Marketing is one of the first items that companies cut in a downturn (Simon Duke writes). So when the world went into hibernation in March, it was no surprise to see executives slash advertising spending even more drastically than they had after the Lehman Brothers’ collapse.
Not that you would know any of this from S4 Capital’s share price chart. Shares in Sir Martin Sorrell’s advertising group have risen by more than 40 per cent since January.
Its performance reflects the scarcity value enjoyed by companies weathering the storm. While more established advertising groups have wilted in recent months, S4 Capital has flourished.
In the first four months of the year, like-for-like revenues increased by 11 per cent and May is likely to have been be stronger than April, the company said in a trading update yesterday. Despite the pandemic, S4 Capital has a “fighting chance” of hitting its three-year target to double revenue and underlining profits by 2022, according to Sir Martin.
The company is a new entrant in an industry upended by Google and Facebook. It focuses on digital advertising and more than half its revenue comes from designing campaigns for technology companies and advising them on how to spend their marketing budgets.
Sir Martin, 75, started S4 Capital months after his acrimonious departure from WPP. He left the world’s largest advertising group in April 2018 after an investigation into his personal conduct. Sir Martin denied wrongdoing and was allowed to depart as a “good leaver”. He remains one of WPP’s top ten shareholders.
He had a blank sheet of paper when he embarked on his new venture. What he has sketched out is a devastating critique of the business model he pioneered. He believes that holding companies such as WPP and Publicis have became too unwieldy and bureaucratic and that their core skills are in danger of becoming obsolete.
What use is a slickly produced television and cinema campaign when the name of the marketing game had become chasing eyeballs across YouTube and Facebook? S4 Capital was to be a digital native and “unitary”; to encourage collaboration, staff bonuses would be judged on the company’s overall performance, rather than on that of individual business units.
Sir Martin has continued to show a prolific appetite for a deal. In September 2018, he bought Mediamonks, an Amsterdam-based agency that makes digital advertising campaigns, for €300 million. A couple of months later, S4 Capital spent $150 million on Mightyhive, which buys online advertising for clients through automated exchanges. Since then, acquisitions have come thick and fast.
The company is building on three foundations: making content; planning campaigns and buying online advertising; and accumulating its trove of first-party data to help customers to target new and existing customers. Thanks to its acquisitions, S4 Capital has made progress in the first two areas, but is only just beginning to create a data capability.
Sir Martin expects Covid-19 to accelerate the shift to digital both in advertising spending and across the corporate world. If he is right, S4 Capital will be strongly placed to capitalise. Jefferies, one of its three brokers, predicts that earnings will triple in the next four years.
S4 Capital shares, which rose 16¼p, 6.4 per cent, to 270¼p yesterday, are trading at heady levels. Nevertheless, Dowgate Capital, which brought S4 Capital to market and has been its most loyal supporter, rates the shares at 300p. The stock is worth holding, but its valuation is daunting.
Advice Hold
Why S4 will prosper from the move to digital advertising but its valuation is steep
Mediclinic International
Since publishing its full-year results a week ago, shares in Mediclinic International have perked up a little, but there is some way to go before the FTSE 250 private hospitals company shows signs of making a full recovery (Alex Ralph writes).
Mediclinic is known in Britain for holding the biggest shareholding in Spire Healthcare — of 29.9 per cent — but the bulk of its business is overseas. It was founded in South Africa in 1983, where it retains a secondary listing on the Johannesburg stock exchange, and also operates in Switzerland, through its Hirslanden business, and in the United Arab Emirates. It has been led by Ronnie van der Merwe, 57, since 2018 and its chairwoman-designate is Dame Inga Beale, 57, former chief executive of Lloyd’s of London. The group has 76 hospitals, mostly in South Africa, as well as other facilities and clinics.
The shares have slipped back since Tempus recommended avoiding them in May 2018 — indeed, they have roughly halved since then and edged down a further 4½p, or 1.5 per cent, yesterday to 295p. It’s a far cry from the stock’s peak above £11 back in 2016, but since then the company has faced several challenges, not least in the United Arab Emirates with the £1.4 billion acquisition of Al Noor Hospitals, which expanded the group beyond Dubai, and regulatory changes in Switzerland. More recently it has been hindered by the suspension of non-urgent elective surgery because of the coronavirus outbreak, which weakened trading in the middle of March, traditionally the group’s strongest month and towards the end of its financial year.
Elective procedures have been reintroduced gradually since April to address the demand for underlying healthcare needs, but the company has acknowledged uncertainty over the progression of the pandemic and its full impact, which it warned could continue for at least the next year.
In response, in April Mediclinic suspended all “non-essential” capital expenditure and its dividend. Mr van der Merwe has indicated, too, that adventurous moves are not on the cards, such as trying to acquire the remainder of Spire, as Mediclinic unsuccessfully sought to do in 2017.
Advice Avoid
Why Elective procedures being reintroduced but faces continued uncertainty
