Porta Communications (AIM: PTCM) has attracted an equity investment from fellow AIM-listed PR agency, SEC (AIM: SECG). There are both financial and operational benefits from this deal and along with some debt restructuring, it should allow Porta’s relatively new CEO Steffan Williams to focus on improving profitability.
Porta owns PR and marketing agencies including Newgate, Redleaf and Summit. Around 60 per cent of the revenues are from the UK, with an important footprint in the Pacific region through Australia and Hong Kong/China. The group’s main challenge is to raise profitability. Last year saw gross profit (a proxy for revenue) grow by 10 per cent, but the EBITDA margin reduced to 7.7 per cent from 9.7 per cent in 2015. This reflected investment in senior staff as well as some patchy operating performance after the referendum.
If that investment in the business proves to be successful, Porta should be capable of doubling the margin into the mid-teens area over time. Winning lucrative mandates will need these big-hitters to be effective and the group will also have to extract synergies from its stable of brands and geographies. This means cross-selling and working collaboratively to maximise its opportunities.
There’s also scope to benefit from collaborative working with new investor, Milan-based SEC, which has invested £3 million at 3.5p a share in return for a 19.3 per cent stake. Steffan Williams says SEC is an entrepreneurial business which provides a good geographic and cultural fit with Porta. There’s a collaboration agreement which will help the two companies offer a broader range of capabilities to their existing and prospective clients.
That £3 million investment was flagged up as a priority in the last results announcement. The balance sheet has looked constrained and the equity injection, along with the renegotiation of some expensive debt, will help management focus on growing the business. These transactions should cut a meaningful amount from last year’s £1.3 million interest bill, which needs to be placed in the context of £2.3 million of EBITDA. However we also need to be aware that the number of shares in issue now stands 56 per cent higher than last year’s weighted average.
Ultimately it’s all about whether the investment in the business, improved balance sheet, and new collaboration can deliver the necessary revenue growth, while keeping costs under control.