S4 Capital shares halve on profit warning

Shares in S4 Capital halved last week after it issued a shock profit warning. The advertising and marketing firm led by ex-WPP chief Sir Martin Sorrell told investors it would fail to meet previous earnings guidance for the full year due to “investment in hiring” and the increase in the cost base at its Content business.

Management said that although revenue growth remained “robust”, the company would be lowering EBITDA (earnings before interest, tax, depreciation and amortisation) expectations to around £120 million. Previous analyst estimates were for EBITDA of £154 - £165 million.

“With the pattern of profitability already significantly skewed to the second half of the year, and as previously signalled more than the usual two-thirds weighting, this means that the profitability required for the second half of the year to meet market expectations will be even greater,” the company told investors.

Another blow for S4 Capital investors

The latest disappointment comes after S4 Capital previously had to delay reporting its financial results due to auditing issues, a situation Sir Martin described at the time as “embarrassing”.

The company has issued a hiring freeze and has introduced cost cutting measures. On the more positive side, management said that improved working capital means that net debt will now be towards the lower end of guidance of £140 to £190 million.

Analysts at broker Citi described the latest snag as “growing pains” for the start-up, which has swallowed up 30 companies in less than three years. However, they noted that it might “perpetuate concerns about the group’s controls given, arguably, this should have been better anticipated.”

Meanwhile, analysts at broker Morgan Stanley cut their rating on the shares to equal weight from overweight, while those at Peel Hunt were concerned that, while the shares are cheap, poor investor sentiment would weigh on them and any hopes of a recovery.

M&A deals may prove more difficult to achieve

S4 Capital shares have performed poorly this year and are down 83% to 120p. Investor confidence had already been hit hard by the previous auditing fiasco that led to the company delaying its results and this profit warning will not help matters.

Clients include Meta, Alphabet and HP and the company had aimed to double gross profit or net income organically over the next three years. However, the share price slump will now limit the company’s ability to do cash and stock-based merger and acquisition deals going forward.

While the shares look cheap and could be a long-term recovery play, investors may fear there may be further disappointment to come.