Creston’s AGM statement this morning confirms that trading is in line with expectations for the current year and our forecasts for both FY17 and FY18 are unchanged. Revenue in the first four months of FY17e was broadly flat over the previous year, but profits are more strongly ahead. This is partly currency-related, partly reflecting improvements to margins stemming from FY16’s operational initiatives showing through more strongly. The valuation remains at a marked discount to peers, despite the strong balance sheet and well-covered, premium dividend yield.
The trading story is little changed from that at the prelims; revenues from good new business gains have been offset by delays and postponements on client projects. This is particularly true of the UK health-facing segment, which continues to be a turbulent market, with a concentration in Creston’s client base in the larger accounts and a fall-off in the business from the long tail of clients. Prompt moves on managing overheads and the ongoing benefits of the group’s Unlimited initiative are helping buoy margins, along with some benefit from weaker sterling compared to the prior year. An annualised £1.2m was taken out of non-client facing operating costs in FY16 (£0.7m in Comms & Insight, £0.5m in Health).
Creston’s balance sheet showed net cash of £1.4m at end March 2016. The group has naturally strong cash conversion, with little requirement for capital expenditure. For FY16, operating cash flow conversion ran at 111% of EBITDA, giving a fiveyear average figure of 92%. The group’s working capital position is well controlled, and our model shows an increase in net cash to £4.2m at end FY17 and £7.0m the year after. There is no debt.
When compared with agency peers, Creston’s shares are trading on a discount of more than 30% on an annualised 2016 EV/EBITDA basis at 5.1x. A DCF under varying conservative assumptions on WACC and terminal growth rates also indicates a share price in a range of 114p to 130p. With a (comfortably covered) dividend, the yield is well in excess of market and sector levels. DBAY Advisors, which is represented on the board, holds 28.0% of the equity, with Artemis holding a further 15.6%.