Investor view: Sorrell still has ‘Whoppertunities’ if S4 Capital gets a grip on its audit
A view from Ian Whittaker

Investor view: Sorrell still has ‘Whoppertunities’ if S4 Capital gets a grip on its audit

There is reason to be optimistic, despite recent scrutiny around company's accounting controls, Ian Whittaker argues.

Recently, S4 Capital delivered its full-year results after twice postponing them due to delays in the auditing process. The results were well received by the markets on the day, and so they should have been.

While the results themselves were in line with market expectations, the forecast of 25% like-for-like net revenue growth in 2022, together with Ebitda improvement, suggests that S4 has plenty of growth left.

Sir Martin Sorrell was also on fine form, with the “Sage of Soho” – although, given the S4 offices are round the corner from Pall Mall, maybe his title should now be the "Mage of Mayfair" – giving his usual in-depth and wide-ranging overview of the macro and advertising environment, stating that 2022 should maintain its momentum but that 2023 could bring problems for the world economy.

Not for S4 Capital, mind: a slide on the results presentation pointed to the 25% like-for-like net revenue growth it expects in 2023 with the six "Whoppers" (clients generating more than $20m in annualised revenues) and the up to 19 further “Whoppertunities” (yes, that word was used) expected to drive the growth.

However, there was also the overhang of the actual deliverance of the numbers, a situation that Sir Martin acknowledged, stating that “the delay in producing our 2021 results is unacceptable and embarrassing”.

S4 Capital announced significant changes in the financial, governance and risk areas with the aim of reassuring the markets that there were no major underlying problems as it looked to regain the confidence of investors.

Risks around auditing and operations

However, the subsequent Sunday Times exposé on S4, which portrayed an organisation where financial controls were lax, threatens to reignite concerns, with the shares down again on Monday when there was a 10% drop. 

S4’s annual report, also out this week, announcing annual bonuses would not be paid and that the ex-CFO would be leaving the board, shows the company realises it has work to do on this front.

In effect, for S4, there are two issues here: namely, the auditing/internal controls and the operational performance.

On the auditing side, there is an obvious question of whether S4 has grown too fast too quickly, especially when it comes to the issue of financial controls. Building fast definitely has its benefits, especially in an area where scale counts but can bring its own risks, particularly around the integration of assets and proper controls.

The presentation highlighted staff turnover as an issue (common to all agencies) along with “control weaknesses” and “lack of detailed documentation”, an admission that things were not going smoothly.

None the less, while it remains to be seen whether there are any more revelations, it does look as though S4 is handling the allegations in a way that suggests it is looking to genuinely fix its problems rather than deny the problem (or, even worse, hide it).

The appointment of Mary Basterfield as chief finance officer, someone who has a strong reputation in financial control, is one positive sign, as is the clear language communicating both that what had happened was unacceptable and that S4 was putting in controls to make sure it did not happen again. 

When it comes to the operational side, much has been made about the nature of S4’s business.

Sir Martin’s message from the start has been that S4 Capital is a new type of agency model, one that is dynamic, future thinking and embraces technology (48% of S4’s revenues come from technology clients). It is the speedboat – or motor torpedo boat, depending on your analogies – to the super-tankers/battleships of the traditional agency holding groups.

That is a view that has been questioned in recent months, with several analysts stating S4 is, over the long term, just another agency holding company and so should be valued as such.

Undoubtedly, this has driven a significant part of the share price weakness over the past several months, with the market consensus becoming more wary over the story of future returns, a situation exacerbated by the rise in interest rates and the general cooling in sentiment towards tech names.

Outperforming the holding companies

However, S4's numbers – so far – speak for themselves. The performance of the agency holding groups has been impressive and certainly more impressive than the markets had been expecting. However, S4’s like-for-like growth was four times that of the holding groups in 2021 and, according to broker estimates shown in the presentation, nearly five times is expected for 2022. That is not something that can be ignored.

A large part of this is due to S4 being started from scratch, which means it does not have many of the legacy slow/no-growth businesses that traditional holding groups retain and which drags down the growth of the latter. Related to this, S4’s acquisition policy deliberately targeted high growth firms (and why wouldn’t you?), which kept its growth rates high.

But I think there is more to it than this. It is always hard to pin down whether one group’s talent is truly better than others but one thing S4 does have more than the other agency groups, and which is a big boost for its business, is confidence in its product and the value that it adds to its clients.

From my standpoint, one of the greatest ironies – and problems – of the advertising industry is that, for a sector where selling its clients’ vision and product is key, it seems to have lost confidence in the value of its own proposition.

S4, however, doesn’t have this problem. It clearly does believe in its proposition and that clients should pay for it, and the growing number of whoppers points to this. It is this, I would argue, that is playing a key factor in its growth rates.

In the short term, however, Sir Martin may need a laser focus on financial discipline to reassure investors. If he can do that, then S4 can truly give the other agency groups a very important lesson when it comes to driving growth.

Ian Whittaker is founder and managing director of Liberty Sky Advisors

He writes a regular column for Campaign about the advertising landscape from a financial standpoint. For further insights and articles, subscribe at: https://ianwhittakermedia.com/

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