When a company, especially a small or medium-cap one, announces wider losses, shrinking margins and pleads that it expects to do better in the second half of the year, investors are often seen running for the exit.
Even more so, if that company had, let’s say, also worried the market by failing to report scheduled results on time earlier in the year, on more than one occasion, and then when it did so it unveiled a swing to losses from a small profit the year before.
What’s more, this is only its fourth full financial year.
Interims from digital advertising group S4 Capital PLC (LSE:SFOR) today ticked all of those potentially troubling signs, yet the shares, after an initial splash into the red, had risen by almost 14% in mid-afternoon trading.
Some investors are likely to be reassured that the boss of the company is Sir Martin Sorrell, which means on top of the four-year trading record of S4 can also be added his three decades in charge of FTSE 100 advertising giant WPP, even though that relationship ended sourly.
Furthermore, first-half losses of £75.4mln that were four and a half times wider than a year ago were largely flagged with a profit warning in July, which had sent the shares back to lows last seen in the first weeks of the Covid pandemic.
The ballooning losses were also accompanied by a better top-line, with billings up 40% to £765.6mln and revenue up 60% to £446.4mln, respectively 22.2% and 30.7% on a like-for-like basis.
Sorrell said the larger loss was down to acquisition costs and higher pay as it ramped up staff levels by 50% on a year earlier to handle those increased billings and further growth.
Following several acquisitions by the buy-and-build group, many of which offered a split of cash and shares, there were £100.8mln of related payments, much of it being acquisition payments tied to continued employment and share-based pay, as well as an associated £93.9mln of expenses and amortisation.
The company said it now has in place “significant cost management measures”, including putting the brakes on hiring and implementing controls on discretionary costs, with staff numbers “stabilising at around 9,100” including recent combinations over the past month or so.
Sorrell commented: “In the second half, we are focused on a better balance between top and bottom-line growth to ensure we reach our revised targets for the year.”
This seems to include a pause on merger & acquisition (M&A) activities, with Sorrell saying S4 will be “focused on organic growth and maximising value from our existing businesses, where momentum remains strong”, though the group said it does not plan giving up on this “key part of our growth strategy”.
Full-year targets remain in place to grow like-for-like gross profit/net revenue by 25%, based on management’s expectations of a “significantly stronger second half performance with a weighting to the fourth quarter”.
For the full year, the expected operational EBITDA target remains unchanged at approximately £120mln as indicated at the July profit warning, when it was cut from the previous target of £154mln-165mln.
Sorrell noted that even amid the war in Ukraine, central bank tightening and other geopolitical and global economic tensions, prospects for digital advertising “remain relatively bright, whilst traditional media languish, and there is evidence that demand accelerates during periods of economic uncertainty as we saw with Covid in 2020, when we performed strongly”.
However, as shown by S4 Capital's valuation, which is down almost 60% this year, there is likely to remain some scepticism around the company that all the fine reassuring words will not snuff out until further evidence of stability is shown.