The £12bn UK advertising industry is presently experiencing dramatic change. The importance of traditional radio, press and TV media is diminishing, as consumers continue to spend more time and money on the internet. And so advertisers, such as General Motors, are looking to agencies such as this week's 'gamble' to provide them with a full suite of services that integrate digital communications with conventional marketing.
Gamble of the week: Creston (CRE)
reston was set up in January 2001 to acquire related businesses and build from scratch an international marketing group. Since then it has bought ten complementary firms, including splashing out a total of £94m on three chunky acquisitions last year, part-funded by a £15m placing at 165p.
As a result the group is now a one-stop shop, providing market research, communications, advertising and PR, and has strong internet/digital expertise that represents around 15% of revenue. Importantly, these acquisitions have not disrupted organic growth, since Creston continues to win new business from many leading blue-chip customers, including Alton Towers, Capital One, and the Royal Mail.
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Last week, the firm gave an upbeat trading statement, saying that "in the first-quarter like-for-like sales were up 12% with operating profit margins at a consistent level". Last year proforma sales were £117.6m, generating operating profit margins of 20%. Encouragingly the group added that "full year trading remains in line with expectations albeit weighted towards the second half and it continues to enjoy a strong pipeline of new business opportunities". In relation to the numbers, house broker Panmure is forecasting underlying earnings per share of 16.6p and 17.8p for this year and next, putting the shares on corresponding forward p/e multiples of 8.4 and 7.9. To me that looks too cheap for a growth stock with such a strong blue-chip client base. So what are the risks? Undoubtedly, the biggest concern is the current debt position of £21.2m as at 31 March but there is also a further £34.2m of deferred consideration to be paid (depending on performance) over the next three years relating to past acquisitions. However, interest payments for 2007 are covered a healthy 14 times.
In summary, Creston looks to be an attractive play on the continued growth in the advertising sector. Furthermore, with consolidation rife across this sector, I would not be surprised if Creston was snapped up over the next two years, possibly by an overseas player wishing to bulk up in the UK.
Recommendation: speculative BUY at 135p (market cap. £75m)
