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S4 Capital shares boosted by strong results

The advertising company reported solid full-year results last week

S4 Capital finally unveiled its full-year results on Friday after they were delayed in March. The digital advertising and marketing firm had put back releasing the figures after accountant PwC was unable to complete its audit. The shares slumped by 43% to 271p at the time.

Chairman Sir Martin Sorrell, former chief executive of WPP, called the delay “embarrassing” and “unacceptable” but gave little detail about the cause. Fortunately for the shares, S4 Capital’s results were strong. Revenues doubled to £686.6m (from £342.7m in 2020), while billings rose by 99% to £1.3bn.

The company made a pre-tax loss of £55.7m for the year to 2021, compared to a pre-tax profit of £3.1m in 2020, mainly due to acquisition costs and amortisation. Shares rose 12% on the day of results but have since fallen back by 11% to 318.2p.

S4 Capital ‘doubles in size’

The advertising and marketing provider is growing rapidly. “In our third full financial year we almost doubled in size, approximately half through organic growth and approximately half through combinations and generated over $900 million of revenue in 33 countries,” Sir Martin told investors.

“We continued to develop conversion at scale with six well established “whoppers” and a further nineteen clients identified as “whoppertunities” and with approximately half of our revenues from technology clients. We plan to achieve our ultimate 202 objective, that is twenty clients each generating revenues of over $20 million per annum, over the period 2022-24.”

However, he acknowledged that the results delay was an embarrassment and that changes were being made to S4 Capital’s governance structure and new finance staff hired and “up-skilled.”

The company recently added Meta, Mondēlez, BMW/MINI and HP to the client roster, which also includes Alphabet, owner of Google.

Management says that the company has also established content revenue streams in popular areas such as the metaverse, blockchain, NFTs and cryptocurrencies.

Sir Martin Sorrell’s outlook for the economy

The company has a plan to double gross profit or net revenue organically over the next three years. It also intends to secure another five ‘whopper’ clients – which account for $20m in revenue a year, develop its existing ones and further integrate its three practices and geographies.

Sir Martin said that although global GDP forecasts had been cut from 4-5% to 3%, he thinks 2022 will be a “good year economically.” He believes that consumers will overcome inflationary pressures in the short term due to savings made during Covid.

Sir Martin also said that he believed that as “defence budgets are increased” there will be a greater need for technology companies “with a robust surrounding technological eco-system.”

He expects GDP growth to weaken further in 2023 and political tensions around the world to “impact economics more significantly.”

Analysts’ reactions were mixed, however. Thomas Singlehurst, a media analyst at Citi, called the figures “solid but unspectacular,” saying that the his call on the company was “that the delay to results would likely be procedural and, in this context, the market was overstating risk. We think this is borne out by today’s results and would expect a gradual rerating as the market reengages with fundamentals.”

Nevertheless, while Barclays analyst Julien Roch said the auditing problem “sounds really minor,” he wondered, “Will investors be entirely convinced? That is the question.”

However, with strong growth forecast and way off their three-year high of 864p seen in September last year, the shares are worth buying at 318.2p.

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*Based on revenue excluding FX (published financial statements, October 2021).

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