Sinner Schrader: Strong Rebound In Earnings Forecast For FY14
Edison | Feb 20, 2014 07:19AM ET
Evidence of strong recovery not priced in
With evidence of a strong recovery in the agency businesses and first revenues expected from the new NEXT AUDIENCE (NA) Platform following its recent launch, FY14 should be a year of significant earnings growth for Sinnerschrader O.N., (SZZG). Investors will need confidence that it can execute on its NA targets before they fully price in the recovery prospects. However, if it can give comfort here, we see scope for a doubling of the underlying P/E rating. Visibility should improve throughout the year.
A leading German digital agency
SinnerSchrader (SZZ) is a leading German digital agency group with a strong franchise in e-commerce platform solutions and online sales and marketing services. Approximately 88% of its net revenues are derived on a professional services basis, the remainder being commission or performance based. In recent years, management has invested heavily in the development of an integrated ad serving and data management platform (NA). Consequently, the 20% CAGR in revenues that SinnerSchrader had enjoyed for the five years to FY12 has not yet been evident at the bottom line.
Strong rebound in earnings forecast for FY14
Although 2013 was a relatively difficult year (revenues +1%), growth has picked up since the summer; Q1 (to November) was up +18% and strong demand has continued into Q2 (to February). Although comparatives become harder in H2, last week’s announcement that it has just signed the largest single contract in its history suggests that SZZ is on track to exceed its current guidance of 14% revenue growth for the year. Together with some targeted cost savings, this should drive significant margin expansion in the core businesses. Alongside this, 2014 should see inaugural revenue contributions from the new NA Platform, which went live at the end of January. The platform has some fairly unique qualities, and provided management can execute on its targeted break-even of this division by the end of the year, FY14 should see a very strong rebound in earnings; we are forecasting a fourfold increase in EBITA.
Valuation: Recovery and NA prospects not priced in
Despite strong evidence of a recovery in the core business, and its exposure to the more highly rated adtech market, on a P/E of 15.5x, and an EV/sales of 0.6x, SZZ trades at a 30% discount to peers. Excluding the NA losses, the implied P/E for the agency business is 11.2x – roughly half that of its peers. Provided it can deliver on targets, in particular for NA, we see scope for the underlying P/E rating to double.
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