Stockwatch: A cheap share on the up

After I cautioned on £60 billion advertising group WPP (WPP) earlier this week, interestingly at the opposite end of the scale in marketing services, £118 million St Ives (SIV) has declared very good progress and prospects for its strategic marketing core business.

Interim results to 2 February show adjusted pre-tax profit up 35% to £12.7 million on revenue up 7% to £146.5 million, with strategic marketing now the basis for long-term growth, delivering 23% growth and representing 85% of adjusted operating profit.

In contrast with big advertising groups having issues with multinational clients altering buying patterns for services, St Ives cites its marketing services specialty as robust.

Stockwatch: What to do with this bombed-out blue chip

New client wins include NFU Mutual, Sun Life, Amgem, BMS and Brunswick, and “As a result of an increase in client demand for more integrated solutions, we have continued to drive our collaboration agenda….we continue to focus on the disciplines of digital, data and insight, although strict distinctions are becoming less relevant as clients demand more integrated propositions from us.”

It contrasts with the “part-structural, part-cyclical” excuse from WPP for its flat performance just lately; instead affirming how sizable corporate clients continue to spend on development, especially in digital, which accounts for 62% of St Ives’ strategic marketing revenues. This is positive both for selective investing in the sector and the wider economic context, though I’d still pay attention to advertising trends as a leading indicator.

Interim progress helps full-year forecasts

Before these 7 March results, the consensus expectation (see table) for pre-tax profit rising over £24 million and earnings per share (EPS) over 12p looked demanding.

Admittedly, the outlook statement is a bit convoluted and doesn’t mention the full year. New projects won from existing and new clients, seem bullish for strategic marketing, “however we recognise the need to continue to address the effect that our legacy businesses are having on the group’s overall performance…”

Long-term followers will know they have been an Achilles heel involving nasty changes, however, in books printing (26% of interim revenue, 10% down on the prior period due to a contract loss) “we are continuing to take decisive action to ensure the cost base reflects anticipated volumes” and on 5 March a “significant” part of the marketing activation activities – four businesses – were sold for £6 million, having struck a £4.4 million loss on £106.3 million revenue in the year to 28 July 2017.

This is large-format printing and other services, and the sale “significantly reduces the group’s exposure to the structurally challenged, commoditised print markets and the risk of further, potentially significant restructuring costs.”

A chief risk to 2018-19 forecasts is, therefore, the remaining print-related businesses offsetting good performance from strategic marketing, if the UK economy eases under Brexit uncertainties and higher interest rates.

Yet this could be discounted by a forward price/earnings (PE) multiple of about 6 times, admittedly with de-rated dividend expectations providing little downside support, given a 2.4% yield at the current share price around 82p.

The interim dividend is maintained at 0.65p per share, but the total dividend dropped from 7.8p in respect of the 2016 year to 1.95p in 2017. Mind that tables like the one shown cite payments actually made in a period, which can lag a change in policy.

Anyway, and with goodwill/intangibles representing 192% of net assets as of 2 February 2018, intrinsic value very much relies on earnings.

Adjusted versus statutory figures in the latest release thwart a comparison of operating margin but, looking back to the March 2017 interims, the margin is up from 5.8% to 9.7% on an adjusted basis.

Balance sheet issues

The next key question for medium-term prospects is to what extent gearing and other balance sheet issues could weigh.

Long-term debt is down from £88.9 million to £63.7 million (there being no short-term bank debt) versus £21.4 million cash.

However, a £26.6 million deferred consideration payable demands a cautious view of near-term financial pressures than a net debt measure of £34.2 million implies.

Last October’s 2017 accounts had indicated £29 million cash and £7 million shares due paid in the next two years, with £20.5 million cash due 2018 and £8.5 million due 2019, all this being over the £26.6 million deferred consideration if you just look at the interim balance sheet.

An interim finance expense of £1.4 million was covered nearly 10 times by operating profit. Ideally, this would be lower though should not weigh on the balance sheet, near-term.

You could take quite a negative view of all this if deferred consideration payments soak up cash in the relative near term, and clients proceed to cut marketing budgets in a general slowdown, which also coincides with interest rates having to rise to contain inflation. That would be a worse-case “UK stagflation” scenario.

Meanwhile, cash generated from operations is up 23% to £23.1 million despite a comparative slip at the net level as a prior tax credit normalising to a tax payment. Priority to manage liabilities is shown by the cash flow statement: dividend payments down from £7.8 million to £1.9 million, like-for-like, while a £5 million decrease in bank loans rose to a £15.5 million decrease this time.

Otherwise, £60.6 million trade receivable versus £59.0 million trade payables looks fair, reported profit is not being enhanced by late payments. And despite a £15.8 million pension fund deficit, it’s down 15% like-for-like.

St Ives – financial summary           Consensus estimates year ended 31 Jul 2013 2014 2015 2016 2017 2018 2019                 Turnover (£ million) 323 331 345 368 393     IFRS3 pre-tax profit (£m) 5.5 11.9 8.7 -5.7 -44.1     Normalised pre-tax profit (£m) 15.9 14.7 14.8 19.4 12.7 24.3 25.5 Operating margin (%) 5.2 5.0 5.1 6.1 3.9     IFRS3 earnings/share (p) 3.6 8.3 4.2 -5.9 -30.4     Normalised earnings/share (p) 12.0 10.5 8.9 12.4 9.4 12.1 13.3 Earnings per share growth (%) 11.6 -12.6 -15.6 39.6 -24.2 28.9 9.9 Price/earnings multiple (x)         8.7 6.8 6.2 Historic annual average P/E (x)   17.8 18.6 16.3 6.4 7.8   Cash flow/share (p) 26.1 21.2 20.8 10.6 19.0     Capex/share (p) 5.2 8.5 1.0 3.1 -5.8     Dividend per share (p) 6.0 6.7 5.0 7.9 6.1 2.0 2.0 Dividend yield (%)         7.4 2.4 2.4 Covered by earnings (x) 2.1 1.6 1.2 1.6 1.5 6.2 6.8 Net tangible assets per share (p) 20.3 -18.3 -38.5 56.5 38.1

Source: Company REFS      Past performance is not a guide to future performance

Broadly a UK but also US business

While the 2018 interims don’t give a latest geographic breakdown, the 2017 accounts report showed revenue as 83% UK-derived, 13% US and 4% rest-of-world. If anything, UK majority revenues are likely reducing with the latest disposals; the operating review cites for strategic marketing, “growth and improved profitability in our US businesses, with the new office in San Francisco quickly building a strong presence in the technology sector.”

Healthcare consulting has also expanded abroad, especially in the US. Thus, St Ives is not exposed to potential issues arising from whatever trade agreement (or not) is struck with the EU, like the big advertising groups. If the UK economy does slow as a result of Brexit, this group’s clients are generally big firms/organisations, and likely more resilient to marketing cuts than smaller ones.

Admittedly, as a turnaround stock, St Ives has needed trading. I first drew attention near 90p in October 2012, on an historic PE of 5 and prospective yield of 7% covered 2.5 times; the price had shot up to 225p a year or so later; and in March 2015 I suggested risk appeared to weigh on the upside at 177p.

Stock to Watch: St Ives

The share price hit 247p a further year on, but a downturn started from April 2016 as various large projects e.g. in books printing got cancelled and deferred. Challenges persisted for the grocery-oriented marketing activation side and the stock was down to 37.5p in mid-2017.

Much more focused, on a growth segment

Despite the “Clays” books printing side remaining, it is a market leader which ought to help a sale. Meanwhile, the strategic marketing businesses look in strongest shape and St Ives relatively most-focused, than at any time I’ve covered the group.

Barring a UK recession, at about 82p the stock, therefore, offers scope to re-rate – likewise dividends – as the deferred considerations are managed through. The operations could also prove a useful integration for another marketing services group, to bid while market price is low. Accumulate.

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