BrainJuicer is more clearly focusing on driving its higher quality earnings streams in ad-testing, brand tracking and predictive markets. These areas of the business are growing faster, are more scalable and should drive higher margins than the one-off research projects and consultancy services that have formed much of the mix historically. The group has very strong cash generation and a debt free balance sheet. Proof that the shift in emphasis is paying off should help close the discount with other quoted market research companies.
The group has stated that it is moving to a March year-end as from the current year so will publish 15-month numbers to March 2017 in due course. Our forecasts remain for a December year-end as pro-forma figures are not yet available. This change helps remove the potential volatility of operating profits in a sector where clients backload their spending to the final weeks of the year. FY15 results showed strong growth in the System1-driven gross profit (emotional, intuitive reactions, as opposed to System2 rational responses), with core products growing at 17%, more than offsetting the decline in the more commoditised areas and the high-level but expensive-to-deliver consultancy. New initiatives such as the creative agency and broadened distribution should deliver incremental growth and margin
The group has inherently strong cash generation, with little substantive capital requirement. Acquisitions have not figured to date, primarily due to the distinct culture of the group, although an aborted purchase (on valuation grounds) in H115 indicates that this option is not closed off. BJU has no debt and ended the year with net cash of £6.4m. It has a record of returning cash to shareholders through a combination of ordinary dividends, special dividends and share buy-backs
The transition from ambitious upstart challenger to ambitious, high-profile industry champion has led to the earlier valuation premium being chipped away. The group trades at a discount to peers of 21-24% on a P/E basis across FY15, FY16e and FY17e; and at a larger differential on EV/EBITDA, our preferred measure. The discount is 35% for FY15; 30% for FY16e and 28% for FY17e, with BJU trading at 6.0x FY16e. Evidence that the growth strategy is paying off is a likely catalyst to close this gap.