The FY19 result for marketing services company, Enero Group (ASX:EGG), is a beater! Starting with the headline numbers, Enero posted revenue of $129.5m and operating EBITDA of $20.7m which was 6% above consensus. Underlying revenue growth of 14% was very strong, whilst underlying EPS growth was 53% and the final dividend increased to 3cps.

Enero segment their operations by geography; UK/EU, USA and Australia. All divisions experienced revenue growth and we believe the company can be put in the basket of a global business as >60% of their earnings come from offshore. In our view the key takeaways from the result are:

• The organic growth of 14%. This is substantially higher than what has occurred in previous years and in our view the most pleasing aspect of the result.
• The 2HFY19 EBITDA was an improvement on the strong 1HFY19 EBITDA which demonstrates that momentum continues to build within the business.
• The nature of the US operations is focused on public relations (PR) services & digital marketing services which are typically high margin. We are seeing the US operations delivering outsized revenue growth which, due to the margin profile is a meaningful contribution to group earnings growth. The margins in this division have almost doubled in FY19 vs FY18.
• The growth experienced is occurring whilst cash conversion (was 100%) and cost control disciplines remain. 

Growing through strategic accretive acquisitions

Momentum in these types of businesses is a significant factor. When there is a culture of success, it can become a virtuous cycle. Success fosters further growth in terms of both attracting talent and being a desirable firm for new clients to work with. We believe EGG is demonstrating this ‘winning’ momentum after many years of hard turnaround work and we believe this will be a tailwind for the medium to long term.

The strategic benefit of acquisitions which lead to group revenue synergies is very important. Under the current management, we have seen them make two acquisitions. Revenue synergies occur as the EGG group can offer a client a holistic solution of say creative, digital and public relations (PR) services through sharing resources and ideas within their group of companies, whilst remaining a nimble organisation.

EGG has been able to ‘land and expand’ their services within existing clients in addition to winning work with new, larger clients as a result of this aligned approach such as with Facebook and NetApp. We believe the revenue synergies are flowing through the P&L as shown by the 14% organic revenue growth.

This industry has always been a very acquisitive one. There is the presence of global conglomerates such as WPP & Publicis Group, but an interesting recent development is the entry of the global accounting and advisory companies (such as Deloitte, Accenture) who have now executed many acquisitions within the advertising/marketing industry. 

Many of these acquisitions work off a rule of thumb valuation of 2 x revenue and most of these acquisitions are of private businesses. EGG is a public business and trades on an EV/Revenue multiple of circa 1x. We believe the market is overlooking the strategic value of successful yet small businesses like EGG to the global acquirers.

The road ahead for Enero

As mentioned above, EGG has excellent momentum, particularly within the US operations. From a high-level standpoint, we do not see a reason to believe the requirement for tech-focused PR services (especially within US tech companies) will abate hence we believe this tailwind will remain in place.

Through its UK/EU operations, EGG has been able to weather the uncertainty surrounding Brexit reasonably well. Should any market improvement occur then we believe it would become a tailwind for advertising spend within that market from which EGG would benefit.

As at the end of FY19 EGG has no debt and a current cash balance of $44m - some of which could be used to pursue further value-added acquisitions in the future. The management team are competent at buying good businesses, which complement the broader group, as well as extracting revenue synergies. An acquisition in FY20 in either the US or UK could further build out the holistic nature of the EGG offering in these geographies.

FY19 was a great result. With an organic growth profile, offshore earnings, industry tailwinds, a conservative balance sheet and valuation, it looks to be 'sunny side up' for EGG heading into FY20. 

Invest for the long term