Digital And Issues Practices Will Drive Stronger Margins And Earnings In Coming Years

Catalysts

About M&C Saatchi

M&C Saatchi is a global marketing services group that delivers integrated advertising, consulting, media, issues, sports and entertainment solutions for clients.

What are the underlying business or industry changes driving this perspective?

• Ongoing shift of client spend toward digital, social and performance-led marketing, where the group is investing in AI-driven tools and performance media capabilities, should support faster top line growth and a richer mix that lifts group revenue and operating margins.
• Structural growth in sports, entertainment and influencer-led content, combined with the Dune 23 acquisition and the launch of M&C Saatchi Football, positions the company to capture higher-margin briefs that enhance earnings quality and overall net margins.
• Rising demand from governments and institutions to communicate around geopolitical, social and policy issues underpins expansion of the higher-margin issues practice, which can provide recurring work, stabilise revenue and improve profit resilience through cycles.
• Completion of back-office and middle-office transformation, together with the exit or licensing of low-margin and noncore units, is expected to hardwire structural cost savings. This should support margin expansion and earnings growth even if revenue remains mid-single digit lower in the near term.
• Targeted expansion in underpenetrated high-growth regions such as the United States and the Middle East, where marketing spend pools are large and growing, should allow the business to reweight its revenue mix toward faster-growing geographies and drive improved group revenue and profit over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming M&C Saatchi's revenue will decrease by 21.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 13.0% in 3 years time.
• Analysts expect earnings to reach £23.4 million (and earnings per share of £0.14) by about December 2028, up from £7.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the GB Media industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent or worsening geopolitical and macroeconomic uncertainty, such as further tariff tensions and policy ambiguity, could continue to delay client projects and depress marketing budgets, structurally limiting net revenue growth over time.
• The heavy reliance on self help cost savings and transformation initiatives to keep annual profit flat while revenue trends are mid single digit negative risks masking an underlying deterioration in demand that could eventually pressure operating margins and earnings if savings opportunities are exhausted.
• Ongoing weakness in key regions and specialisms, particularly the sharp declines in Australia and consulting, may indicate that parts of the portfolio are structurally exposed to cyclical, project based work, leading to a slower recovery in top line and structurally lower net margins.
• The strategy to pivot into higher margin, faster growth areas such as sports, entertainment, issues and performance media depends on successful execution of bolt on M&A and integration of new capabilities, and if these investments underperform expectations they could dilute returns on capital and constrain earnings growth.
• A continued shift of client spending toward digital, social and AI enabled marketing increases competitive intensity from technology platforms and specialist agencies, and if M&C Saatchi’s new data and AI tools fail to keep pace, client wins and retention could weaken, reducing revenue resilience and long term profit growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £1.56 for M&C Saatchi 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 £1.9, and the most bearish reporting a price target of just £1.15.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £180.1 million, earnings will come to £23.4 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of £1.23, the analyst price target of £1.56 is 21.3% 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.