The NFC rating has come under pressure due to a combination of macro concerns and a 1% organic revenue decline just reported for H1 FY2109. The organic decline is largely driven by two of the seventeen portfolio businesses with organic growth elsewhere in the portfolio improving from previous data points. We expect the issues at Beyond to correct through H2 which, combined with healthy organic growth elsewhere in the portfolio and a full contribution from Health Unlimited, leads us to upgrade our FY 2020 expectations. NFC now trades at a PE discount to both the Agency and Small Cap Media peer groups despite a superior growth profile. The balance sheet remains comfortable.
Good overall headlines (net revenue +11%; adj. PBT +14% and a better than expected £3.6m net debt position), were overshadowed by the 1% organic revenue decline. Archetype should have been in the price as this has been well flagged but a challenging H1 for Beyond was unexpected. Beyond is back on the client win track although unlikely to fully wash through until next financial year.
These interim results highlight the benefits of NFC’s portfolio spread. Despite two specific agency challenges; the remaining fifteen performed well, with organic revenue growth of 11.6% excluding Beyond and Archetype. Recent acquisitions have also been performing well (Planning Inc and Activate especially so), which further underpins longer term growth prospects.
NFC has announced the acquisition of Health Unlimited for an initial consideration of $27.7m ($20.8m cash and c.1.1m shares at 550p); representing an 7x EBIT multiple. This represents NFC’s first material step into the attractive healthcare communications market.
There are two offsetting movements behind our unchanged FY 2020 estimates; a small reduction in our organic expectations for the UK and North America and the initial contribution from Health Unlimited. We have upgraded our FY 2021 estimates (+3%) to reflect progress made with Archetype and Beyond and a full contribution from Health.
NFC has de-rated somewhat since July; with the prospective PE falling from 16.0x to 14.5x. This has been driven by a combination of macro concerns and the H1 organic dip. NFC now stands at a PE discount to both Agency and Small Cap Media peers despite higher growth expectations.