Google sales

S4 Capital needs to turn more sales into cash

  • Margin improvement in the second half
  • Operating cash flow declines

After two delays in the publication of S4 Capital (SFOR) annual results, it was feared that something nasty was hiding in the explanatory notes. In this case, other than a declining operating margin and an increase in trade receivables, there was nothing too worrying.

The digital ad agency is very acquiring, so it’s best to look at comparable numbers to get an idea of ​​how the company is performing. On this basis, billings increased by 66.8%, but operating cash profit (Ebitda) only increased by 11.9%, which means that the underlying margin decreased by 5.1 points. percentage.

Management put this down to investing in major new customers. The company playfully or regrettably (depending on your take on advertising language) uses the appropriately hyperbolic term to describe customers with over $20 million in billings. New whoppers include Google, Meta (US:FB.), Mondelez (US:MDLZ) and BMW (DE:BMW). New business required significant investment in new people. Once the new recruits were installed, productivity increased, which allowed some recovery in margins in the second half. A statutory operating loss of £42.1 million was recorded due to £137 million of adjustments related to acquisition and depreciation expense.

Operating cash flow was £68.5 million, compared to £72.4 million last year. The reason for this was a £132 million increase in trade and other receivables. The company said there had been an increase in working capital to fund larger accounts – a possible explanation. However, rising receivables can be a red flag in some cases as it could be a warning sign that customers are not able to pay their bills promptly.

Predicting the future of S4 Capital is tricky as ad spend is closely tied to the macro environment which is highly unpredictable. Recently, Google reported disappointing ad revenue from YouTube and pointed to Ukraine’s war for this miss.

S4 Capital Managing Director Martin Sorrell also acknowledged the challenges facing the industry, saying “2023 could be a different ball game as GDP growth weakens further and geopolitical tensions have a greater impact. important to the economy. However, S4 Capital’s digital model is first-party data-driven, so the company won’t be too impacted by tighter privacy rules.

The FactSet 2024 EPS consensus forecast of 32.4p gives S4 a very affordable 2024 PE ratio of 10.5. But aggregate demand in the global economy is likely to contract significantly as central banks tighten monetary policy, perhaps at the expense of corporate marketing and advertising budgets. Although deferred accounts have had no demons, we are wary of the broader macro conditions. Hold.

Last Seen IC: Buy, 569p, May 5, 2021

ORDER PRICE: 348p MARKET VALUE: £1.9 billion
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Year at December 31 Turnover (£million) Profit before tax (millions of pounds sterling) Earnings per share (p) Dividend per share (p)
2018 136 26.0 5.20 nil
2019 271 37.0 7.10 nil
2020 343 3.09 -0.80 nil
2021 687 -55.7 -10.3 nil
% cash +100
Ex div:
*Includes intangible assets of £981 million, or 177 pence per share.