online advertising, portal development, website design and build, industry analyst relations, media planning, and various other services.  The Health division provides integrated communications solutions to the healthcare and pharmaceutical sector, including advertising and branding, corporate reputation and crisis management, direct and customer relationship marketing, executive support, campaigns, graphic design, health advocacy, internal communications and sales, market research and consultancy, and various other services.

 

Management Strategy

 

CRE.L is a diverse group of ad agencies and market research firms built up over many years.  In recent years, CRE.L has sought to diversify revenues into new segments, with acquisitions in the Health segment, and geographically, with expansion into the U.S. market.  Importantly, there has been a major focus on digital advertising industry, which is one of the fastest growing segments of the overall advertising industry.  CRE.L’s total revenues from digital advertising have consistently increased as a percentage of total revenues over the past several years and represented over 50% of total revenues in fiscal 2014.  We believe management has positioned the Company well to benefit from the continued growth of digital advertising over time and its customers’ desire to follow and connect with end user customers as they spend more time in the digital area.  We believe this strategic position in the digital advertising industry could also eventually make CRE.L attractive to strategic acquirers, including some of the large, global ad agencies which dominate the industry.

 

Management has been aggressive about right-sizing its cost structure to match revenues over time.  Agencies that are under-performing have been sold or restructured to maintain strong profitability and cash generation, even when top line has struggled.  CRE.L has consistently maintained high operating margins (near mid-teens levels) similar to the large global ad agencies highlighted in Comparables table below.  CRE.L has aggressively and successfully sought new business through pitching activities when it has needed to replace lost business, such as the loss of Sanofi in fiscal 2013, where a large portion of the lost business has already been replaced.  We believe management strategies to grow revenues over the next few years, combined with disciplined cost and margin management, and selected strategic niche acquisitions, can drive significant shareholder value over the next few years.

 

Further, CRE.L’s acquisitions have all had a large deferred compensation component, where a large portion of purchase price is based on future performance.  This conservative approach protects downside, as shown by the Cooley Waters acquisition, where the final price was dramatically reduced due to the loss of the Sanofi business.

 

Customer Base

 

CRE.L’s client base is diversified among mostly long-term, high-quality clients.  In fiscal 2014, the Company’s top 20 clients were about 57% of total revenue and the top 50 clients represented about 76% of total revenue.  The average revenue of the top 20 clients in fiscal 2014 was 2.1m GBP.  The average tenure of the top 20 clients in fiscal 2014 was about 11 years.  The Company has sought to strategically increase share of wallet with clients through cross-marketing its agencies.  Management believes this increases the “stickiness” of its revenues with the client.  Of the top 50 clients in fiscal 2014, 18 clients were served by at least two agencies and 6 were served by 3 or more agencies.  In fiscal 2014, the Company’s top 20 clients by size of account (and start of relationship) were as follows: Danone Baby (1999); Unilever (1990); Gilead (2003); Infiniti (2007); Diageo (2002); Sainsbury’s (2007); Tesco (1992); Reckitt Benckiser (2012); Canon (2001); CDC (1999); Nissan GB (1996); Toyota (2009); Jaguar (2008); Lexus (2006); GSK (2005); Amgen GSK (2011); Aviva (1996); Astellas (2007); HTC (2006); and Sony Mobile (2011).

 

CRE.L lost a major account early in fiscal 2013 (Sanofi Pasteur) which impacted results for that year.  This will continue to be an ongoing investment risk, but the Company was able to replace these lost revenues with new client wins fairly quickly, and this may be a mitigating factor.  Overall, the steadiness of the Company’s revenue base through a very difficult economic climate, from 2008 to 2013, has been pretty impressive, in our view.

 

Acquisitions and Disposals

 

CRE.L has several brands across many specialties.  Management has bought and sold several advertising and market research brands over time, although much less in recent years.  In July 2010, CRE.L sold advertising agency DLKW Group for cash of 28m GBP which deleveraged the Company and enabled it to focus on higher growth areas.  In October 2010, CRE.L acquired Cooney/Waters to expand its healthcare segment and international presence for 6m GBP in cash and 13m of deferred comp (most of which was not paid due to under-performance).  In November 2011, CRE.L acquired The Corkery Group, a New York based health and medical public relations company for 3.2m GBP in cash and 3.3m GBP in deferred comp.   In November 2012, CRE.L acquired 75% of DJM Digital Solutions Ltd, a U.K. based digital healthcare agency, for 1.2m GBP in cash and 1.4m GBP in deferred comp.

 

Communications Division

 

Communications division is about 50% of earnings and includes 11 agencies focused primarily on traditional media.  The Communications division offers clients an integrated approach to their marketing and communication strategy, offering a range of services, which include advertising, brand strategy, channel marketing, customer relationship management (CRM), digital marketing, direct marketing, local marketing, social media marketing, and public relations.  The Communications division includes several operating companies, including Colombus Communications (Direct Marketing), Creston Communications (Marketing Communications), Emery McLaven Orr Ltd (Marketing Commuications), Nelson Bostock Group (Public Relations), Real Adventure Marketing (Marketing Communications), and Tullo Warren Ltd (Direct Marketing).

 

Health Division

 

Health division is about 30% of earnings with a focus on healthcare companies.  Approximately 50% of this segment’s revenues come from the U.S. market.  The health division provides an integrated communications solution to the healthcare and pharmaceutical sector and offers services which include advertising, advocacy, digital and direct marketing, public relations, issues and reputation management and medical education.  The Health division includes several operating companies such as Almebic Health (P.R.), Cooney/Waters (P.R.), DJM Digital Solutions (Digital-Health), PAN Advertising Ltd (Advertising Health),  Red Door Communications (P.R. Health), ROCK Medical (Medical Education), and The Corkery Group (P.R. Health).

 

Insight Division

 

Insight segment is about 20% of earnings.  This segment includes two agencies and is primarily market-research oriented.  The Insight division performs a complete range of market research services on behalf of its clients, through both qualitative and quantitative means, using face to face, telephone, and online data collection techniques.  The Insight division includes several operating companies, including FieldworkUK.com Ltd (Market Research), ICM Direct Ltd (Market Research), ICM Research Ltd (Market Research), and Marketing Sciences (Market Research).

 

Operating costs

 

Below are the major components of the Company cost structure.  Employee benefits are by far the largest component of operating costs, which has enabled management to adjust its cost structure to match revenues.

 

 

 

 

2008

2009

 2010

2011

2012

2013

2014

Employee benefits

51.6

55.5

43.2

46.5

48.4

46.7

50.0

D&A expense

2.2

2.4

1.3

1.6

1.5

1.9

1.9

Acquisition related costs/ Goodwill write off (2010)

0

0

3.8

1.0

0.6

0.2

 ---

Other expenses

14.0

13.7

7.0

10.1

13.3

15.4    

15.6

Total

67.8

71.5

55.3

59.0

63.8

64.2

67.5

 

 

Attractive Valuation For A Strong Franchise

 

CRE.L is trading at about 1.15 GBP per share and has about 61m shares outstanding for a market value of about 70m GBP.  Net cash is about 7m GBP for an EV of about 63m GBP.  We believe this EV is attractive considering CRE.L’s LTM revenues of 75m GBP, adjusted EBITDA of 12m, and FCF of about 7m.  (We note that CRE.L’s FCF was burdened by a normalization of working capital of about 3m GBP in FY14 and, adjusting for this, FCF is closer to 9m+, which we expect in FY15.)  CRE.L is trading at about 0.8x revenues, 5.3x adjusted EBITDA, and a 14% unleveraged FCF yield.  We expect solid generation of adjusted EBITDA, cash from operations, and FCF in fiscal 2015 and fiscal 2016.  As CRE.L’s net cash position builds, the high quality and cash-generative features of its business should become increasingly clear to shareholders.

 

From fiscal 2009 to fiscal 2014, CRE.L generated cumulative cash from operations of about 65m GBP or about 100% of the current EV, including some contribution from disc ops.  This was achieved over a very difficult economic period, especially considering almost 70% of total revenues are generated in the U.K.  We believe CRE.L can generate free cash flow of 8m-10m+ GBP per year in fiscal 2015 and fiscal 2016.

 

We believe cumulative FCF could result in a net cash position of 22m+ by fiscal year-end 2016 (ended 3/31).  We believe CRE.L could increase adjusted EBITDA to 15m GBP for fiscal 2016 and trade for 8x adjusted EBITDA or 120m GBP plus net cash of 22m+ GBP at fiscal year-end 2016, or a market value of about 142m GBP or 2.30 GBP per share, 100% above current prices.

 

Steadily Improving Balance Sheet

 

CRE.L’s net debt was 25m GBP at fiscal year-end 2010.  Since the recession in 2008-9, CRE.L has steadily reduced net debt and de-risked the balance sheet.  CRE.L sold traditional advertising agency DLKW Group for 28m GBP in July 2010 and has used free cash flow to pay down debt and pay dividends.  We believe its net cash position of about 7m GBP at fiscal year-end 2014 greatly reduces risk and gives management strong options to enhance shareholder value, including dividends and share repurchases.  We believe management is focused on maintaining a strong balance sheet and is primarily looking at smaller acquisitions with solid paybacks. 

 

We expect CRE.L’s net cash to build through fiscal 2016.  We also expect continued discipline in capital expenditures, working capital management, and acquisitions going forward.

 

Strong Cash Flow Generation and Solid Business Model

 

The Company’s advertising agency and market research business has generated significant free cash flow over the past six years, despite a tough economy.  This reflects CRE.L’s non-capital intensive business model.  Capital expenditures are modest and have averaged less than 2m GBP per year.  Similarly, working capital requirements are not large, as there are almost no inventories and accounts receivables have been pretty consistently balanced by accounts payable.  Capital requirements in terms of capital expenditures or working capital investments are small.  Net working capital was about 4m GBP and net PPE was about 6m GBP on CRE.L’s 3/31/14 balance sheet, for a combined investment in net tangible assets of about 10m GBP.  This compares to an average operating income of about 10m GBP per year over the past five years.  Calculating return on invested capital as operating income divided by the sum of net working capital plus net PPE, results in $10m/$10m or 100%,  a very high return business model.  CRE.L generates substantial operating income with modest capital requirements.  This is exactly the type of high ROIC, cash-generative business model we like to invest in.  We believe the competitive position of CRE.L is based on well-established advertising brands and long-term relationships with major customers.  The asset-light business model of CRE.L means the company has an excellent chance to continue generating strong FCF over the next several years.  

 

High Operating Margin Business Model

 

CRE.L’s operating margins have consistently averaged mid-teens levels over the past six years, consistent with the high operating margins of the major global ad agencies (see Comparables chart below).  These high margins reflect the attractive pricing and margin structure of the advertising industry where revenues are earned based on end customer billings which are structured to allow attractive margins to be achieved on a fairly consistent basis.

 

Potential Beneficiary of U.K. Economic Rebound

 

The U.K., which represented close to 70% of total revenues in fiscal 2014, has been mired in several years of recession since 2008-9 and is only beginning to emerge from these doldrums.  It appears that the U.K. government’s austerity program may begin to start paying dividends, as the U.K. has shown among the strongest growth rates in GDP among European countries.  The U.K. is the fifth largest advertising market in the world and we believe CRE.L has a strong position in the U.K. market (one of the top five U.K. digital advertising agencies).  We would expect CRE.L’s advertising agency business to benefit meaningfully from any sustained economic rebound by the U.K.  Total U.K. ad spend was expected to reach 14b GBP in 2013, with about 50% from digital advertising.

 

Well-Positioned in Fast-Growing Digital Advertising Market

 

Management has focused on digital and online advertising revenues over the past several years, recognizing that digital advertising is one of the fastest growing segments of the advertising industry.  CRE.L has built a reputation as a specialist in these fast growing areas.  In fiscal 2014, digital and online advertising revenues represented over 50% of total revenues and this share is expected to continue to climb.  We believe that CRE.L is well-positioned to benefit from the continued growth in digital advertising and that the Company’s clients will increasingly want to pursue customers where they are consuming media, including both online and mobile advertising.  As discussed, digital represented almost 50% of the 14b U.K. advertising market in 2013 and is one of the fastest growing segments of the market.  U.K. digital advertising was about 2.7b GBP in 2007 compared to almost 7b GBP in 2013.

 

Overall, we expect a continued shift of advertising and marketing dollars toward more targeted digital ad dollars and away from mass marketing spending.

 

We believe digital advertising enables agencies like CRE.L to add more value to customers compared to traditional media advertising.  We also think digital advertising makes international growth easier for agencies like CRE.L.  The Company should benefit from these two positive factors over time.

 

Industry Consolidation Prospects

 

The major advertising agencies are large and well-capitalized (see Comparables below) and highly acquisitive in terms of adding smaller ad agencies to increase their client and service portfolios.  We believe one or more of these agencies could be attracted to CRE.L as a result of its diverse and high-quality customer base, its geographic position in the U.K. and Europe, and its well-established niche in the rapidly growing digital advertising market.  It is noteworthy that Havas (HAV.PF) took a 6% stake in CRE.L in mid-2013, which could be a prelude to an acquisition proposal.

 

Fiscal 2014 Results Provide Solid Momentum for Fiscal 2015

 

The Company’s fiscal 2014 results were solid.  Fiscal revenue was 75m GBP, about flat with prior year, and net cash (excluding deferred compensation) was 7.5m GBP at 3/31/14 versus 2m GBP at 9/30/13.  The company noted they were pleased with the second half performance in which they achieved growth over both the first half of fiscal 2014 and the same period prior year.  The Company noted that following a busy period of pitching business in the first half of fiscal 2014, new business wins had a positive impact on the second half, as expected.

 

We believe the positive momentum in second half of fiscal 2014 is likely to carry over into the first half of fiscal 2015 and, hopefully, beyond.   We believe this positive momentum, driven by new business wins and reduced expenses from consolidated offices, could continue over the next few fiscal years.

 

Management has recently consolidated offices of various ad agencies to reduce expenses and also to drive more interaction between the agencies.  Management believes there is strong potential for cross-selling different products to its major clients and thereby strengthening the client relationship and increasing share of wallet.

 

Solid Earnings Growth Strategy Over Next Few Years

 

We think CRE.L has a solid earnings growth strategy over the next couple of years with multiple potential earnings drivers.  These include: 1) organic revenue growth from existing companies supported by improving market, high levels of new business activity, and investments in service offerings; 2) organic revenue growth from cross selling and integrated group pitches under Creston Unlimited brand; 3) selected acquisitions and start-ups to complement existing client offerings; and 4) a share repurchase program in FY15 to take advantage of net cash position and current share valuation.

 

Excellent Potential for Share Repurchase or Dividends

 

CRE.L has not repurchased significant shares to date.  However, as CRE.L’s balance sheet continues to build its net cash position, we believe a major share repurchase program will be more seriously considered.  Management has announced a 2m GBP share repurchase program for FY15.  CRE.L’s strong cash generation and unleveraged balance sheet give management several levers to drive shareholder value if the stock price remains depressed.

 

Pension Costs

 

CRE.L retirement benefits to employees are provided by defined contribution programs that are funded by CRE.L and employees.  Payments are made to pension trusts that are financially separate from CRE.L.  These costs are charged against profits as incurred.

 

Conclusion and Target Price

 

Based on 8x our adjusted EBITDA estimate of 15m GBP for fiscal 2016 (ended 3/31) and a projected 22m+ GBP net cash position at fiscal year-end 2016, we believe CRE.L could trade for a market value of close to 142m GBP or about 2.30 GBP per share versus 1.15 GBP per share today (+100%).  If CRE.L’s advertising and market research business perform as we expect, we think our target prices or better can be achieved.  Further, CRE.L’s advertising-related businesses are well-established with attractive position in digital marketing and long-term relationships with well-established global clients, and these features could be attractive to a strategic acquirer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share Ownership

 

 

Shares

%

Artemis Investment

7,277

12.1%

Fidelity Worldwide

6,130

10.0%

Majedie Asset

6,015

10.0%

Havas SA

3,739

6.2%

Western Selection

3,000

4.9%

DBAY Advisors

3,839

6.5%

Hargreave Hale Ltd.

3,093

5.2%

Ruffer LLP

2,991

5.03%

Donald Elgie

2,116

3.5%

       

 

 

 

Avg   Daily Volume

Price per share

1.15

   

88,000

 

Shares outstanding

61

 

 

Market value

70

 

 

 

52 week range

0.8

1.16

 

             
 

Income statements (2)

             

FYE 3/31

2008

2009

2010

2011

2012

2013

2014

Turnover

137

138

94

101

110

107

107

Sales

81

84

61

68

75

75

75

Adjusted EBITDA (1)

14

17

12

12

12

12

12

Adjusted EBIT (1)

13

14

11

11

10

10

10

Net income

5

7

8

8

8

9

7

EPS – continuing ops (1)

8.64

12.10

13.46

12.39

12.34

14.66

11.79

Adjusted EBITDA % (1)

16.0%

16.7%

19.7%

17.6%

16.0%

16.0%

16.0%

 

 

 

 

 

 

 

 

Cash   flow statements (2)

   

 

FYE 3/31

2008

2009

2010

2011

2012

2013 (4)

2014 (4)

Net income

5

7

6

7

9

9

7

Dep. & amortization

1

2

2

1

1

2

2

Non cash adjust

 

3

4

1

(4)

(2)

1

Working capital chg. (4)

 

4

3

(1)

2

8

(9)

Cash fr operations

14

17

15

7

8

17

1

Capital expenditures

(2)

(1)

(1)

(1)

(2)

(3)

(2)

Dividends

(2)

(1)

0

(1)

(2)

(2)

(2)

Share repurchases

0

0

3

0

0

0

0

Acquisitions/Divestitures

(4)

(15)

(20)

17

(4)

(2)

0

Est. free cash flow

12

16

14

6

6

8

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheets (2)

 

 

FYE 3/31

2008

2009

2010

2011

2012

2013

2014

Cash (3)

4

3

3

2

2

11

7

Total assets

166

164

162

138

 141

150

140

Total debt

37

25

28

2

2

0

0

Shareholder equity

83

88

96

97

104

112

110

               

Net debt

33

22

25

0

0

(11)

(7)

 

 

Shares outstanding

             

Head Count

 

918

737

813

818

817

820

                       
 

 

 

Valuation & Valuation Ratios

 

Market value

70

EV / Adjusted EBITDA

5.3

Net debt (3)

(7)

Enterprise Value / Adjust EBIT

6.2

Preferred

0

Enterprise Value / Cash from Ops

 5.7

Enterprise value

63

Enterprise Value / Revenues

83%

 

 

Price per share

1.15

 

Shares outstanding

61

 

Market value

70

Avg Daily Volume

 

   

88,000

 

52 week range

0.88

1.15

 

 

 

 

                 

(1)     Excluding extraordinary items; represents Headline results.

(2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP.

(3)     Net cash position was $7.5m (excluding deferred compensation) at 3/31/14.

(4)     Working capital change in FY14 includes negative 3.7m due to net payments on operating lease, which is not recurring, and an additional negative 4m due to normalization of working capital levels, which we also believe is not recurring.  Working capital change in FY13 includes positive 6.5m GBP due to net proceeds on operating lease, which is not recurring.

 

 

Detailed Income Statements (1) (2)

 

FYE   3/31

2007

2008

2009

2010

2011

2012

2013

2004

Revenues

69.7

80.5

83.8

80.5

67.8

74.9

75.2

74.9

Operating profit

14.0

15.2

15.6

14.3

10.8

10.4

10.2

9.8

Operating margin

20.1%

18.9%

18.6%

17.8%

15.9%

13.9%

13.6%

11.8%

               

 

 

 

 

 

 

 

 

 

 

Diluted EPS

17.35

17.01

18.58

17.65

12.39

12.34

14.66

11.88

 

 

 

 

 

 

 

 

 

Headline EBITDA

15.9

17.5

18.0

16.0

 12.0

11.8

12.0

 11.8

Headline EBITDA %

22.8%

21.7%

21.5%

19..9%

18.0%

15.8%

16.0%

16.0%

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Excluding extraordinary items; represents Headline results.

(2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Detailed Interim Income Statements (1) (2) (3)

 

 

3/09

9/09

3/10

9/10

3/11

9/11

3/12

9/12

3/13

9/13

3/14

Revenues

42.5

29.5

31.8

32.0

35.8

36.5

38.4

37.2

38.0

35.7

39.2

Operating profit

8.6

5.1

5.8

4.4

6.5

4.9

5.5

4.4

5.8

3.6

6.2

Operating margin

20.2%

17.3%

18.2%

13.8%

18.2%

13.4%

14.3%

11.8%

15.3%

10.1%

15.0%

               

 

 

 

 

 

                           

 

(1)     Excluding extraordinary items; represents Headline results.

(2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP

(3)     Results are generally seasonally stronger in the second half (3/31) of the fiscal year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3/08

9/08

3/09

9/09

3/10

9/10

3/11

9/11

3/12

9/12

3/13

9/13

3/14

 

Cash and equivalents

   4

 0

3

0

3

0

2

 0

2

1

11

3

8

 

A/R

   35

36

31

29

32

23

29

29

 26

26

 25

26

29

 

Inventories

  2

3

2

3

2

2

1

2

1

1

1

1

1

 

Prepaids and other

     0

0

0

0

 0

0

 0

 0

 0

0

0

0

0

 

                     

 

 

 

 

Total current

   40

39

35

32

38

25

32

31

29

29

38

29

38

 

                     

 

 

 

 

PPE, net

      4

3

3

2

2

2

2

2

3

4

4

5

6

 

Goodwill, Other

       121

121

 124

121

121

 90

103

103

109

106

107

106

104

 

Total assets

166

165

164

156

162

117

138

137

142

139

149

140

148

 

                                                         

 

Accts Pay.

     29

30

30

29

36

20

28

21

28

24

29

24

30

 

Accrued expenses

 16

18

21

2

2

3

3

 3

1

1

2

0

0

 

CPLTD

 7

19

10

25

28

0

2

6

2

3

0

1

0

 

                     

 

 

 

 

Total current

 52

68

61

56

66

23

33

30

31

2.8

30

25

30

 

                     

 

 

 

 

Trade and other payables

17

0

0

0

0

0

0

0

0

3

5

3

3

 

LTD

    14

13

12

10

0

0

 3.0

0

0

0

0

0

0

 

Other liabilities

0

0

3

0

0

0

8

9

7

 

2

1

2

 

                     

 

 

 

 

Shareholder equity

83

84

88

91

96

95

97

98

103

110

112

110

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net   debt

17

32

19

35

25

0

0

6

2

2

(11)

(2)

(8)

 

                                                       

 

 

 

 

 

 

 

Segment Reporting (1) (2)

 

Revenues

 

 

2008

2009

 2010

2011

2012

2013

 2014

Insight

17.9

16.7

16.0

14.8

13.8

12.1

12.9

Communications

62.6

58.7

55.7

41.1

43.0

41.1

40.7

Health

-----

8.4

8.8

11.8

18.1

21.9

21.3

Total revenue

80.5

83.8

80.5

67.8

74.9

75.2    

74.9

Headline   Operating Profit (before items)

 

 

 

       

 

 

 

 

 

2008

2009

 2010

2011

2012

2013

 

2014

Insight

5.3

4.5

4.9

4.1

2.1

1.4

2.6

Communications

13.1

11.6

8.9

6.2

6.3

6.2

5.7

Health

-----

2.7

2.7

3.4

4.6

5.1

4.5

Head Office

(3.2)

(3.2)

(2.2)

(3.0)

(2.6)

(2.5)

(3.0)

Total operating earnings

15.2

15.6

14.3

10.8

10.4

10.2

9.8

                 

 

 

 

Geographical Reporting (1) (2)

 

Revenues

 

 

2008

2009

 2010

2011

2012

2013

 2014

U.K.

66.8

66.3

47.6

51.1

52.1

49.0

51.0

Rest of Europe

12.7

15.2

11.7

11.7

11.3

12.3

12.8

Rest of World (including U.S.)

1.1

2.3

2.0

5.0

11.5

14.0

11.2

Total revenue

80.5

83.8

61.3

67.8

74.9

75.2    

74.9

 

 

 

(1)     Excluding extraordinary items; represents Headline results.

(2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP

 

 

 

 

 

 

 

     

Creston plc (CRE.L)

Omnicom Group (OMC)

WPP Group plc (WPPGY)

Havas (HAV.PA)

Interpublic   Group (IPG)

 

 

     

London-based advertising agency and media company   providing services through three key segments, including Communications,   Health, and Insight.  70% of revenues   in U.K., 15% in U.S., and 15% rest of world.

Operates an advertising, marketing, and corporate   communications services company on worldwide basis.

Provides communication services worldwide through key   segments, including: Advertising-Media, Consumer Insight, Public Relations,   and Healthcare and Specialist.

Operates advertising and communications services company,   which offers brand strategy, advertising, communications, digital and sales   promotion services.  Based on France   with operations in Europe, North America, and Asia.

Provides advertising and marketing services worldwide   through two segments, Integrated Agency and Constituency Management.  Brands include McCann, Low, Deutsch.

   
     

 

 

   
     

 

 

   
     

 

 

   
     

 

 

   

Cash

7.5m

1.5b

2.0b

0.5b

0.9b

   

LTD

0.0m

4.0b

6.8b

0.8b

2.0b

   

 

 

 

   

Price

1.15

71

104

6.26

18.9

   

Shares

61m

251m

265m

410m

424m

   

Market Cap

70m

17.8b

28.1b

2.6b

8.0b

   

Enter. Value (EV)

63m

20.3b

31.8b

2.9b

9.4b

   

 

 

 

   

Rev - LTM

75m

14.9b

18.5b

1.8b

7.3b

   
             

 

 

 

   

Adj. EBITDA – LTM

12m

2.2b

3.0b

0.27b

0.87b

 

Adj. EBITDA – 2013

   

 

$

 

 

Adj. EBITDA margin

16%

 15%

17%

15%

12%

 

EV to Adj. EBITDA

5.3x

9.2x

10x

10x

11x

 

 

EV to LTM Revenues

0.8x

1.4x

1.7x

1.7.x

1.2x

 

LTM Capital Expenditures

2m

0.2b

 

 

0.17b

 

Cap Ex to Revenues

3%

 1.4%

 

 

2%

 

LTM Free Cash Flow

7m

1.6b

2b

 

0.4b

 

FCF to EV

14%

8%

6%

 

5%

 

                             

 

 

 

 

 

 

 

 

 

 

 

 

Catalysts

  1. Low valuation (14% unleveraged FCF yield; 5.3x LTM EBITDA; 0.84x LTM revs).
  2. Steady build-up of net cash position on balance sheet: 7m GBP net cash at fiscal year-end 3/31/14 could increase to 22m+ GBP at fiscal year-end 3/31/16.
  3. Continued high conversion ratio of adjusted EBITDA into cash from operations resulting in strong FCF.
  4. Projected fiscal 2016 EBITDA of 15m GBP due to growth in digital ad market growth, geographic footprint, and segments, combined with reduced expenses.
  5. Recognition of highly cash-generative business model with high ROIC trading at below market multiples.
  6. Continued benefits from strong position in high-growth digital advertising industry.
  7. Share repurchases and dividends from excess cash and FCF generation.
  8. Possible acquisition of CRE.L by a strategic or financial purchaser.
  9. Increased analyst coverage and recognition of CRE.L’s steady improvement.

Risks

 

  1. The U.K. and/or global economy declines, impacting CRE.L’s advertising business model.
  2. CRE.L has generated limited revenue growth in the past few years and will need to improve this performance to justify a higher multiple.
  3. Loss of major customers such as Sanofi in fiscal 2013.
  4. Highly competitive industry with several large global advertising players.
  5. New technologies weaken CRE.L’s business model.
  6. Misallocation of capital into a poor acquisition
  7. Management turnover (long-time CEO recently retired)

 

 

 

Disclaimer

 

Disclaimer:  We own shares of CRE.L.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but readers should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

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    Description

    Creston plc (CRE.L)  

     

    Summary

     

    Our fund generally focuses on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields.  We are often seeking a mid-teens FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.

     

    We think Creston plc (ticker is CRE.L in GBP) is an attractive advertising agency and market research business based in London with a stable, cash-generative business model and an unleveraged FCF yield of about 14%.  CRE.L also has a “Ft. Knox” balance sheet with a net cash position of about 7m GBP at 3/31/14. CRE.L is a diverse group of advertising agencies and market research firms built through several acquisitions over the past ten years.  CRE.L has a strong focus on digital advertising, which represents over 50% of total revenues and has consistently increased its share over the past several years.  CRE.L operates in three divisions: Communications (about 50% of operating profits), Insight (20%), and Health (30%).  About 70% of revenues are generated in the U.K., where CRE.L is one of the top five digital advertising agencies, with 15% generated in the U.S and 15% in rest of world.

    CRE.L has a very strong focus on FCF and a highly cash-generative business model.  In the past five years, CRE.L has close to a 100% conversion ratio of adjusted EBITDA into cash from operations.  Capital expenditures are modest (below 2m GBP per year).  CRE.L has consistently generated strong FCF over the past six years, despite the difficult U.K. economy.  From fiscal 2009 to 2014, cumulative cash from operations was about 65m GBP, or close to 100% of today’s EV (includes some operations disposed in fiscal 2010).  Even in the global recession of 2008-9, cash generation was solid, which speaks to the strong business model and “stickiness” of customer relationships.

     

    CRE.L has an asset-light business model. CRE.L has limited fixed assets and its net working capital investment is small, as receivables are largely offset by accounts payable and inventories are almost zero.  Consequently, CRE.L has a business model with ROIC over 100%.  CRE.L’s primary asset is its employees and the Company had  about 810 employees at fiscal year-end 2014.

     

    We believe that as the U.K economy continues to rebound from the recession, CRE.L’s advertising and marker research business should benefit.  We believe that during fiscal 2015 (ended 3/31) and fiscal 2016, cumulative FCF could result in a net cash position of 22m+ GBP at fiscal year-end 2016.  We also believe CRE.L could increase adjusted EBITDA to 15m GBP for fiscal 2016 and trade for 8x adjusted EBITDA or 120m GBP plus net cash of 22m+ GBP at fiscal year-end 2016 or a market value of about 142m GBP or 2.30 GBP per share, 100% higher than today’s price.

     

    CRE.L provides marketing insights and communications services primarily in the United Kingdom, Europe, and internationally, with a strong overall focus on digital advertising.  The Insight division offers various services, including brand tracking and development, business and competitor analysis, category definition and segmentation, category management system, churn and retention, among many other services.  The Communications division provides a range of services, such as advertising, brand and communications planning, crisis and issues management, customer publishing, data planning and management, eCRM, online advertising, portal development, website design and build, industry analyst relations, media planning, and various other services.  The Health division provides integrated communications solutions to the healthcare and pharmaceutical sector, including advertising and branding, corporate reputation and crisis management, direct and customer relationship marketing, executive support, campaigns, graphic design, health advocacy, internal communications and sales, market research and consultancy, and various other services.

     

    Management Strategy

     

    CRE.L is a diverse group of ad agencies and market research firms built up over many years.  In recent years, CRE.L has sought to diversify revenues into new segments, with acquisitions in the Health segment, and geographically, with expansion into the U.S. market.  Importantly, there has been a major focus on digital advertising industry, which is one of the fastest growing segments of the overall advertising industry.  CRE.L’s total revenues from digital advertising have consistently increased as a percentage of total revenues over the past several years and represented over 50% of total revenues in fiscal 2014.  We believe management has positioned the Company well to benefit from the continued growth of digital advertising over time and its customers’ desire to follow and connect with end user customers as they spend more time in the digital area.  We believe this strategic position in the digital advertising industry could also eventually make CRE.L attractive to strategic acquirers, including some of the large, global ad agencies which dominate the industry.

     

    Management has been aggressive about right-sizing its cost structure to match revenues over time.  Agencies that are under-performing have been sold or restructured to maintain strong profitability and cash generation, even when top line has struggled.  CRE.L has consistently maintained high operating margins (near mid-teens levels) similar to the large global ad agencies highlighted in Comparables table below.  CRE.L has aggressively and successfully sought new business through pitching activities when it has needed to replace lost business, such as the loss of Sanofi in fiscal 2013, where a large portion of the lost business has already been replaced.  We believe management strategies to grow revenues over the next few years, combined with disciplined cost and margin management, and selected strategic niche acquisitions, can drive significant shareholder value over the next few years.

     

    Further, CRE.L’s acquisitions have all had a large deferred compensation component, where a large portion of purchase price is based on future performance.  This conservative approach protects downside, as shown by the Cooley Waters acquisition, where the final price was dramatically reduced due to the loss of the Sanofi business.

     

    Customer Base

     

    CRE.L’s client base is diversified among mostly long-term, high-quality clients.  In fiscal 2014, the Company’s top 20 clients were about 57% of total revenue and the top 50 clients represented about 76% of total revenue.  The average revenue of the top 20 clients in fiscal 2014 was 2.1m GBP.  The average tenure of the top 20 clients in fiscal 2014 was about 11 years.  The Company has sought to strategically increase share of wallet with clients through cross-marketing its agencies.  Management believes this increases the “stickiness” of its revenues with the client.  Of the top 50 clients in fiscal 2014, 18 clients were served by at least two agencies and 6 were served by 3 or more agencies.  In fiscal 2014, the Company’s top 20 clients by size of account (and start of relationship) were as follows: Danone Baby (1999); Unilever (1990); Gilead (2003); Infiniti (2007); Diageo (2002); Sainsbury’s (2007); Tesco (1992); Reckitt Benckiser (2012); Canon (2001); CDC (1999); Nissan GB (1996); Toyota (2009); Jaguar (2008); Lexus (2006); GSK (2005); Amgen GSK (2011); Aviva (1996); Astellas (2007); HTC (2006); and Sony Mobile (2011).

     

    CRE.L lost a major account early in fiscal 2013 (Sanofi Pasteur) which impacted results for that year.  This will continue to be an ongoing investment risk, but the Company was able to replace these lost revenues with new client wins fairly quickly, and this may be a mitigating factor.  Overall, the steadiness of the Company’s revenue base through a very difficult economic climate, from 2008 to 2013, has been pretty impressive, in our view.

     

    Acquisitions and Disposals

     

    CRE.L has several brands across many specialties.  Management has bought and sold several advertising and market research brands over time, although much less in recent years.  In July 2010, CRE.L sold advertising agency DLKW Group for cash of 28m GBP which deleveraged the Company and enabled it to focus on higher growth areas.  In October 2010, CRE.L acquired Cooney/Waters to expand its healthcare segment and international presence for 6m GBP in cash and 13m of deferred comp (most of which was not paid due to under-performance).  In November 2011, CRE.L acquired The Corkery Group, a New York based health and medical public relations company for 3.2m GBP in cash and 3.3m GBP in deferred comp.   In November 2012, CRE.L acquired 75% of DJM Digital Solutions Ltd, a U.K. based digital healthcare agency, for 1.2m GBP in cash and 1.4m GBP in deferred comp.

     

    Communications Division

     

    Communications division is about 50% of earnings and includes 11 agencies focused primarily on traditional media.  The Communications division offers clients an integrated approach to their marketing and communication strategy, offering a range of services, which include advertising, brand strategy, channel marketing, customer relationship management (CRM), digital marketing, direct marketing, local marketing, social media marketing, and public relations.  The Communications division includes several operating companies, including Colombus Communications (Direct Marketing), Creston Communications (Marketing Communications), Emery McLaven Orr Ltd (Marketing Commuications), Nelson Bostock Group (Public Relations), Real Adventure Marketing (Marketing Communications), and Tullo Warren Ltd (Direct Marketing).

     

    Health Division

     

    Health division is about 30% of earnings with a focus on healthcare companies.  Approximately 50% of this segment’s revenues come from the U.S. market.  The health division provides an integrated communications solution to the healthcare and pharmaceutical sector and offers services which include advertising, advocacy, digital and direct marketing, public relations, issues and reputation management and medical education.  The Health division includes several operating companies such as Almebic Health (P.R.), Cooney/Waters (P.R.), DJM Digital Solutions (Digital-Health), PAN Advertising Ltd (Advertising Health),  Red Door Communications (P.R. Health), ROCK Medical (Medical Education), and The Corkery Group (P.R. Health).

     

    Insight Division

     

    Insight segment is about 20% of earnings.  This segment includes two agencies and is primarily market-research oriented.  The Insight division performs a complete range of market research services on behalf of its clients, through both qualitative and quantitative means, using face to face, telephone, and online data collection techniques.  The Insight division includes several operating companies, including FieldworkUK.com Ltd (Market Research), ICM Direct Ltd (Market Research), ICM Research Ltd (Market Research), and Marketing Sciences (Market Research).

     

    Operating costs

     

    Below are the major components of the Company cost structure.  Employee benefits are by far the largest component of operating costs, which has enabled management to adjust its cost structure to match revenues.

     

     

     

     

    2008

    2009

     2010

    2011

    2012

    2013

    2014

    Employee benefits

    51.6

    55.5

    43.2

    46.5

    48.4

    46.7

    50.0

    D&A expense

    2.2

    2.4

    1.3

    1.6

    1.5

    1.9

    1.9

    Acquisition related costs/ Goodwill write off (2010)

    0

    0

    3.8

    1.0

    0.6

    0.2

     ---

    Other expenses

    14.0

    13.7

    7.0

    10.1

    13.3

    15.4    

    15.6

    Total

    67.8

    71.5

    55.3

    59.0

    63.8

    64.2

    67.5

     

     

    Attractive Valuation For A Strong Franchise

     

    CRE.L is trading at about 1.15 GBP per share and has about 61m shares outstanding for a market value of about 70m GBP.  Net cash is about 7m GBP for an EV of about 63m GBP.  We believe this EV is attractive considering CRE.L’s LTM revenues of 75m GBP, adjusted EBITDA of 12m, and FCF of about 7m.  (We note that CRE.L’s FCF was burdened by a normalization of working capital of about 3m GBP in FY14 and, adjusting for this, FCF is closer to 9m+, which we expect in FY15.)  CRE.L is trading at about 0.8x revenues, 5.3x adjusted EBITDA, and a 14% unleveraged FCF yield.  We expect solid generation of adjusted EBITDA, cash from operations, and FCF in fiscal 2015 and fiscal 2016.  As CRE.L’s net cash position builds, the high quality and cash-generative features of its business should become increasingly clear to shareholders.

     

    From fiscal 2009 to fiscal 2014, CRE.L generated cumulative cash from operations of about 65m GBP or about 100% of the current EV, including some contribution from disc ops.  This was achieved over a very difficult economic period, especially considering almost 70% of total revenues are generated in the U.K.  We believe CRE.L can generate free cash flow of 8m-10m+ GBP per year in fiscal 2015 and fiscal 2016.

     

    We believe cumulative FCF could result in a net cash position of 22m+ by fiscal year-end 2016 (ended 3/31).  We believe CRE.L could increase adjusted EBITDA to 15m GBP for fiscal 2016 and trade for 8x adjusted EBITDA or 120m GBP plus net cash of 22m+ GBP at fiscal year-end 2016, or a market value of about 142m GBP or 2.30 GBP per share, 100% above current prices.

     

    Steadily Improving Balance Sheet

     

    CRE.L’s net debt was 25m GBP at fiscal year-end 2010.  Since the recession in 2008-9, CRE.L has steadily reduced net debt and de-risked the balance sheet.  CRE.L sold traditional advertising agency DLKW Group for 28m GBP in July 2010 and has used free cash flow to pay down debt and pay dividends.  We believe its net cash position of about 7m GBP at fiscal year-end 2014 greatly reduces risk and gives management strong options to enhance shareholder value, including dividends and share repurchases.  We believe management is focused on maintaining a strong balance sheet and is primarily looking at smaller acquisitions with solid paybacks. 

     

    We expect CRE.L’s net cash to build through fiscal 2016.  We also expect continued discipline in capital expenditures, working capital management, and acquisitions going forward.

     

    Strong Cash Flow Generation and Solid Business Model

     

    The Company’s advertising agency and market research business has generated significant free cash flow over the past six years, despite a tough economy.  This reflects CRE.L’s non-capital intensive business model.  Capital expenditures are modest and have averaged less than 2m GBP per year.  Similarly, working capital requirements are not large, as there are almost no inventories and accounts receivables have been pretty consistently balanced by accounts payable.  Capital requirements in terms of capital expenditures or working capital investments are small.  Net working capital was about 4m GBP and net PPE was about 6m GBP on CRE.L’s 3/31/14 balance sheet, for a combined investment in net tangible assets of about 10m GBP.  This compares to an average operating income of about 10m GBP per year over the past five years.  Calculating return on invested capital as operating income divided by the sum of net working capital plus net PPE, results in $10m/$10m or 100%,  a very high return business model.  CRE.L generates substantial operating income with modest capital requirements.  This is exactly the type of high ROIC, cash-generative business model we like to invest in.  We believe the competitive position of CRE.L is based on well-established advertising brands and long-term relationships with major customers.  The asset-light business model of CRE.L means the company has an excellent chance to continue generating strong FCF over the next several years.  

     

    High Operating Margin Business Model

     

    CRE.L’s operating margins have consistently averaged mid-teens levels over the past six years, consistent with the high operating margins of the major global ad agencies (see Comparables chart below).  These high margins reflect the attractive pricing and margin structure of the advertising industry where revenues are earned based on end customer billings which are structured to allow attractive margins to be achieved on a fairly consistent basis.

     

    Potential Beneficiary of U.K. Economic Rebound

     

    The U.K., which represented close to 70% of total revenues in fiscal 2014, has been mired in several years of recession since 2008-9 and is only beginning to emerge from these doldrums.  It appears that the U.K. government’s austerity program may begin to start paying dividends, as the U.K. has shown among the strongest growth rates in GDP among European countries.  The U.K. is the fifth largest advertising market in the world and we believe CRE.L has a strong position in the U.K. market (one of the top five U.K. digital advertising agencies).  We would expect CRE.L’s advertising agency business to benefit meaningfully from any sustained economic rebound by the U.K.  Total U.K. ad spend was expected to reach 14b GBP in 2013, with about 50% from digital advertising.

     

    Well-Positioned in Fast-Growing Digital Advertising Market

     

    Management has focused on digital and online advertising revenues over the past several years, recognizing that digital advertising is one of the fastest growing segments of the advertising industry.  CRE.L has built a reputation as a specialist in these fast growing areas.  In fiscal 2014, digital and online advertising revenues represented over 50% of total revenues and this share is expected to continue to climb.  We believe that CRE.L is well-positioned to benefit from the continued growth in digital advertising and that the Company’s clients will increasingly want to pursue customers where they are consuming media, including both online and mobile advertising.  As discussed, digital represented almost 50% of the 14b U.K. advertising market in 2013 and is one of the fastest growing segments of the market.  U.K. digital advertising was about 2.7b GBP in 2007 compared to almost 7b GBP in 2013.

     

    Overall, we expect a continued shift of advertising and marketing dollars toward more targeted digital ad dollars and away from mass marketing spending.

     

    We believe digital advertising enables agencies like CRE.L to add more value to customers compared to traditional media advertising.  We also think digital advertising makes international growth easier for agencies like CRE.L.  The Company should benefit from these two positive factors over time.

     

    Industry Consolidation Prospects

     

    The major advertising agencies are large and well-capitalized (see Comparables below) and highly acquisitive in terms of adding smaller ad agencies to increase their client and service portfolios.  We believe one or more of these agencies could be attracted to CRE.L as a result of its diverse and high-quality customer base, its geographic position in the U.K. and Europe, and its well-established niche in the rapidly growing digital advertising market.  It is noteworthy that Havas (HAV.PF) took a 6% stake in CRE.L in mid-2013, which could be a prelude to an acquisition proposal.

     

    Fiscal 2014 Results Provide Solid Momentum for Fiscal 2015

     

    The Company’s fiscal 2014 results were solid.  Fiscal revenue was 75m GBP, about flat with prior year, and net cash (excluding deferred compensation) was 7.5m GBP at 3/31/14 versus 2m GBP at 9/30/13.  The company noted they were pleased with the second half performance in which they achieved growth over both the first half of fiscal 2014 and the same period prior year.  The Company noted that following a busy period of pitching business in the first half of fiscal 2014, new business wins had a positive impact on the second half, as expected.

     

    We believe the positive momentum in second half of fiscal 2014 is likely to carry over into the first half of fiscal 2015 and, hopefully, beyond.   We believe this positive momentum, driven by new business wins and reduced expenses from consolidated offices, could continue over the next few fiscal years.

     

    Management has recently consolidated offices of various ad agencies to reduce expenses and also to drive more interaction between the agencies.  Management believes there is strong potential for cross-selling different products to its major clients and thereby strengthening the client relationship and increasing share of wallet.

     

    Solid Earnings Growth Strategy Over Next Few Years

     

    We think CRE.L has a solid earnings growth strategy over the next couple of years with multiple potential earnings drivers.  These include: 1) organic revenue growth from existing companies supported by improving market, high levels of new business activity, and investments in service offerings; 2) organic revenue growth from cross selling and integrated group pitches under Creston Unlimited brand; 3) selected acquisitions and start-ups to complement existing client offerings; and 4) a share repurchase program in FY15 to take advantage of net cash position and current share valuation.

     

    Excellent Potential for Share Repurchase or Dividends

     

    CRE.L has not repurchased significant shares to date.  However, as CRE.L’s balance sheet continues to build its net cash position, we believe a major share repurchase program will be more seriously considered.  Management has announced a 2m GBP share repurchase program for FY15.  CRE.L’s strong cash generation and unleveraged balance sheet give management several levers to drive shareholder value if the stock price remains depressed.

     

    Pension Costs

     

    CRE.L retirement benefits to employees are provided by defined contribution programs that are funded by CRE.L and employees.  Payments are made to pension trusts that are financially separate from CRE.L.  These costs are charged against profits as incurred.

     

    Conclusion and Target Price

     

    Based on 8x our adjusted EBITDA estimate of 15m GBP for fiscal 2016 (ended 3/31) and a projected 22m+ GBP net cash position at fiscal year-end 2016, we believe CRE.L could trade for a market value of close to 142m GBP or about 2.30 GBP per share versus 1.15 GBP per share today (+100%).  If CRE.L’s advertising and market research business perform as we expect, we think our target prices or better can be achieved.  Further, CRE.L’s advertising-related businesses are well-established with attractive position in digital marketing and long-term relationships with well-established global clients, and these features could be attractive to a strategic acquirer.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Share Ownership

     

     

    Shares

    %

    Artemis Investment

    7,277

    12.1%

    Fidelity Worldwide

    6,130

    10.0%

    Majedie Asset

    6,015

    10.0%

    Havas SA

    3,739

    6.2%

    Western Selection

    3,000

    4.9%

    DBAY Advisors

    3,839

    6.5%

    Hargreave Hale Ltd.

    3,093

    5.2%

    Ruffer LLP

    2,991

    5.03%

    Donald Elgie

    2,116

    3.5%

           

     

     

     

    Avg   Daily Volume

    Price per share

    1.15

       

    88,000

     

    Shares outstanding

    61

     

     

    Market value

    70

     

     

     

    52 week range

    0.8

    1.16

     

                 
     

    Income statements (2)

                 

    FYE 3/31

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    Turnover

    137

    138

    94

    101

    110

    107

    107

    Sales

    81

    84

    61

    68

    75

    75

    75

    Adjusted EBITDA (1)

    14

    17

    12

    12

    12

    12

    12

    Adjusted EBIT (1)

    13

    14

    11

    11

    10

    10

    10

    Net income

    5

    7

    8

    8

    8

    9

    7

    EPS – continuing ops (1)

    8.64

    12.10

    13.46

    12.39

    12.34

    14.66

    11.79

    Adjusted EBITDA % (1)

    16.0%

    16.7%

    19.7%

    17.6%

    16.0%

    16.0%

    16.0%

     

     

     

     

     

     

     

     

    Cash   flow statements (2)

       

     

    FYE 3/31

    2008

    2009

    2010

    2011

    2012

    2013 (4)

    2014 (4)

    Net income

    5

    7

    6

    7

    9

    9

    7

    Dep. & amortization

    1

    2

    2

    1

    1

    2

    2

    Non cash adjust

     

    3

    4

    1

    (4)

    (2)

    1

    Working capital chg. (4)

     

    4

    3

    (1)

    2

    8

    (9)

    Cash fr operations

    14

    17

    15

    7

    8

    17

    1

    Capital expenditures

    (2)

    (1)

    (1)

    (1)

    (2)

    (3)

    (2)

    Dividends

    (2)

    (1)

    0

    (1)

    (2)

    (2)

    (2)

    Share repurchases

    0

    0

    3

    0

    0

    0

    0

    Acquisitions/Divestitures

    (4)

    (15)

    (20)

    17

    (4)

    (2)

    0

    Est. free cash flow

    12

    16

    14

    6

    6

    8

    3

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Balance sheets (2)

     

     

    FYE 3/31

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    Cash (3)

    4

    3

    3

    2

    2

    11

    7

    Total assets

    166

    164

    162

    138

     141

    150

    140

    Total debt

    37

    25

    28

    2

    2

    0

    0

    Shareholder equity

    83

    88

    96

    97

    104

    112

    110

                   

    Net debt

    33

    22

    25

    0

    0

    (11)

    (7)

     

     

    Shares outstanding

                 

    Head Count

     

    918

    737

    813

    818

    817

    820

                           
     

     

     

    Valuation & Valuation Ratios

     

    Market value

    70

    EV / Adjusted EBITDA

    5.3

    Net debt (3)

    (7)

    Enterprise Value / Adjust EBIT

    6.2

    Preferred

    0

    Enterprise Value / Cash from Ops

     5.7

    Enterprise value

    63

    Enterprise Value / Revenues

    83%

     

     

    Price per share

    1.15

     

    Shares outstanding

    61

     

    Market value

    70

    Avg Daily Volume

     

       

    88,000

     

    52 week range

    0.88

    1.15

     

     

     

     

                     

    (1)     Excluding extraordinary items; represents Headline results.

    (2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP.

    (3)     Net cash position was $7.5m (excluding deferred compensation) at 3/31/14.

    (4)     Working capital change in FY14 includes negative 3.7m due to net payments on operating lease, which is not recurring, and an additional negative 4m due to normalization of working capital levels, which we also believe is not recurring.  Working capital change in FY13 includes positive 6.5m GBP due to net proceeds on operating lease, which is not recurring.

     

     

    Detailed Income Statements (1) (2)

     

    FYE   3/31

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2004

    Revenues

    69.7

    80.5

    83.8

    80.5

    67.8

    74.9

    75.2

    74.9

    Operating profit

    14.0

    15.2

    15.6

    14.3

    10.8

    10.4

    10.2

    9.8

    Operating margin

    20.1%

    18.9%

    18.6%

    17.8%

    15.9%

    13.9%

    13.6%

    11.8%

                   

     

     

     

     

     

     

     

     

     

     

    Diluted EPS

    17.35

    17.01

    18.58

    17.65

    12.39

    12.34

    14.66

    11.88

     

     

     

     

     

     

     

     

     

    Headline EBITDA

    15.9

    17.5

    18.0

    16.0

     12.0

    11.8

    12.0

     11.8

    Headline EBITDA %

    22.8%

    21.7%

    21.5%

    19..9%

    18.0%

    15.8%

    16.0%

    16.0%

     

     

     

     

     

     

     

     

     

     

     

     

    (1)     Excluding extraordinary items; represents Headline results.

    (2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Detailed Interim Income Statements (1) (2) (3)

     

     

    3/09

    9/09

    3/10

    9/10

    3/11

    9/11

    3/12

    9/12

    3/13

    9/13

    3/14

    Revenues

    42.5

    29.5

    31.8

    32.0

    35.8

    36.5

    38.4

    37.2

    38.0

    35.7

    39.2

    Operating profit

    8.6

    5.1

    5.8

    4.4

    6.5

    4.9

    5.5

    4.4

    5.8

    3.6

    6.2

    Operating margin

    20.2%

    17.3%

    18.2%

    13.8%

    18.2%

    13.4%

    14.3%

    11.8%

    15.3%

    10.1%

    15.0%

                   

     

     

     

     

     

                               

     

    (1)     Excluding extraordinary items; represents Headline results.

    (2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP

    (3)     Results are generally seasonally stronger in the second half (3/31) of the fiscal year.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    3/08

    9/08

    3/09

    9/09

    3/10

    9/10

    3/11

    9/11

    3/12

    9/12

    3/13

    9/13

    3/14

     

    Cash and equivalents

       4

     0

    3

    0

    3

    0

    2

     0

    2

    1

    11

    3

    8

     

    A/R

       35

    36

    31

    29

    32

    23

    29

    29

     26

    26

     25

    26

    29

     

    Inventories

      2

    3

    2

    3

    2

    2

    1

    2

    1

    1

    1

    1

    1

     

    Prepaids and other

         0

    0

    0

    0

     0

    0

     0

     0

     0

    0

    0

    0

    0

     

                         

     

     

     

     

    Total current

       40

    39

    35

    32

    38

    25

    32

    31

    29

    29

    38

    29

    38

     

                         

     

     

     

     

    PPE, net

          4

    3

    3

    2

    2

    2

    2

    2

    3

    4

    4

    5

    6

     

    Goodwill, Other

           121

    121

     124

    121

    121

     90

    103

    103

    109

    106

    107

    106

    104

     

    Total assets

    166

    165

    164

    156

    162

    117

    138

    137

    142

    139

    149

    140

    148

     

                                                             

     

    Accts Pay.

         29

    30

    30

    29

    36

    20

    28

    21

    28

    24

    29

    24

    30

     

    Accrued expenses

     16

    18

    21

    2

    2

    3

    3

     3

    1

    1

    2

    0

    0

     

    CPLTD

     7

    19

    10

    25

    28

    0

    2

    6

    2

    3

    0

    1

    0

     

                         

     

     

     

     

    Total current

     52

    68

    61

    56

    66

    23

    33

    30

    31

    2.8

    30

    25

    30

     

                         

     

     

     

     

    Trade and other payables

    17

    0

    0

    0

    0

    0

    0

    0

    0

    3

    5

    3

    3

     

    LTD

        14

    13

    12

    10

    0

    0

     3.0

    0

    0

    0

    0

    0

    0

     

    Other liabilities

    0

    0

    3

    0

    0

    0

    8

    9

    7

     

    2

    1

    2

     

                         

     

     

     

     

    Shareholder equity

    83

    84

    88

    91

    96

    95

    97

    98

    103

    110

    112

    110

    113

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Net   debt

    17

    32

    19

    35

    25

    0

    0

    6

    2

    2

    (11)

    (2)

    (8)

     

                                                           

     

     

     

     

     

     

     

    Segment Reporting (1) (2)

     

    Revenues

     

     

    2008

    2009

     2010

    2011

    2012

    2013

     2014

    Insight

    17.9

    16.7

    16.0

    14.8

    13.8

    12.1

    12.9

    Communications

    62.6

    58.7

    55.7

    41.1

    43.0

    41.1

    40.7

    Health

    -----

    8.4

    8.8

    11.8

    18.1

    21.9

    21.3

    Total revenue

    80.5

    83.8

    80.5

    67.8

    74.9

    75.2    

    74.9

    Headline   Operating Profit (before items)

     

     

     

           

     

     

     

     

     

    2008

    2009

     2010

    2011

    2012

    2013

     

    2014

    Insight

    5.3

    4.5

    4.9

    4.1

    2.1

    1.4

    2.6

    Communications

    13.1

    11.6

    8.9

    6.2

    6.3

    6.2

    5.7

    Health

    -----

    2.7

    2.7

    3.4

    4.6

    5.1

    4.5

    Head Office

    (3.2)

    (3.2)

    (2.2)

    (3.0)

    (2.6)

    (2.5)

    (3.0)

    Total operating earnings

    15.2

    15.6

    14.3

    10.8

    10.4

    10.2

    9.8

                     

     

     

     

    Geographical Reporting (1) (2)

     

    Revenues

     

     

    2008

    2009

     2010

    2011

    2012

    2013

     2014

    U.K.

    66.8

    66.3

    47.6

    51.1

    52.1

    49.0

    51.0

    Rest of Europe

    12.7

    15.2

    11.7

    11.7

    11.3

    12.3

    12.8

    Rest of World (including U.S.)

    1.1

    2.3

    2.0

    5.0

    11.5

    14.0

    11.2

    Total revenue

    80.5

    83.8

    61.3

    67.8

    74.9

    75.2    

    74.9

     

     

     

    (1)     Excluding extraordinary items; represents Headline results.

    (2)     Results include revenues and profits from DLKW Group until its sale in June 2010 for 28m GBP

     

     

     

     

     

     

     

         

    Creston plc (CRE.L)

    Omnicom Group (OMC)

    WPP Group plc (WPPGY)

    Havas (HAV.PA)

    Interpublic   Group (IPG)

     

     

         

    London-based advertising agency and media company   providing services through three key segments, including Communications,   Health, and Insight.  70% of revenues   in U.K., 15% in U.S., and 15% rest of world.

    Operates an advertising, marketing, and corporate   communications services company on worldwide basis.

    Provides communication services worldwide through key   segments, including: Advertising-Media, Consumer Insight, Public Relations,   and Healthcare and Specialist.

    Operates advertising and communications services company,   which offers brand strategy, advertising, communications, digital and sales   promotion services.  Based on France   with operations in Europe, North America, and Asia.

    Provides advertising and marketing services worldwide   through two segments, Integrated Agency and Constituency Management.  Brands include McCann, Low, Deutsch.

       
         

     

     

       
         

     

     

       
         

     

     

       
         

     

     

       

    Cash

    7.5m

    1.5b

    2.0b

    0.5b

    0.9b

       

    LTD

    0.0m

    4.0b

    6.8b

    0.8b

    2.0b

       

     

     

     

       

    Price

    1.15

    71

    104

    6.26

    18.9

       

    Shares

    61m

    251m

    265m

    410m

    424m

       

    Market Cap

    70m

    17.8b

    28.1b

    2.6b

    8.0b

       

    Enter. Value (EV)

    63m

    20.3b

    31.8b

    2.9b

    9.4b

       

     

     

     

       

    Rev - LTM

    75m

    14.9b

    18.5b

    1.8b

    7.3b

       
                 

     

     

     

       

    Adj. EBITDA – LTM

    12m

    2.2b

    3.0b

    0.27b

    0.87b

     

    Adj. EBITDA – 2013

       

     

    $

     

     

    Adj. EBITDA margin

    16%

     15%

    17%

    15%

    12%

     

    EV to Adj. EBITDA

    5.3x

    9.2x

    10x

    10x

    11x

     

     

    EV to LTM Revenues

    0.8x

    1.4x

    1.7x

    1.7.x

    1.2x

     

    LTM Capital Expenditures

    2m

    0.2b

     

     

    0.17b

     

    Cap Ex to Revenues

    3%

     1.4%

     

     

    2%

     

    LTM Free Cash Flow

    7m

    1.6b

    2b

     

    0.4b

     

    FCF to EV

    14%

    8%

    6%

     

    5%

     

                                 

     

     

     

     

     

     

     

     

     

     

     

     

    Catalysts

    1. Low valuation (14% unleveraged FCF yield; 5.3x LTM EBITDA; 0.84x LTM revs).
    2. Steady build-up of net cash position on balance sheet: 7m GBP net cash at fiscal year-end 3/31/14 could increase to 22m+ GBP at fiscal year-end 3/31/16.
    3. Continued high conversion ratio of adjusted EBITDA into cash from operations resulting in strong FCF.
    4. Projected fiscal 2016 EBITDA of 15m GBP due to growth in digital ad market growth, geographic footprint, and segments, combined with reduced expenses.
    5. Recognition of highly cash-generative business model with high ROIC trading at below market multiples.
    6. Continued benefits from strong position in high-growth digital advertising industry.
    7. Share repurchases and dividends from excess cash and FCF generation.
    8. Possible acquisition of CRE.L by a strategic or financial purchaser.
    9. Increased analyst coverage and recognition of CRE.L’s steady improvement.

    Risks

     

    1. The U.K. and/or global economy declines, impacting CRE.L’s advertising business model.
    2. CRE.L has generated limited revenue growth in the past few years and will need to improve this performance to justify a higher multiple.
    3. Loss of major customers such as Sanofi in fiscal 2013.
    4. Highly competitive industry with several large global advertising players.
    5. New technologies weaken CRE.L’s business model.
    6. Misallocation of capital into a poor acquisition
    7. Management turnover (long-time CEO recently retired)

     

     

     

    Disclaimer

     

    Disclaimer:  We own shares of CRE.L.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but readers should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectROIC...
    Entry09/17/2014 10:20 AM
    Memberzzz007
    andreas,
     
    Thanks for the idea.  I looked at this one in the past, but it's been a while.  My primary concern was that, although tangible ROIC was impressive, actual ROIC (i.e. GAAP) was horrible for this sort of business...mid single digits if I recall correctly.  So, presumably, the acquisition program has been value-destructive over the years under any reasonable assumptions regarding cost of capital.  So in order to buy into the "high ROIC" part of the thesis, you have to have some level of comfort that mgmt won't continue to destroy value through addl acquisitions and, therefore, that tangible ROIC is a reasonable proxy for economic returns going forward.  You mentioned a new CEO.  Has he given any indication of a change in approach to growth through acquisition?  This entire industry seems to be addicted to M&A activity.
     
    zzz

    SubjectRE: ROIC...
    Entry09/17/2014 11:17 AM
    Memberandreas947
    zzz,
    thanks for the very fair question.  not sure that it is so much poor acquisitions but rather churn of the topline where organic growth has been supplemented by acquisitions and you still have flat revenues.  to your point, it will be important that they can stabilize organic revenue growth or like for like sales as they say.  they have lost some accounts and the brutal economy in the U.K. probably has not helped.  we think these can improve over the next year or two and stable organic revenue growth could be supplemented with niche acquisitions.  on the acquisitions they have done, they have tended to use a large chunk of deferred comp, with payout contingent on performance, and we think that reduces risk.  the new ceo worked under old ceo so not sure there will be a huge shift there.  but we think stable/flat revenues for this type of advertising business over the past five years is maybe not so bad given the economy they were operating in.  if organic revenue remains fairly stable, you do have a highly cash generative, high ROIC business model here, that converts a very high % of adjusted EBITDA into cash from ops and FCF, and we like those type of businesses.  if organic revenue performs poorly, your point is well taken, and they may just run in place here, with FCF being used to replentish churned off revenue.  we like to odds here but it is not a slam dunk.  with regard to acquisitive nature of the industry, we agree, and we think a larger player may buy them for their knowledge in digital and online advertising area, which is becoming a very big deal.  sorry for the long answer, but you bring up a very fair and good point.  we will see what happens here.
    hope that helps a bit, Andreas

    Subjecthavas exit?
    Entry09/17/2014 11:18 AM
    Memberandreas947
    We are told that Havas exited its stake in CRE.LN in August.  Sorry to have missed that.  It does not change our belief here that a large player might eventually want to purchase these guys.

    SubjectRE: RE: ROIC...
    Entry09/17/2014 12:06 PM
    Memberzzz007
    Thanks for the quick reply.  That's helpful.

    SubjectOrganic Growth
    Entry09/24/2014 11:28 AM
    MemberMSG257
    Andreas,
     
    Thanks for posting.  Interesting idea and definitely cheap on a number of metrics.  One thing that I've been wrestling with organic growth/deteriorating profitability.  I think the multiple changes quite a bit depending on whether you view this as +2-3%, 0%, -2-3% growth buriness.
     
    Adjusted EBIT seems to have declining consistently since 2010, despite acquisitions being made by the company.  While revenue appears flat to declining on an organic basis (hard to tell as I haven't parsed out the acquisitions), per ZZZs point, it also seems like they might overpaying for acquisitions and in some cases it seems like the acquired companies might erode post acquisition. 
     
     
    What is your view on organic revenue and profitability growth and what gives you conviction given the trajectory over the last few years? 
     
    Thanks again for posting. 

    SubjectRe: Update
    Entry02/15/2016 02:55 PM
    Memberrab

    I would echo that.  CRE is selling for < 10x run-rate EPS essentially with a debt free balance sheet.  EV/EBITDA is 5x and free cash flow has been solid the past few years. 

    Andreas947, in your view would Creston be a target for a larger advertising conglomerate?

    It would seem to be a easy tuck for one of the majors.


    SubjectRe: Re: Re: Re: Update
    Entry02/16/2016 12:31 PM
    Memberandreas947

    Golfer,

    I have to agree with your assessment thus far.  It is disappointing that even after spending 8m GBP on acquisitions for YTD they have not been able to grow headline EBITDA.  I would have expected much better.  If they are going spend money on acquisitions, it needs to be additive to EBITDA and cash from ops and that just has not happened so far.  They need to show they can stabilize organic growth and EBITDA and show that any acquisitions are additive to those numbers fairly quickly or the acquisitions start to look like maintenance capital expenditures and you are kind of on a treadmill, notwithstanding the cash generation.  I do think someone could acquire them strategically.  We are trying to give the idea time to work but so far pretty disappointing.  They say H2 will be better but, as you and others point out, mgmt credibility is not as strong as it was.  Sorry this has been disappointing to date, we are going to give it some more time and hope they can get their act together...Best, Andreas 


    SubjectWhat is happening at Creston?
    Entry05/26/2016 08:15 AM
    Memberrab

    Andreas947,

    I would be curious to hear your views on Creston.  The stock price continues to leak (some of which may be attributable to uncertainty regarding Brexit, although those fears should be easing yet the stock continues to fall).  Meanwhile, DBAY Advisors has grown their position to 29%, one percentage point shy of the UK limit (which forces the shareholder to make a full bid for the company at a price at least as much as the 12-month high).  The Non-Executive Chairman stepped down in February and a new Board Member, Iain Ferguson, was added to represent the interests of DBAY Advisors.  Mr. Ferguson worked at Havas and has significant digital/tech advertising expertise. 

    One would think that on "special situation" status alone, the stock would be holding in, yet it continues to fall.

    Thoughts?

    RAB


    SubjectRe: What is happening at Creston?
    Entry05/26/2016 12:21 PM
    Memberandreas947

    Hi RAB,

    The short answer is we are not sure and also surprised at the stock price performance.  We see LTM EBIT of about 10m GBP with small net debt position so trading at about 6x which seems cheap to us, unless there is a shoe to drop that we don't see.  DBAY's big position would seem to be a positive as the CEO is going to have execute on his value creation plan or they will likely take action, at least in our view.  While results have been stable, with have been disappointed with performance of the business model, as Creston has recently spent 10m on acquisitions, and we have yet to see these drive consolidated revenues and EBIT, so these are looking more like maintenance expenditures.  They seem to have a great and diversified client list which one would think could have value to larger players but seems like the digital focus always makes it harder to make money on a sustainable basis.  We are maintaining position but it has admittedly been a long wait for a payoff here thus far.  Sorry can't be more helpful.

    Best, Andreas

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