Short-Term Pain Could Be Wellcom Opportunity For Investors
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Wellcom handles the marketing in the UK for Audi and Tesco. In the US, it conducts web development and the digital business for French company Pernod Ricard, one of the world's leading wines and spirits producers, and supplies graphic design and digital production services to Italian group Luxottica, the world's largest eyewear company.
There’s a growing group of Australian services stocks doing excellent things in the global market, and Wellcom Group Limited (WLL) is certainly in that category.
Wellcom is a global advertising and marketing creative production agency specialising in content creation and design. The company designs and produces advertising and marketing material for a wide range of customers who own brands, including household-name consumer goods and services businesses.
Wellcom’s suite of services include visual content creation, online and digital services, graphics, advertising production, video and animation, brand management, website design, pre-media, image and asset libraries, online workflow processes, print, online, TV, in-store and social media marketing services. Knowledgewell, the company’s proprietary content management platform and workflow tool, offers clients services including campaign management, content management, automated publishing, online approval, print procurement and app development.
The company sums up its services as everything that a client would need to make the “craft of marketing” easier, in any form of traditional or social media, from a printed retail catalogue, to a television commercial to content designed for social media channels such as Facebook and YouTube. Because of this diversification of offering, Wellcom is insulated to a large extent from the changing nature of the media landscape.
Five years ago, Wellcom implemented a major push into digitally integrated services to complement and take up any possible drop-off from the traditional print-based services area. Digital is now its fastest-growing business medium.
Wellcom operates in Australia, New Zealand, Malaysia, Singapore, Hong Kong, the USA and the UK. It has about 60 full-service “hubs” located in client businesses around the world: these hubs now account for more than 70% of global revenue. It also operates a “centre of excellence” in Kuala Lumpur, which handles briefs from all parts of the worldwide network.
The establishment of Wellcom’s US business in 2014 completed a worldwide network of graphic arts production facilities. The US business comprises New York-based creative production agency TheLab, and digital imaging agency Dippin’ Sauce. Wellcom US has offices in New York, Columbus and Los Angeles.
This global reach and the diversified offering means that Wellcom has signed major names as clients. For example, the company acts as global brand manager for DKNY (in 37 countries), Michael Kors (35 countries), BASF (18 countries), Canon (11 countries), Patek Philippe (40 countries), De Beers (18 countries) and Steinway & Sons (US, UK, Germany and China). It also manages Victoria’s Secret.
Wellcom handles the marketing in the UK for Audi and Tesco. In the US, it conducts web development and the digital business for French company Pernod Ricard, one of the world’s leading wines and spirits producers, and supplies graphic design and digital production services to Italian group Luxottica, the world’s largest eyewear company.
Other clients include Citibank, GAP, Jaguar, Discovery Channel, Google, Luis Vuitton, Clinique and Cadillac. With major global clients, Wellcom benefits from multi-regional cross-selling. In Australia, major clients include Telstra, Coles, Woolworths, Kmart, SBS and CommSec.
Wellcom began life in Melbourne in 2000 as a pre-press graphic arts business, but founder Wayne Sidwell moved the company along a path of becoming a visual data asset management company, then into providing production services for large companies. Over time Wellcom has followed a planned transition to a global content provider and marketing technology enterprise.
Wellcom listed on the Australian Securities Exchange (ASX) in July 2005, after raising $13.5 million through the sale of 34.5% of the equity, for an initial market capitalisation of $39 million. Wellcom is now valued at $182 million.
In FY16, Wellcom boosted revenue by 35%, to $156.2 million, with earnings before interest, tax, depreciation and amortisation (EBITDA) up 19%, to $19.1 million. Net profit from continuing operations rose 14%, to $11.1 million, while the fully franked dividend was boosted by 10%, to 22.5 cents.
Then, in the December 2016 half-year, revenue slipped by 8%, to $73.9 million, while net profit increased by 6%, to $5.7 million. Wellcom said it was hit in the half by two large clients, Dick Smith Electronics and Masters, going out of business. On the other hand, new business wins included AHM Medibank, Sigma Pharmaceuticals, Chemmart, Treasury Wine Estates, Pernod Ricard and Havas Worldwide.
The share market was not greatly impressed with the interim result, with the share price toppling from $5.32 to the current level, at $4.60 – a loss of 13.5%. But that has potentially opened up some value.
For the current financial year, Thomson Reuters’ analysts’ consensus forecasts have Wellcom lifting earnings per share (EPS) by 9.5%, to 30.8 cents, allowing a 3.1% (0.7 cent) improvement in the fully franked dividend, to 23.2 cents. At the current share price of $4.60, that places Wellcom on a prospective 5% yield and price/earnings (P/E) ratio of 14.9 times earnings.
In FY18, analysts see Wellcom boosting EPS by 12%, to 34.8 cents, and lifting the dividend by 11.2% (2.6 cents), to 25.8 cents. That lowers the prospective P/E to 13.3 times earnings, and improves the fully franked yield to 5.6% – equivalent to a grossed-up yield of 8%.
If those forecasts are borne out, WLL would represent good buying at this point – and indeed, the analysts’ consensus price target on the stock sees it recovering virtually all of its 2017 losses, to $5.30, which is 15.2% north of the current share price.
However, this week, Wellcom updated the market that it has experienced slower-than-anticipated revenue growth in the second half of this year, with the subdued market conditions following widespread reporting across mainstream global media of a weak retail market. The company says many companies have reduced their advertising and marketing spending generally: Wellcom now expects full-year earnings before interest and tax (EBIT) to be about 5% lower than in FY16 (or 3% lower on a constant-currency basis). The analysts in the Thomson Reuters survey have not yet updated their forecasts to account for this.
The dilemma for investors is that there has been a small earnings downgrade, and the client base that Wellcom serves – which includes many multi-national major companies – has reacted to a market slowdown by softening its spending; but the company has become a well-deserved leader in its space, and can reasonably expect strong ongoing demand for its marketing services and technology.
Economic conditions in the US, Europe and UK are far from falling in a heap: while there may be short-term turbulence in the WLL share price, the company’s market positioning and strong track record in generating return on equity – consistently 20%-plus – should reward patient investors.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au