Next Fifteen (“NFC”) has released good H1 results; delivering healthy 9% group organic revenue growth, 25% EBITA and EPS growth and a 20% hike in the interim dividend. The UK has replaced North America as the prime driver of group growth, especially at the profit line, where performance was ahead of our expectations. North America was more subdued, although organic revenue growth was still a healthy 7%. The interims underline the importance of the UK restructuring and refocusing that has taken place over the last four years. The acquisition of fast growing, higher margin innovative and digitally focused businesses are now making a material contribution to the group bottom line. The NFC share price has continued to perform well through 2018 yet the valuation still does not feel stretched at a PEG of c.1x.
Perhaps the key message coming out of the H1 numbers is the strong level of organic revenue growth compared to FY2018. Group organic revenue growth of 9% in H1 2019 compared to 5% for the last financial year and a slight acceleration on H2 2018.
This is a continuation of a theme that has developed over the last two years. The UK performance was impressive, driven by M&A on top of strong organic growth (+15% in H1). The US had a less impressive H1; held back through a combination of FX, the Story disposal and client losses in Text 100. Yet, despite this, US organic growth was still 7% in H1, with most of the US agencies growing. US margins were weaker but these are expected to recover in H2 as Beyond, in particular, moves on from the onboarding of a recent, substantial client win.
We have re-assessed our expectations following this better than expected H1 performance. The strength of the UK more than outweighs the softer US, with H2 also likely to benefit from an unwinding of H1 FX headwinds and a normalising of US margins. We have upgraded our FY19E and FY20E EPS by 2% and 4% respectively.
NFC trades on a Jan 2019E PE of 17.5x, falling to 15.7x for Jan 2020E, and a yield of 1.3%. Next Fifteen is by no means the most highly rated stock in the Small Cap Media peer group despite having a superior track record and offering a superior growth outlook (trading on a PEG of c.1x).