Enero Group – ASX:EGG . A Summary Of The 1HFY16 Results.

Enero Group – ASX:EGG

1HFY16 Results – A Summary

A flattening revenue line, record breaking profitability, strengthening margins and 40% of its market value backed by cash does not set the stage for basement level market prices.  

Enero Group (EGG) reported strong 1HFY16 results which saw net revenue rise 3% to $57.6m (helped by a FX tailwind of ~$4.3m) and operating EBITDA by 57% to $7.2m compared to the pcp. Driving this strong operating EBITDA performance was robust margin expansion from 8.2% to 12.6% over the same time period last year as a result of a resilient revenue base and cost management. Operating costs as a percentage of revenue continue to decline as a result of stricter cost controls.

Marketing budgets are generally one of the first budgets to get culled when times get tough. Despite this, EGG delivered a strong result from all three key operating hubs. Australasia saw revenue decline 21.8% to $22.9m and operating EBITDA fell by 25.0% to $3.3m. However, EGG was able to arrest a material decline in margin erosion which fell by a mere 0.6% to 14.4% on the back of cost control measures. I do not expect revenue declines in Australia to continue into 2HFY16.

Robust performance in the UK & Europe region was helped by a recovering economy and the resurgence of marketing spending by companies and led to some significant client wins such as Ebay. Revenue in the region was up 13.1% to $27m and operating EBITDA increased 63.9% to $6.7m. All of which helped boost the operating EBITDA margin from 16.7% to a respectable 24.8%. I expect strength in this facet of the company to continue its momentum and deliver a good 2HFY16 result. 

The turnaround in the USA is gaining traction but it’s still sub-scale. Revenue grew by 6.0% to $7.7m and operating EBITDA rose 59.8% to $0.7m. Given the size of the US market, it represents a large opportunity going forward. Given the large cash balance and need to grow scale, M&A activity may seem appropriate.

On almost any measure, this stock appears undervalued. Barring upside (downside) from revenue growth (decline), continued focus on cost management, the expansion of margins,  and momentum in key agencies will see continued profit growth. With almost half of its market value backed by cash (which continues to grow), and trading on about 3x EV/EBITDA  (FY16e) and a FCF yield of ~17% FY16e, such a risk-reward is extremely favourable.

Background Information

Enero Group (EGG) is an integrated marketing and communications firm with a portfolio of 10 companies. EGG operates from three primary locations – Sydney, London and New York with Australia being the largest by revenue and exposure. EGG’s key services fall into three main categories including advertising and production, public relations and research.

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