Next 15 Group: Marketing A Recovery

7th Nov '24 by Mark Simpson

5 comments 1046 reads

Next 15 (LON:NFG) is a company that has not really appeared on my radar before. The size of the company, its rating, and the type of industry meant that it passed me by. However, recent falls in the share price have been brutal. A profit warning combined with the general malaise in AIM means the shares are now trading on a forward P/E of just 5. It seems to me that the company is worth looking at in more detail.

Summary

Next 15 (LON:NFG) is a mid-cap, AIM-listed company that aims to help companies tackle their thorniest, most complex and most important challenges by combining growth consulting with marketing services, data and technology platforms and business transformation projects.
The company has been highly acquisitive over the years. Initially, to build scale within its marketing and communications business by adding additional agency brands. Latterly, to shift the business towards growth consultancy, it has acquired companies such as Mach49.
Historically, the company has been a strong performer. Between 2015 and 2022, the share price came close to 10-bagging. Since 2022, their revenue has risen 56%, and historical EPS more than trebled, with a ROCE that has averaged 20%. Yet the shares lost over 60% of their value in that time.
The majority of the share price fall has occurred since the start of September, when the company announced that its largest customer had not renewed the contract after its initial three-year term and will now end on 31 December 2024. This contract had been expected to contribute just over £80m of revenue in FY26, meaning that the Momentum rank comes in at just 9.
With a StockRank of just 57, this won't appeal to pure quant investors. As well as the weak Momentum Rank, a declining Quality Rank may give some investors pause for concern. However, a quick check at the historical StockReports shows that the company had the same fundamental ratios at the start of October and a 91 Quality Rank. It seems this company's StockRank has fallen not due to declines in the company's quality ratios but the increase in these metrics for other companies.
However, if current broker forecasts are to be believed, the forward P/E is now around 5, and the Value Rank is 84, which will appeal to Value Investors. A rough sum-of-parts valuation suggests there may be a 40% upside to the current share price.
Without acquisitions,…

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The Ox 2906

7th Nov '24

Thanks Mark, very interesting, I’ve just taken a posn earlier this week as a contrarian view, but also feel vindicated with the Trump win, he’ll free up the M&A world currently stagnated by the current FTC incumbent, he’ll also remove tax worries associated with entrepreneurship and should help, loosen the purse strings in Silicon Valley which will trickle down eventually. It would be nice to see more directors buying and there has been no sign whatsoever of any share strength which might suggest another leg down. I’ll probably have to average down I’m sure, but Next 15 (LON:NFG) could easily get snapped up by P/E or a competitor at these levels.

Mark Simpson

Thanks.

I have no current position, but I am watching quite closely. There is little sign of share price support, but, like you, I am happy averaging down, so this is not an issue for me. If the brokers' are correct, this is a prodigious cash flow generator, even if they are struggling with organic growth, so this could easily meet hurdles for Private Equity. Perhaps just the debt and earnouts may limit the abilty for them to lever up the business. At this point, institutions may simply want a liquidity event and a win that the usual 30-40% premium would represent. Management don't have enough to block it, so I think this may be a good call.

PastPerformance

Thanks Mark, interesting analysis. My main concern with this type of business is what happens when the earn outs end? Vendors leave, and potentially set up in competition (stc!) or key clients leave. The director share buying is also extremely tame as you noted. One guy repurchased just 10% of the shares he's sold in the last year at far higher levels!

Damian Cannon

That's a good write up Mark and you've covered all of the main points. Coincidentally I had a meeting with Next 15 (LON:NFG) today where we covered a reasonable amount of ground.

In short the lost contract was in Saudi Arabia and involved providing consulting services to that mad project The Line. Apparently there was rampant fraud in other areas (NOT Mach49) and the client decided to exercise their 3-year break clause. TBH management are sort of wondering whether they should ever have taken on such a mammoth deal and maybe they should have been more explicit in communication but that's in the past I guess. The problem is that in the next financial year they've lost a lot of forecast revenue.

In other areas the public sector has also proved sluggish in terms of getting deals approved and signed off. So they haven't got as much momentum as they would like. Maybe things will start to improve now that all of the elections are over but Xmas isn't far away and maybe any benefits will only happen next year?

It's also fair to say that their current stable of 19 businesses is a bit too much to handle. I think that they are going to rationalise further to cut costs. Not that this stops them being on the hook for £100m of earn-out payments which seems extraordinary.

For me the shares look cheap but not cheap enough to interest me at the current time. They seem to be suffering a bit of a hangover from their lengthy series of acquisitions and I'd like to see business prospects turning up before taking another look.

Richard Goodwin

8th Nov '24

Earn outs tend to prevent consolidation as they need to keep an intact p&l for the purchased company to measure against. Unless they renegotiate what will presumably be more generous terms.

Next 15 Group: marketing a recovery

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Mark Simpson

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