Expansion Into US And AI Integration May Improve Operations, But Net Debt And Tech Challenges Could Affect Profitability

Key Takeaways

• Strategic AI integration and restructuring efforts are set to enhance margins and generate cost savings, boosting profitability.
  
• U.S. market growth strategy and Mach49 stabilization are expected to drive future revenue and operational cash flow.
  
• Loss of major contracts and weak technology market trends threaten revenue growth, while increased net debt and operational inefficiencies pose financial risks.

Catalysts

Provides communications services in the United Kingdom, Europe, Africa, the United States, and the Asia Pacific.

• The company is positioning SMG for significant growth in the U.S. market, which is much larger than the U.K., suggesting potential for a considerable increase in revenue and earnings.
  
• The focus on integrating AI initiatives across the business is expected to create new revenue streams and improve efficiencies, which could enhance both gross margins and net margins.
  
• The company's restructuring efforts and head office simplification are expected to generate material cost savings, improving profit margins and potentially increasing earnings.
  
• The stabilization and future growth of Mach49, particularly after securing a large contract, may contribute positively to earnings and operational cash flow.
  
• Continued investment in organic growth, such as expansion into retail media and influencer marketing, alongside strategic bolt-on acquisitions, could drive future revenue growth.

Next 15 Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Next 15 Group's revenue will decrease by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 10.6% in 3 years time.
• Analysts expect earnings to reach £55.4 million (and earnings per share of £0.43) by about April 2028, up from £39.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £65 million in earnings, and the most bearish expecting £40 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from 6.0x today. This future PE is greater than the current PE for the GB Media industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Next 15 Group Future Earnings Per Share Growth

Risks

• The loss of a major contract and continued sluggish trends in the technology market have raised concerns about sustained revenue growth. This uncertainty particularly impacts revenue streams from technology-focused clients.
  
• Flat revenue and currency fluctuations, particularly with potential aggressive Fed policies relative to U.K. policy, may exert downward pressure on earnings due to a relatively high dollar-denominated business model.
  
• The increase in net debt, partly due to earn-out payments and challenging working capital outflows, can affect liquidity and net margins, posing a financial risk if not managed properly.
  
• The complexities and inefficiencies of the current operating model, especially concerning client synergies and head office scaling, could lead to increased operational costs, reducing net margins.
  
• Persistent challenges in the B2B tech segment, where high-margin businesses have shown weaker performance, may hinder profitability and earnings, as seen in the significant drop in EPS and operating profit.

Valuation

• The analysts have a consensus price target of £5.852 for Next 15 Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £7.0, and the most bearish reporting a price target of just £3.82.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £523.8 million, earnings will come to £55.4 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of £2.39, the analyst price target of £5.85 is 59.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.