Share in the digital disruptor of advertising S4 Capital (SFOR) fell by 7% to 761p by midday, despite the company increasing its profit guidance for the third time this year. There are two reasons, both transitory, which explain the decline in today’s share price.
The share price performance of S4 Capital has been exceptionally strong over the last year, rising from a level of 403p to today’s figure of 771p. This equates to a return over the period of 91.3%.
These gains have been fueled by a series of mergers and acquisitions. S4’s merger run-rate to date is one per month. The 25 deals announced since S4’s inception has led to a series of earnings upgrades for the group.
Today’s announcement is the third time this year the company has raised its guidance. At the start of the year the group had penciled in 25% like for like profit growth, whereas it now stands at 40%.
The market has now become accustomed to S4 announcing deals on a regular basis and upgrading its earnings guidance. Today’s profit taking suggests the market had already priced in an earnings upgrade and some investors therefore decided to lock in profits.
The second reason for today’s decline in the share price was the increase in both the headcount and operating loss. The latter increased to £16.1 million compared to a profit of £1.3 million last year, largely due to acquisition payments.
Headcount has increased from 2,644 at this point last year to 5,751 at present. The higher headcount investment is likely to offset the gross profit forecast by the group, meaning it is unlikely sell side analysts will materially lift their EBIDTA (earnings before interest tax depreciation and amortization) forecasts for this year.
The shares are currently trading on 24.4x full year EV/EBITDA, which is fairly elevated for a U K firm.
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