Sir Martin Sorrell’s advertising group S4 Capital (LSE: SFOR) saw its share price crash 35% just before markets closed on Wednesday. They plunged after S4 said its 2021 results would be late, due to audit delays, and would not be published on Thursday as planned.
Sir Martin founded S4 Capital in 2018, after he left FTSE 100 firm WPP. He has an impressive record in advertising and S4 has grown quickly. Is yesterday’s share price collapse a chance for me grab a bargain for my portfolio?
I’ve been taking a look at this unusual situation.
What’s gone wrong?
S4 Capital originally scheduled its 2021 results for 18 March. On 1 March, it said auditor PricewaterhouseCoopers had requested extra time to complete its work.
The company rescheduled its results for 31 March, blaming the delay on Covid disruption. I didn’t think it was a big concern. S4 Capital’s share price was not really affected.
Wednesday’s delay was different. In my experience it’s very unusual for a company of this size to delay its results twice. The last-minute timing of the announcement also worries me.
PWC has been auditing S4 since December 2018. I’d imagine its auditors should already be familiar with S4 Capital’s business.
I’m not surprised the share price crashed yesterday. Investors will be worrying that PWC has found a serious problem.
Is fast growth sustainable?
S4 Capital’s growth has been very fast. Sales have risen from £55m in 2018 to a forecast level of £623m for 2021. One reason for this rapid expansion is that S4 has made a series of big acquisitions.
Acquisitions can be used to disguise a lack of internal growth, but S4 Capital says like-for-like revenue growth was over 40% during the first 11 months of 2021. I think this shows the group’s acquired businesses are all growing fast themselves.
Is the S4 Capital share price cheap?
S4 Capital shares have often looked expensive to me, but the group’s rapid growth has helped to justify a premium rating.
For all I know this growth will continue, but the double delay to these results means I’m not going to gamble on this.
S4 has said that it expects the results to be within the range of current forecasts. My sums suggest that these put the stock on a 2021 forecast price/earnings ratio of around 26 after yesterday’s slump.
There may be no problem here, in which case I think S4 shares could be good value. On the other hand, something serious may have gone wrong that could slow the group’s growth.
The one thing I can do as an investor to manage risk is to try and understand the companies I invest in.
Until I see the numbers, I have no idea what the true situation is here. For this reason, S4 Capital shares are too risky for me right now. I’m going to stay on the sidelines and wait for the results.
