Now trading for pennies, one UK share I own has fallen from over £8 apiece just over two years ago.
A trading statement today (9 November) caused the share to sink even further. It is down 18% in trading as I write this on Thursday morning.
Over five years, the share has more than halved. One concern I have now as a shareholder is whether it might end being worthless.
Changed trading environment and performance
The share in question is digital media agency network S4 Capital (LSE: SFOR).
Why did this do so well just a couple of years ago?
Headed by WPP creator Sir Martin Sorrell, S4 was a strong growth story. Revenues were booming, it was aggressively acquiring other businesses and demand for digital advertising was growing strongly.
Fast forward a couple of years and much has changed.
Advertising budgets are being cut by many companies. S4 is no longer on the acquisition trail. A string of accounting delays and profit warnings since the start of last year has shot its credibility in the City.
Raft of bad news
The latest trading statement simply added to my concerns as an investor about the outlook for S4.
Revenues in the latest quarter fell 18.1% compared to the same period last year. Sir Martin described trading in the quarter as “difficult”. In response to falling demand, S4 has seen “a significant reduction in headcount across the company”.
Net debt is £185m and expected to rise in the current quarter as the company continues to pay up for past acquisitions.
The company expects like-for-like net revenue to fall compared to last year and operational earnings before interest, tax, depreciation and amortisation (EBITDA) margins to be around half of their historical levels.
Glass half full
However, the company expects that, as acquisitions payments end, it will generate free cash flow next year it can use to fund share buybacks and dividends.
Is that a sensible focus?
Revenues are falling, the company’s staff is shrinking, market demand is weak and S4’s net debt is around 57% of its current market capitalisation. Despite the UK share crashing, the last sizeable director transaction was in May. That was not a purchase. The chief operating officer offloaded over 2m shares at more than double the current price.
With its track record of shifting performance targets and undershooting long-term expectations, as well as last year’s repeatedly delayed accounts, I find it increasingly difficult to take anything S4 management says as credible.
Lots of work to do
If revenues keep falling and profits remain elusive, I fear that in the end the shares could lose all value. For now I continue to hold my shares though I will not buy any more.
Sir Martin has been on the ropes before in his career and has a stellar record of creating value at WPP. S4 is still a fairly young company and its current challenges may be teething problems borne of overly aggressive growth and management hubris.
The digital advertising market remains a huge opportunity and S4 has an impressive client roster I think could help it do well. For now I will hang onto my shares — but I think the business has a lot of work to do to regain wider investor confidence.
