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Next Fifteen’s superior performance still has legs
Marketing firm Next Fifteen Communications (NFC:AIM) is one of AIM’s big success stories of recent years. Despite a recent shift in sentiment towards the tech industry which it serves we believe the small cap’s innovative approach could deliver further upside in the years to come.
In the last five years shares in the £374m business have delivered a total return of 460% thanks to organic growth and judicious acquisitions.
Results for the 12 months to 31 January 2018 illustrate the ongoing achievements with adjusted pre-tax profit up 21% to £29.3m. The rate of organic growth was down slightly at 5.3% but the company attributed this result to political uncertainty in the first half of its financial year.
The share price strength means it commands a premium equity valuation. At 489p it trades on a consensus forward price-to-earnings ratio of 15 against an average of 14.08 for a Thomson Reuters-compiled peer group. Next Fifteen will need to continue to deliver superior growth in order to maintain this premium rating.
The company’s client base includes the likes of Amazon Facebook, Google’s parent company Alphabet and IBM. More than 50% of its revenue comes from the US.
WHAT ARE THE RISKS TO GROWTH?
A potential to risk for investors to weigh is the level of customer concentration.
Its top 33 clients account for more than 40% of revenue so the loss of one of these key customers could have a material impact – against this it is worth noting the business has never lost a top-20 client since its inception.
The market’s attitude to the US tech sector has soured somewhat of late, largely relating to over-inflated valuations. While this is unlikely to impact on marketing spend, the same cannot be said if there is increased regulation.
Next Fifteen chief executive Tim Dyson says the company is increasingly shifting from a simple marketing role to using data and technology to improve the companies it works for, so ‘rather than just putting lipstick on the pig, (we’re) helping to redesign the pig itself’.
With a net debt to earnings ratio of 0.3-times and a £40m credit facility in place, Next Fifteen has plenty of scope to make further bolt-on acquisitions to continue this transition.