We look at valuation for S4 Capital using three distinct methodologies:

- The first is a DCF-based valuation analysis based on a LT growth rate of 2% and a discount rate of 10%. This implies a FV of 219p (down from 230p on lower forecasts).
- The second is a comparative multiple analysis looking at revenue growth for S4 Capital vs. a range of agency and IT consultancy peers. Benchmarking the group on a range of metrics (P/E, EV/EBIT, EV/Sales) with its two peer groups (agencies/consultancy services companies) implies a FV of 250p.
- The third is a SOTP-based analysis that values the Content, Data & Digital Media and Technology Services activities separately. This implies a fair value of 184p per share (down from 196p again on lower forecasts).

The mid-point of these analyses suggests a FV of 220p (down from 225p), but we apply a discount to this to reflect the dilution from the group’s LTIP plan for its co-founders. This, on our estimates, would be 5-10% dilutive to shareholders based on the £1.1bn of base invested capital plus the 6% compound growth hurdle. This drives an implied fair value of 203p which is the basis for our target price of 200p (reduced from 210p).

S4 Capital screens as High Risk in our quantitative model given its relatively short trading history and high level of price volatility. We concur that the group does indeed warrant a High Risk rating not only because of this but also because of the group’s fairly short history as a public company, highly acquisitive nature and recent issues with regard to publishing FY results due to lack of sign-off from its auditors.

The following risks, listed in order of importance, could negatively impact our forecasts and the achievement of our target price:

Macro Uncertainty – Notwithstanding the strong growth experienced over many years, digital advertising markets are vulnerable to macro uncertainty. A less robust macro environment than we expect could lead to less consumer confidence and disposable income and a knock-on effect to demand for advertising. Any sharp variation in advertising could depress revenues and without an adjustment to the cost base, high levels of drop-through to profitability.

Loss of Key Clients – Revenue concentration both in terms of end industries and individual clients is fairly for S4 Capital. Should there be a reversal of prospects in particular for technology clients or if the group were to lose any of its more significant clients, this too could have a material impact on revenue, as well as sentiment.

Competitive Risk – S4 Capital operates in highly fragmented and competitive markets and a lot of its relationships with advertisers are non-exclusive in nature. An increase in competition across the landscape, or a move to more exclusive arrangements, could have a negative impact on S4 Capital’s business.

Regulatory Risk – Digital marketing is an area where politicians and policymakers have looked to become more active in terms of regulation. Further privacy-related regulations on advertising could have a material impact if they disrupt programmatic/real time media buying to any material extent. In its defence, S4 Capital, via its Technology Services and Content segments, helps advertisers build their own first-party data sets so it may have a natural hedge to this risk.

Currency Volatility – As a business that operates across borders and has a meaningful EM exposure, S4 Capital generates revenue in a number of currencies. To the extent that EM currencies tend to exhibit more volatility, this may enhance the cyclicality of the business around macro shocks, even if, ultimately, we anticipate this risk will be translational for the main part.