S4 Capital PLC

S4 Capital PLC (LON: SFOR) is a FTSE main market listed digital advertising and marketing services entity.

Investment Rationale – SPECULATIVE BUY at GBX 570.00

• Merger: The combination of Maverick Digital and Media.Monks will significantly expand the Company’s Data&digital media and Technology services practices. Previously, Miyagi also merged with Media.Monks, to strengthen content capabilities, adds talent and expands in Italy.
• Financial Growth: SFOR delivered significant revenue and gross profit growth in Q3 FY21. Meanwhile, the liquidity also remained robust.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Book valuation multiples are quite undervalued against the industry average of Consumer Cylicals sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (~31.25) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.

Risk Assessments

• Covid-19 Impact: As the Omicron strain could exacerbate the prolonged pandemic impact, derail economic recovery, and can lead to cancellation or postponement of events. It can impact the SFOR’s business prospects.
• Macroeconomic Uncertainty: The ongoing economic instability with potential tightening of monetary policy, subdued consumer confidence, and currency fluctuations can also impact business performance.

Recent News

Issue of Shares: On 6 December 2021, SFOR reported that for the merger with Maverick Digital (announced on 1 December 2021), the Company issued 579,093 ordinary shares of 25 pence each as initial consideration.

Trading Update (for the third quarter ended 30 September 2021, as on 10 November 2021)

(Source: Company Website)

• Top-line Growth: Revenue jumped nearly 56% on like-for-like basis in Q3 FY21.
• Operational Growth: EBITDA and EBITDA margin continued to reflect the impact of increasing investment to prioritise top-line growth.
• Liquidity: The net debt position at the end of Q3 FY21, remained between £20 million and £40 million despite significant merger payments.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion 

SFOR delivered an exception growth in Q2 FY21 and carried the same momentum in Q3 FY21 as well. The Covid-19 pandemic has accelerated the trends of digital marketing transformation, and the Company has been capitalizing on the market opportunities well by investing a portion of EBITDA margin in growth prospects. The Company also continued to trade in tandem with ambitious internal and external targets. The stock made a 52-week High and Low of GBX 603.60 and GBX 459.80, respectively.

Based on the strong revenue growth, excellent client conversion, potential benefits of mergers, strong liquidity, and favourable valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on S4 Capital PLC at the closing market price of GBX 570.00 (as on 13 December 2021), with lower double-digit upside potential based on 56.36x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

AFC Energy PLC

AFC Energy PLC (LON: AFC) is a FTSE AIM UK 50 index listed provider of hydrogen power generation technologies.

Investment Rationale – SPECULATIVE BUY at GBX 46.40

• New Contract: On 1 December 2021, AFC affirmed that its Hydrogen Fuel Cell and Ammonia Cracker technology has been selected for Norwegian ZeroCoaster's Bulk Cargo Ship Design.
• New Partners: During H1 FY21, the Group added three new partners, namely ABB, Altaaqa Alternative Solutions, and Mace. It has bolstered the AFC’s global route to market.
• Favourable Dynamics: The accelerating demand for electric vehicles would uptick the demand for additional fast charging capability.
• Technical Indicator: From a technical standpoint, 14-day RSI (~37.52) indicating an oversold scenario, while the stock has gone significantly below the lower Bollinger Band.
• Outperformance Against Index: AFCs stock price has surged over 27% in the past year, reflecting a significant outperformance against the FTSE AIM UK 50 index.

Key Risks

• Demand Uncertainty: As the global demand outlook for energy is unstable due to the Omicron variant, while there are significant operational challenges. The short-term outlook for the Company looks skeptical with the resurgence in Covid-19 cases.
• Inflation Woes: Higher input costs due to supply chain disruption and labor absenteeism can also hamper the profitability margins.

Recent News

Fuel Cell Order: On 16 November 2021, AFC Energy received a contract worth £4 million from ABB B.V., regarding a fuel cell system for high power e-Mobility charging.

Financial Highlights (for the half year ended 30 April 2021, as on 23 June 2021)

 (Source: Company Website)

• Financial: AFC generated a revenue of £0.15 million in H1 FY21 (H1 FY20: £nil) from initial recognition of Extreme E commercial.
• Liquidity: At the end of H1 FY21, it held cash balance of £61.6 million (H1 FY20: £2.8 million), while the Company made significant investments in product development.
• Order Book: At the end of H1 FY21, AFC had more than 50 qualified fuel cell deployment enquiries, which held multiple order potential.

One Year Share Price Chart

(Data Source: REFINITIV, Analysis done by Kalkine Group)

Conclusion 

The partnership with ABB and recent order worth £4 million would enable the Company to deliver a 200kW (kilowatt) "S" Series charging system in early 2023. Moreover, it has delivered the first commercial fuel cell power system to Extreme E. It also invested robustly in product development and increased headcount.

However, AFC has a small market capitalization and is yet to be profitable. Therefore, investors should gauge their risk-return profile before punting on this stock.

Nevertheless, it expects multiple new system orders in H2 FY21, while the Company can capitalize on significant market opportunities in the clean energy business space. Also, there is a strategic collaboration in the maritime sector under discussion. The stock made a 52-week High and Low of GBX 94.40 and GBX 35.30 respectively.

Based on ABB's order, rising demand for electric vehicles, new product releases in the pipeline, we have given a "SPECULATIVE BUY" recommendation on AFC Energy PLC at the closing price of GBX 46.40 (as on 13 December 2021).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer Information been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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