18th Sep 2023 11:49
(Alliance News) - S4 Capital PLC's plan for a possible maiden dividend was only a scant consolation as it warned on top line growth for the second time in two months.
Analysts at Jefferies believe the dividend announcement was a good sign, but the company needs to soothe investor fear over near-term earnings too.
Shares in the company plunged 25% to 71.90 pence each in London on Monday.
In the six months to June 30, S4 Capital's revenue rose 16% on-year to GBP517.1 million from GBP446.4 million. Net revenue, which excludes direct costs, increased 19% to GBP445.5 million from GBP375.3 million.
S4's pretax loss narrowed to GBP23.2 million from GBP85.6 million.
"We had a very mixed first half of the year reflecting challenging global macroeconomic conditions and consequent fears of recession, which resulted in client caution to commit and extended sales cycles, particularly for larger projects," Executive Chair Martin Sorrell said.
"We expect the year as usual to be weighted to the second half, especially Q4 - stimulated, in particular, by increased seasonal levels of clients' activity and our Artificial Intelligence initiatives and the use cases we are developing with our clients. We remain confident our talent, business model, strategy and scaled client relationships position us well for above average growth in the longer term, with a new emphasis on deploying free cash flow to dividends and share buybacks."
Looking ahead, S4 Capital now expects like-for-like net revenue to decline in 2023, and an operational earnings before interest, tax, depreciation and amortisation margin between 12% and 13.5%.
Back in July, S4 Capital said it was now targeting full-year like-for-like net revenue growth in a range of 2% to 4%, as opposed to 6% to 10% previously, and operational Ebitda margin of 14.5% to 15.5%, compared to a previously guided 15% to 16%.
AJ Bell analyst Russ Mould commented: "Advertising agencies are at the mercy of the economy. In bright times, companies are prepared to spend big to promote their products and services. In harder or uncertain times, those budgets are pared back, which means companies like S4 Capital will find it harder to grow fast. Martin Sorrell's digital advertising agency is currently suffering from subdued client activity – its customers are worried about recession so they are cautious about signing off big advertising campaigns.
"This is not a new trend for S4 as it has been moaning about the state of the market for some time. However, the latest downgrade to earnings expectations has caused yet another sell-off in the share price."
S4 said it will consider a dividend of 1p per share with its final results, "reflecting its confidence in the strategy for the group and that we expect to be cash generative in 2024 with no material combination payments".
Analysts at Jefferies added: "The intention to initiate a dividend stream in FY24 is a confident signal, and valuation remains compelling, but S4 needs to provide comfort on near-term earnings momentum as a priority."
S4 Capital said that in the longer term, it expects to "outperform our markets" and predicts operational Ebitda margins back to historic levels above 20%.
Edison analyst Fiona Orford-Williams believes the fourth-quarter will be a key one for S4 and the wider industry.
"For S4, and for its peers, Q4 is the crucial quarter and it is not yet clear if the fog of uncertainty restraining spending will have lifted in time for that boost to deliver the full anticipated benefit. From a free cash flow perspective, 2024 is set to be a better year, with contingent payments from prior acquisitions falling into H223," Orford-Williams added.
By Eric Cunha, Alliance News news editor
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