It has already moved up 105% since the start of this year. I believe it could still go far higher.

A shooting star that fell to earth

The company is S4 Capital (LSE: SFOR), a digital advertising agency network founded by Sir Martin Sorrell after he left WPP eight years ago.

In its first several years, there was great excitement about S4. Sorrell had a glittering record of wealth creation and S4 was growing fast. In 2021 its share price was over £8.

Then the wheels came off.

Audited accounts were delayed and investors got concerned about the debt load taken on to fund an acquisition spree. Later, AI was seen as a risk to the company’s core offering.

Towards the end of last year, the S4 share price was as low as 16p.

Signs of a turnaround in fortunes

Then things changed. Net debt was reduced faster than expected.

AI was still seen by some investors as a threat, but others shared the company’s view that AI could actually help it do better because of its purely digital focus. A dividend was introduced, then raised last month.

I added to my holding several times over the past couple of months and plan to hold for the long term.

S4 Capital shares have been on fire lately. Not only have they more than doubled so far this year. They have more than doubled in the past month!

This still looks cheap to me

There could be issues ahead, of course. The founder remains central to the company, posing a key man risk.

And while net debt has been reduced, it is still £87m. That may not sound huge given the company has a £280m market capitalisation, but the company reported a £25m loss last year and revenue fell 11%.

So, why do I still see the current share price as a potential bargain?

That loss may look bad but ad agencies typically have lots of non-cash expenses, like amortising intellectual property. Last year S4 generated £87m of free cash flow. Cash flow from operations was £128m.

That means that the enterprise value (market cap plus the net debt) is a little under three times operating cash flow. For a tech company with renowned leadership and a strong client base, I see that as cheap.

Could it soar even from here?

Just because this growth share once sold for pounds does not mean it will again.

But the business clearly has momentum. Net debt is being reduced fast, cash flows are strong and I buy into the argument that AI could end up accelerating S4’s competitive position not diminishing it.

At around eight times adjusted basic earnings per share, the current share price looks cheap.

The company is looking to boost its operational earnings before interest, tax, depreciation and amortisation (EBITDA) margin from around 12% to 20% over time, in part thanks to thinning its workforce.

That could boost earnings significantly. Combined with an improved balance sheet, I see that as potentially enough to push the share price up substantially, in coming years.

The post This UK growth share’s already doubled this year. I reckon it might just be getting going! appeared first on The Motley Fool UK.

Once the deadline passes, this year’s contribution allowance will be gone forever.

However, as one door closes, another opens. At the stroke of midnight on 5/6 April, the current tax year’s ISA contribution allowance ends but another one immediately starts.

Given that, it can be easy to wonder what all the fuss is about. But not acting in the next several days could actually be a costly mistake. Here’s why!

The ISA wrapper offers tax benefits that can add up

Put simply, the money put into a Stocks and Shares ISA is protected from the taxman. In practice that means if someone makes a capital gain on the shares in their ISA when they sell it, it is not taxable. Dividends they earn inside the ISA are also not taxable.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Even better for a long-term investor like myself, those untaxed dividends can stay inside the ISA wrapper. So for example they could fund more share purchases.

It has the effect that while a typical investor can only put £20k a year into their ISA, they may actually be able to grow its investable amount by more than that each year thanks to dividends being kept inside the tax-free wrapper.

The costs of inaction

Does any of this matter? Absolutely – for two key reasons.

First, legally shielding investments from taxes such as capital gains tax and income tax can be a significant saving.

Depending on how well those investments do, that could mean a substantial amount of money that can stay with the ISA holder rather than being forcibly commandeered by the taxman.

Secondly, this potentially offers something for even a modest taxpayer. With so much discussion centred on the standard £20k annual contribution allowance, many of us may think ‘I don’t have anywhere near that much spare to put in the stock market, so this doesn’t matter to me‘.

But remember – that £20k number is the ceiling. Even for someone with much less to invest – a coupel of hundred pounds, say – taking advantage of their ISA allowance could help them legally reduce the tax to which they would otherwise be liable.

I’m excited about this share!

That may seem academic. But what if a share soars and so might attract a hefty capital gains tax even on a modest investment?

One share that has soared is digital advertising agency S4 Capital (LSE: SFOR). It went up 455% in a year and a half, reaching over £8 a share. However – that was years ago! Now it sells for pennies.

Still, as a long-term S4 Capital investor, I think it may now be badly undervalued. This month, it announced a 10% dividend increase. Net debt has been sharply reduced. The company’s digital focus could help it navigate clients through the AI transformation.

Then again, it may not. Revenue is falling and there is a risk that AI could eat into the ad agency’s lunch, hurting revenues and profits.

That risk is real. But I plan to hang onto the S4 Capital shares in my ISA, as I think its improving balance sheet and strong digital capabilities deserve a much higher valuation.

The post Are you ignoring the ISA deadline? Here’s what you may be losing forever! appeared first on The Motley Fool UK.

But where to start? Here are some principles I think could help someone as they think about how to construct their portfolio.

Always aim to keep diversified

No matter how brilliant a company may be – or how well its share price has performed over the long term – it is possible to have too much of a good thing.

In the stock market, that comes down to a lack of diversification. Spreading the money in a SIPP across different companies is basically a financial equivalent of not keeping all your eggs in one basket.

Fortunately, a £100k SIPP would be big enough to diversify easily, for example, by spreading it evenly across 10 different shares.

Diversifying and being diversified are not the same thing

So, having spread the money like that, will a SIPP be diversified?

Initially, yes. But that can change without buying or selling any shares.

For example, one share in the SIPP may do brilliantly. That does not sound bad! However, it can mean a diversified SIPP becomes far more concentrated over time, with one or two shares representing most of its value.

It is therefore important to consider from time to time whether any changes are needed to keep the SIPP diversified.

A SIPP for all seasons

Diversification is not just about individual shares – it involves business sectors too. Owning 10 shares offers some diversification – but less so if all 10 are financial services shares.

I understand: a strong focus on a single sector can be appealing. Five of the highest-yielding FTSE 100 shares right now are financial services firms.

But some sectors can be highly cyclical. It is important to try and construct a SIPP in a way that it will hopefully do well over the long term, not get sunk by a downturn in the economic cycle or shifts in business trends.

Having a reason for every share you own

Does it make sense to put most of the SIPP into shares you understand and a bit into some speculative ones you know little about?

As an investor not gambler, it makes no sense at all to me.

Someone can try and build SIPP wealth through share prices growing, dividends piling up, or both. But whatever approach chosen, I find it helpful to be able to articulate it – and understand how each share in the SIPP fits that investment strategy.

Could this share in my SIPP be bouncing back?

To illustrate, one share I own in my SIPP is S4 Capital (LSE: SFOR).

The digital advertising agency share has performed terribly over time. My shareholding shows a sizeable paper loss.

Sales are falling. There is an ongoing risk that AI could lead to lower revenues.

But this week saw the S4 Capital share price jump, as the market digested sharply reduced net debt and a 10% dividend increase. One director bought shares, which I took as a sign of confidence on their part.

I have hung onto the S4 shares I own because I believe in its business model and vision, as well as thinking it has excellent management. With promising signs of improving profitability despite lower revenues, I have no plans to sell it.

The post Here’s what a 10-share £100k SIPP portfolio could look like appeared first on The Motley Fool UK.

However, while they sell for pennies each and may look cheap, in both cases there are risks that could help explain the low-seeming price.

Topps Tiles

My shareholding in Topps Tiles (LSE: TPT) has so far been very disappointing. But I have hung on.

I do recognize some of the risks that explain a share price fall of 14% in the past year. A weak economy can hurt demand for home renovation, for example.

Set against that, though, I expect that there will always be some demand for tiles, vinyls, and other such floor and wall coverings, at every point in the economic cycle. Topps can benefit from that thanks to economies of scale, a large customer base, and extensive network of depots.

Interim results this week showed group revenues up 16% year on year, while a pre-tax loss at the same point last year gave way to a £1.9m profit before tax this time around.

The interim dividend fell by a third. I do not like that, but I do appreciate management’s discipline in delivering on their dividend policy. That can help manage cash prudently.

For now, I think the share remains a potential bargain but with a lot of work still to do. So, unless the share price falls further, I will not be buying more for my portfolio. I will hang on to my current holding.

S4 Capital

Another very disappointing investment I have hung on to is digital ad agency group S4 Capital (LSE: SFOR). Just when I think the share price surely cannot go even lower, it does. S4 has lost 97% of its value since September 2021.

But I reckon this share is possibly at an inflection point. I think it may either drift down until it is worthless or else potentially stage a stunning recovery.

Sure, the first quarter saw a 12% year-on-year decline in revenues. Advertising demand may get weaker, AI threatens to eat much of the industry’s lunch, and S4’s tech-heavy client roster may well tighten their belts on spending. All bad news.

But there is another side to all this. The company has sharply reduced net debt and expects to lower it further this year. It has initiated a dividend. Liquidity and cash flow was “much improved” versus the same period last year.

Boss Sir Martin Sorrell was on the ropes like this before at WPP and went on to create enormous shareholder value. But his role also adds key-man risk to all the others.

Insiders own a large chunk of the company and have not been selling lately. Nor, though, have any dipped into their own pockets this year to buy shares despite a record low price.

That alone means that, while I think this could still be a great bargain, I will not expand my shareholding just yet. So, I continue to look for other cheap shares to buy instead.

The post On the hunt for cheap shares to buy for under a pound, here are 2 I found – again! appeared first on The Motley Fool UK.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Beazley

What it does: This speciality-risk insurance and reinsurance business operates across a host of sectors, including professional indemnity, directors and officers, crime, healthcare, property, environmental liability, marine and political risks.

By Harvey Jones. Lloyd’s of London insurer Beazley (LSE: BEZ) is one of the unsung heroes of the FTSE 100. Its shares are up 42.19% over 12 months and 91.92% over three years, but never quite get the attention they deserve.

So despite smashing the index, the Beazley share price still trades at a dirt-cheap valuation of just 4.82 times earnings.

One reason is that it’s risky. One or two big claims could hit annual profits, and such is the nature of insurance, they are totally unpredictable.

Beazley is also on the front line of climate change, as floods, storms and hurricanes are likely to drive up claims costs.

Yet on 8 August it announced that it had almost doubled its first-half profit to $728.9m, a record high. It also increased its combined ratio, a key measure of underwriting profitability.

Return on equity jumped from 18% to 28%. Beazley is also exploring a new opportunity in cyber liability insurance.

The yield is so-so at 1.89% but the board should complete a $325m share buyback by the end of the year. I’m keen to buy Beazley in August. At today’s low price, it would be rude not to.

Harvey Jones does not own shares in Beazley.

London Stock Exchange Group

What it does: London Stock Exchange Group is a leading financial markets infrastructure company and data provider.  

By Edward Sheldon, CFA. I’ve chosen London Stock Exchange Group (LSE: LSEG) as my top growth stock this month. There are a few reasons why. 

One is that the company is performing well at the moment. For the first half of 2024, adjusted earnings per share were up 8.1% year on year. On the back of this performance, the company hiked its interim dividend by 14.8%. 

Another is that the company is working with AI powerhouse Microsoft to enhance its financial data platform (which is used by thousands of banks and investment managers worldwide). Looking ahead, I believe the company may be able to capture market share from Bloomberg and FactSet. Microsoft CEO Satya Nadella has said that the products will allow banks to do “more with less”. 

Finally, the shares are in a strong uptrend at present. And with the stock trading on a reasonable mid-20s P/E ratio right now, I reckon the trend has legs. 

Of course, if the tech sector was to experience some weakness, this stock could experience a pullback. Taking a long-term view, however, I think it has a lot of potential. 

Edward Sheldon owns shares in London Stock Exchange Group and Microsoft.

S4 Capital

What it does: S4 Capital is a digital marketing agency network with a worldwide business serving a range of blue-chip clients

By Christopher Ruane. Over the past several years, my holding in S4 Capital (LSE: SFOR) has plummeted in value. That reflects a number of risks I think are still pertinent, from the key man risk of Sir Martin Sorrell’s critical role, to weak demand for advertising. The share, selling for pennies, continues to be risky in my view.

Still, although the formerly fast-growing company has seen declining revenues, I expect it to return to growth in the next year or two. It has signalled that it may also initiate a dividend.

Meanwhile, as advertising has proven more resilient in the current economy than some commentators expected, S4 could return to revenue growth sooner rather than later.

Interim results are due on 19 September. So we will know how well – or not – the business has been doing lately. An impressive client roster, strong digital marketing offering and unique talent pool are among the competitive advantages I see.  

Christopher Ruane owns shares in S4 Capital.

The post Best British growth stocks to consider buying in September appeared first on The Motley Fool UK.

I recently topped up my holding a bit by buying some more shares. Below, I explain why.

Troubled history

The UK share in question is S4 Capital (LSE: SFOR). Although headquartered and listed in London, the main market for the digital advertising agency network is actually North America.

Although the recent price action has been positive, on a longer term perspective, S4 has done horrendously. The share price has halved in the past year alone and is down 63% over five years. Even worse, it is down 93% since a 2021 high.

What went wrong – and is the price a possible bargain if it gets fixed?

Lots to prove

The share price collapse has been a combination of different factors. S4 always divided opinions in the City and when it repeatedly delayed publishing its accounts a couple of years ago, it badly hurt in a reputation.

The company has implemented new accounting controls since then and vowed never to have a repeat of the episode. But the reputational damage lingers.

The digital market has seen some demand declines in the current economic environment, with net revenues in the first quarter declining 15% year-on-year. Net debt topped £200m, at a company with a market capitalisation of just £345m.

Meanwhile, the business remains lossmaking, although last year’s post-tax loss of £6m was a huge improvement on £161m the prior year.

Director buying

Add into that ongoing dilution as the company issues shares as part of past acquisitions and the S4 investment case looks troubled at best.

For a long time, directors did not buy any more shares using their own money even as the price crashed, although in fairness director shareholdings remained substantial.

In the past few weeks though, two directors have stumped up their own cash to increase their holdings.

Cautiously optimistic

Directors can misjudge share prices, like everyone else. But having held off buying any more shares myself without that vote of confidence, the director deals made me look again at S4.

The first quarter looked weak, but the company has consistently said it expects things to be stronger in the second half of the year. Net debt should start to fall as payments for historical acquisitions stop falling due, leaving the company free to buy back more of its shares and potentially initiate a dividend.

While demand remains subdued, S4 has a strong offering as is demonstrated by its roster of blue-chip clients spending millions of pounds each with the company a year.

Clearly, there are risks here. However, I think they have been priced in and, at the current level, I reckon this UK share offers potentially brilliant long-term value.

The post This UK share’s up 29% in days – and still sells for pennies appeared first on The Motley Fool UK.

Halma

What it does: Halma is a life-saving technology company committed to growing a safer, cleaner, and healthier future. 

By Paul Summers. I’d rather buy stock in a tech innovator whose products are essential rather than just desirable. FTSE 100 member Halma (LSE: HLMA) fits the bill nicely.

A group of around 45 companies, Halma produces safety technologies for industrial and logistics operations, monitoring and protecting the environment and enhancing the quality of care delivered by healthcare providers. 

I don’t know about you but I can’t see demand for these falling away. I therefore fully expect the company to continue raising its dividend by 5% or more every year for the foreseeable future, just as it’s done for the last 44 years!

The drawback to all this is that Halma stock never trades on a low earnings multiple. That said, I reckon the ongoing (but probably temporary) aversion to growth-focused companies among UK investors provides me with as good an opportunity as any to get involved.  

Paul Summers has no position in Halma

RELX

What it does: RELX is a global provider of information-based analytics and decision tools for professional and business customers.

By Andrew Mackie. My Stocks and Shares ISA remains relatively underexposed to the tech sector. This is mostly due to the rich valuations across the board. However, I do invest in tech businesses where I see a clear competitive advantage. RELX (LSE: REL) is one such tech innovator.

Its powerful datasets across risk, legal and insurance are being continually upgraded with AI tools. Launched last October, Lexis + AI is likely to be a game-changer for the legal profession. This solution offers conversational search, intelligent legal drafting, insightful summarisation, and document upload and analysis capabilities.

Its Risk division is another area primed for explosive growth over the coming decade. Financial crime compliance and digital fraud are two such areas. But equally important is insurance risk. Its proprietary data analytics and decision tools enable insurance businesses to improve their offerings across the value chain.

RELX isn’t a cheap stock, with a trailing price-to-earnings multiple of 36. Should the euphoria over AI diminish, its share price will likely fall. But as an investor who takes a long-term view, I remain bullish on its prospects.

Andrew Mackie owns shares in RELX.

RELX

What it does: RELX is a global provider of information and data analytics for customers across the scientific, medical and legal professions.

By Ben McPoland. FTSE 100 data firm RELX (LSE: REL) is fully embracing the huge potential of new technology and has already launched generative AI in its LexisNexis legal business.

This Lexis+ AI solution features conversational search, intelligent legal drafting and summarisation, and document upload and analysis capabilities. Because it is grounded in RELX’s vast repository of legal information, the risk of invented content (hallucinations) is massively reduced.

CFO Nick Luff said this AI tool is already creating “significant efficiency gains, whether summarising documents, conducting research, legal research or drafting court submissions.”

Last year, the firm’s adjusted operating profit grew 13% to £3.03bn on revenue of £9.16bn (up 8%). And this year the company has launched a conversational AI product in its scientific, technical and medical unit, which will support clinicians in delivering high-quality patient care. 

The stock isn’t cheap trading at 27 times forward earnings, which potentially adds some valuation risk.

However, given the fact that generative AI is set to reinforce RELX’s business model, I reckon this innovative FTSE firm deserves a premium valuation.

Ben McPoland does not own shares in RELX.  

S4 Capital

What it does: S4 Capital is a digital media advertising agency network based in the UK, with operations worldwide.

By Christopher Ruane. Owning shares in S4 Capital (LSE: SFOR) has led to me nursing a sizeable paper loss. Directors own a large proportion of the shares but have largely not been buying lately, despite the share price collapsing by almost two thirds over the past year.

Despite that, I do see S4 as a tech innovator. Its digital-only model in the massive global advertising industry means that it is designed for what the marketing world looks like now rather than in the past.

So why have the shares been falling?

Past accounting delays have shaken City confidence in the company’s management, although it has made positive strides in that direction. The company is lossmaking. It has added debt to its balance sheet in recent years.

Clearly, this stock has risks. But I expect debt to fall and cost control could help move the company to profit. Its valuation looks cheap for the potential and I continue to hold.

Christopher Ruane owns shares in S4 Capital.

Sage Group

What it does: Sage Group supplies integrated accounting, payroll and human resources services mainly to small- and medium-sized companies.

By Royston Wild. Over the past 43 years, Sage Group (LSE:SGE) has steadily evolved its services to become one of the world’s top five enterprise resource planning (ERP) providers.

The FTSE 100 firm’s bread and butter is the supply of accounting and payroll software. And it is now investing heavily in artificial intelligence (AI) to enhance the functionality of its cloud-based services.

It recently launched Sage Network Inbox and Sage Copilot, the first tools in the company’s stable to make use of generative AI. Chief executive Steve Hare has predicted that machine thinking will “change the nature” of accounting, and the firm is seeking to put itself at the forefront of this revolution.

Sage’s share price has soared during the past 12 months. And this leaves it trading on a forward price-to-earnings (P/E) ratio north of 35 times.

High multiples like this are common among tech stocks. But remember that elevated numbers like Sage’s also make a price correction more likely if bad news comes along that spooks the market.

Royston Wild does not own shares in Sage Group.

The post 4 tech innovators in the FTSE 350 appeared first on The Motley Fool UK.

One stock that has grabbed my attention recently is Sir Martin Sorrell’s digital marketing business S4 Capital (LSE: SFOR). According to analysts at Citi, it has the potential to rise more than 300% from here.

The potential for huge gains

In a research note published earlier this month, Citi’s analysts put a 230p price target on S4 Capital.

That’s 314% higher than the current share price.

Their view is that the growth stock – which has fallen more than 90% from its highs – is now offering a high-risk-yet-potentially rewarding investment opportunity.

In the research note, the analysts noted that the digital marketing company is facing some challenges right now.

However, they said that they see the potential for a medium-term business rebound.

It’s worth pointing out that if Citi’s share price target comes to pass, an investment of £2,000 in S4 Capital today could grow to around £8,300. That would obviously be a nice windfall.

I need to take brokers’ share price targets with a grain of salt though. From my experience, they’re often a little off the mark.

A turnaround play?

Now, S4 is certainly facing some challenges at the moment.

In its recent results for 2023, the company posted a 2% year-on-year fall in revenue along with a 25% drop in operational earnings before tax, interest, depreciation, and amortisation (EBITDA).

It blamed this performance on a reluctance from its tech-heavy client base to spend and a slowdown in new business wins.

As for near-term guidance, it wasn’t great. For 2024, the company expects like-for-like net revenue to be down year on year, and operational earnings to be broadly similar to 2023 levels.

The company noted that the challenging economic conditions and client caution are likely to persist in the short term, despite the fact that lower interest rates are on the horizon.

However, taking a longer-term view, S4 was optimistic that business performance will pick up.

“We remain confident that our talent, business model, strategy, and scaled client relationships position us well for above average growth in the longer term, with an emphasis on deploying free cash flow to boost shareowner returns,” said Sir Martin Sorrell.

So, for patient long-term investors, there could be an opportunity to consider here.

Currently, the company’s price-to-earnings (P/E) ratio is just 10, so there’s definitely room for a valuation re-rating if business performance improves.

A high-risk stock

That said, this stock is risky.

For starters, net debt was sitting at £181m at the end of 2023. That’s high given that operating profit was just £20m.

Secondly, artificial intelligence (AI) could be a threat to the business in the future. This could potentially have a negative impact on the company’s content business.

It’s also worth noting that last year, the company performed poorly when large technology businesses were generally doing well. This raises some questions about S4’s business model.

Given these issues, I won’t be buying S4 shares right now. For me, they’re just a bit too risky.

However, for those with a high tolerance for risk, they could be worth considering as a high-risk, high-reward play.

The post This 55p UK stock could rise more than 300%, according to a City broker appeared first on The Motley Fool UK.

I own it and looking at the current share price makes me wince. However, I think there may be substantial value in the business that the stock market is overlooking.

Some recent news may be a catalyst for the growth share to start gaining momentum again, in my view.

Digital ad agency network with strong growth history

The share in question is S4 Capital (LSE: SFOR). It grew quickly by acquiring a range of digital ad agencies and has a powerful product offering that has attracted world-class clients.

Its share price has collapsed. The growth share is worth just a fifth of what it was a year ago. But while the share price has been in freefall, there is a strong history of revenue growth at the business.

That has not been maintained and the company expects its full-year results to show a revenue decline from the previous year. A weak advertising market risks further falls.

But that also reflects S4’s evolving nature. It has stopped acquisitions for now and is focusing on improving its financial performance and profit margins.

I think that bodes well. After all, its revenues in the latest quarter were roughly a quarter of a billion pounds. That is almost the same as its market capitalisation of £255m.

Focus on earnings and debt

But revenues are one thing. The bigger concern many investors have about S4 is its profitability and balance sheet.

It is loss-making, although the loss per share in the first half of 3.2p was sharply lower than in the same period last year. With an ongoing focus on cost control I am hoping the company can return to the position of several years ago when it was profitable.

Another concern is net debt. It has risen steeply over the past few years, largely due to the acquisition streak.

The company ended its most recent quarter with net debt of £185m. But it noted that, “the balance sheet has sufficient liquidity and long-dated debt maturities to facilitate growth”.

This week, S4 started a share buyback. The scale is small, with a total maximum in this round of under £3m. But I still take it as a positive sign that the board is comfortable enough with the debt position to spend cash buying back shares.

Light at the end of the tunnel?

There are still clear risks here.

However, I think there are positive signs that could potentially support the growth share rising from here.

One is the optimism signalled by the buyback. Another was a fourth-quarter trading statement this week that contained various reassuring items, such as that operational earnings margin before interest, tax, depreciation, and amortisation improved in the second half of last year due to cost control.

S4 has disappointed me badly before. But I see the current price of the growth share as low given its long-term potential, so I plan to hold my shares.

The post Has this fallen star growth share finally turned a corner? appeared first on The Motley Fool UK.

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.

The post Could this once high-flying UK share crash to zero? appeared first on The Motley Fool UK.