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M&C Saatchi: Erratic share price reflects operational uncertainty

Publication Date: 20 Nov 2018 - By Permjit Singh By Permjit S.

Equity Fundamental Equity UK EU Telecom & Media


M&C Saatchi (MCS) (LON:SAA) is listed on the London Stock Exchange and has a market capitalisation in the region of over £270m. Its principal trading activity is the provision of advertising and marketing services, globally. 

The company grows mainly organically – taking stakes in entrepreneurs – rather than via mergers and acquisitions.

MCS’ operating profit has more than doubled to around £11m for the 6 months to end June 2018, but a £10m deterioration in trade receivables, and £11m net decrease in ‘contract assets’, both within working capital, have left the company again with negative (but worse) operating cash, of £3m. 

Repayment of £9.5m of bank loans has exacerbated the shortfall. However, MCS still has a healthy cash balance of £33m, but netting off with debt reduces this to a not-so-great £4.5m. The company says the cash deterioration in the first half is seasonal.

Gross profit rose by 5% year-over-year, operating profit however rose 104% y/y, net profit rose 13%, but net profit was unchanged, all on a reported basis.  Earnings per share were down y/y by 16%, from 9.0p to 7.6p – partly due to more shares outstanding in 2018.

MCS likes to emphasise its so-called ‘headline’ numbers – a term not recognised under IFRS - which are more flattering that statutory numbers. The conflict perhaps highlights the unusual nature of its accounting practices and business reporting.

Reconciling the two largely rests on differences in accounting for its minority shareholder put options and amortisation of its intangibles. The option liabilities have no effect on the company’s tax charge, so its estimated effective annual tax rate to end June 2018 is a painful 30%.

For: MCS has low gearing; good revenue generation; healthy cash and equity balances.

Against: High PE ratio, no operational cashflow in H1 2018, so no interest cover, poor dividend yield (just 1.5% annualised), poor RoE (4.7% annualised), poor tangible net assets per share (not surprising given the nature of its business), and finally adverse accounting impact of complex transactions (put options and intangibles).

Conclusion: MCS is in a sector that often takes the first economic hit when confidence wanes in companies and they start to cut spending budgets. Brexit will continue to test business confidence, as will worsening macroeconomic conditions (ongoing trade wars, rising interest rates, and geopolitical tensions). The company’s erratic share price profile perhaps reflects that uncertainty and it does not inspire confidence. If you are an investor seeking a fair return for risk, MCS might not be the right stock for you. 


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