$SAL.L – SpaceAndPeople – so what’s it worth?

Advertisers SAL (SpaceAndPeople) issued a trading statement today, sending the share price down nearly 40% to 81p. Yikes. I own some of these shares, too. I’m not happy.

Obviously, the trading statement was poorly received. Paul Scott wrote about it over on Stockopedia:
http://www.stockopedia.com/content/small-cap-value-report-17-apr-2014-blur-stt-sal-82732 concluding “Personally I shall be sitting tight on my SAL shares, as the price has now fallen to such an extent that there’s really no point in selling now.”

So, what’s it worth? I have done some very very rough prelim calcs using a DCF that I’m learning by following Damodaran’s work, and I reckon that the company is worth about £29m. That’s a little over where the share closed yesterday, based on 132.5p, 19.5m shares, for a market cap of £26m.

At 81p, the market cap is £15.8m. So the shares are worth about double the current valuation. Not that anyone will believe me, of course.

My valuation is only preliminary, it doesn’t take into account net cash, and full dilution; it was just and dirty. I’ll try to post my numbers in the near’ish future, and check my calculations.

EBIT to Revenues for 2013 for SAL were about 15.6%, down from 18.4% in 2008. The median for the advertising industry is about 11.77%, if I use Damodaran’s spreadsheet for the US. So, I have used a margin of 15.6%, tapering to 11.77% over a decade. Confidence in these margins has been crushed by the latest RNS. However, I’ll continue to use the numbers, because they do look sane to me. I might ultimately be proved wrong, of course, because everything is an assumption, always.

I have also used a corporation tax rate of 28%, tapering to 21% over a decade. Hopefully this will be the least contentious assumption I make.

A big assumption is that the company will increase revenues by about 19%pa over the next 5 years, which I then have tapering down to the risk-free rate. Is a 19%pa growth rate reasonable? Well, 2015 revenues are forecast to be £21.4m, implying a doubling over a 4 year period. The company is still small, so there should still be plenty of opportunities to expand.

The way the DCF model works is to calculate free cash-flows from revenues given sales to capital ratios. So I can assume whatever sales growth I want, and the free cash flows will come out correctly. Alternatively, it would be possible to work out revenues given an earnings retention rate. I haven’t built my model that way, though. It might be an interesting cross-check.

Over the last 5 years, the mean sales to capital employed was 1.31. Damodaran’s spreadsheet has a value for the advertising industry as being 1.40. So, again, my numbers look sane.

All told, I don’t think I’m making lunatic, pie-in-the-sky assumptions. They look mostly pretty reasonable to me.

But, like I say, I doubt anyone will actually believe the valuation I’ve come up with. I’ll try to give some specific calcs over the next few days. The calcs are done using Python rather than a traditional spreadsheet, which makes them less accessible to most people. Sorry about that.

Update 17-Apr-2014 Looking at a “non-Stockopedia” site, I see that the updated stats have an EV/Sales of 0.95, against a media agency average of 2.05. The price to free cashflow is 9.3. So the company is looking cheap from some additional angles.

Update 22-Apr-2014 For informational purposes, share price was 79.5p at time of writing, and estimate of intrinsic value is 147p.

About mcturra2000

Computer programmer living in Scotland.
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