Genghis Capital Ltd Research Note (29.10.2013)
Executive Summary
We initiate our coverage on Scangroup Ltd with a HOLD recommendation. At KES 58.5, SCAN is trading slightly above our fair value of KES. 57.24 representing a downside potential of 2.2%. We forecast a P/E multiple 29.6x and P/B multiple 3.3x for FY14. Based on a historical dividend payout of 27% we expect a DPS of KES 0.5 FY13E. Set up costs and legal disputes in new markets have weighed down our earnings expectations for FY13 with an EPS of KES 1.74 and KES 2.44 FY14F.
Key Highlights
Investment Drivers:
MNCs Search For The Final Frontier... A growing resources industry, an expanding population of 1 Billion and unprecedented levels of investment in infrastructure has drawn numerous MNCs to take stock of Africa. Going by Scangroup’s expansive Sub-Saharan African foot-hold, we opine the marketing firm has a strong competitive advantage to win some of these contracts as well as leverage on its anchor shareholder WPP, which has an immense portfolio of MNCs to secure some of these big ticket deals.
Digital Diesel... Digital advertising despite being in its nascent stage, is poised to be advertising’s next muckety muck with worldwide digital ad spending projected to nearly double between 2011 and 2016 from USD 87.3 Billion to USD 163 Billion. Scangroup under its Squad Digital flagship leads the pack in the digital mania with the segment experiencing CAGR of 53% in the last 3yrs (FY11-104.5%, FY12-76.5%).
Cavendish Holdings Increases Shareholding:... The London-listed multinational announced plans to raise its stake from 33.6% to 50.1% through the purchase of 94million additional shares in a mix of share swaps and a KES 1.8 billion cash injection. The savory deal is further enticed by increased earnings should shareholders take up control of the 9 subsidiaries previously under joint ownership with WPP, as laid down in the notice.
Investment Risks:
FY13 Profits Dip By 25.8%... We expect profits to decline by 25.8% from KES 859.7Million - FY12A to KES 638.3 Million - FY13F. High operating costs (80% of revenue; FY13F Vs 73% - FY12A) continue to pile pressure on net income & EBIDTA margins on the back of soaring set-up costs of new offices as well as downsizing and legal costs affiliated to the Nigerian division.
PR Scene - New Entries Crowd The Market... Change is afoot in the highly competitive public relations scene as veteran conglomerates come calling for business hubs outside South Africa. In the last two years, Kenya has welcomed some of the biggest global PR firms amongst them Weber Shandwick, Havas International, The Brand Inside and as recent as July, Burson-Marsteller, pushing the total number of registered PR agencies in the country to forty.