The first set of interims, released in September, were in line with expectations, and the company has made what looks like a shrewd bolt-on acquisition, Kameleon Worldwide, the London-based content marketing agency.
City broker Numis initiated coverage of the company with a ‘buy’ recommendation and a punchy target valuation that’s looking less stratospheric a few months later.
In a 28-page note, analyst Paul Richards said the stock, which was changing hands for 3.05p at the time of the broker note, was worth 4.46p; it is now up to 3.66p.
“Be Heard has the management capability and financial resources to build an agile, interconnected group to help clients maximise their return from investment from digital marketing,” Richards said.
The group was set up by Peter Scott, who started his working life with Ogilvy and Mather and co-founded WCRS, which to quote his biography ‘morphed’ into Aegis under his tenure as boss.
The business was eventually sold to Japanese rival Dentsu for £3.2bn. After that he created Engine Group, which was sold to private equity for £100mln in 2014.
The company, which made its debut on AIM last No vember following a reverse into Mithril Capital, is currently valued at £20mln.
The short-to-medium term plan is to turn it into a £100mln turnover business focused on digital marketing – be that user experience (UX), driving traffic to sites, content or data analytics.
Scott and the team have spotted a gap in the marketplace, explained Richards in his research note.
“While the global holding groups continue to add revenue and capability through acquisition, they are often perceived as less able to innovate and adapt as quickly as the smaller, digital specialist,” he said.
However, the smaller digital specialists lack the access to capital, talent and experience to scale and win larger clients. Be Heard plans to build a mid-sized network that combines scale, expertise and agility.
Interconnected and agile
“Be Heard intends to build an agile, interconnected group at the intersection of marketing services, technology and e-commerce.
“The group is focused on enabling clients to maximise the return on investment from their digital marketing spend.
“Further, cross referrals and being part of a larger corporate entity position the Be Heard companies to win larger clients and a greater share of digital budgets than would have been possible as standalone entities.”
Building a dynasty
Scott’s approach to his buy-and-build programme is to offer companies a leg-up. Okay, it isn’t a purely altruistic gesture.
He is acquiring businesses with a mix of cash (around 65% of the initial consideration) and equity along with an earn-out, usually over three years.
Be Heard followed this structure with the acquisition of MMT Digital in March. It agreed to pay up to £20.5mln if the company hits all its financial targets, but is handing over only £5.1mln initially (£3.3mln of this in cash).
The component parts
MMT’s team stays engaged and incentivised over the next three years with £15.4mln still up for grabs.
The targets that must be achieved are exacting and are tied to top line growth rates and margins.
The latter point is a crucial one in the Scott formula, because it prevents the business founder growing revenues at the expense of profitability.
MMT, which designs user-friendly web sites and apps for companies such as ComparetheMarket, Scope, the charity for the disabled, and publishing company Hodder Education, is one of two firms in the Be Heard stable currently. The other is media buying agency Agenda 21; Kameleon is soon to be the third.
Already, the two existing businesses have identified sales synergies and the crossover opportunities will grow along as more acquisitions roll in.
With money in the bank and a reputation for not paying over the odds, there’s enough in the coffers to fund the short term deal flow.
The company has said it is comfortable doing four deals a year and it has the support of a pretty impressive roster of institutional investors (which includes Gresham House, Artemis and Schroders) if it wants to come back to the market to top up its cash pile.
Entrepreneur, investor and Saracens owner Nigel Wray is also a backer.
True to its word, in December Be Heard unveiled another deal, snaring Kameleon Worldwide for, at moat, £10mln.
Be Heard will pay an initial £4.05mln, or just over five times adjusted operating profits, for Kameleon. There’s a deferred £3mln to be paid over three year based on hitting certain revenue targets and further ‘stretch payments’.
Kameleon, which counts among its clients Danone, Quorn and Lee Cooper, is expected to generate turnover of £3.89mln this year, representing growth of 60% and generating EBITDA of £785,000.
Numis Securities said Kameleon looked like “a strong strategic fit” with Be Heard’s existing business.
Kameleon is already partnering successfully with Be Heard and the founding partners at Kameleon are taking shares in Be Heard to participate in the group's growth, aligning their interests with those of existing shareholders, the broker noted.
“All in this appears a sensible acquisition, a strong strategic fit, at a sensible price. The acquisition will be materially earnings enhancing in the first full year of ownership,” Numis said, as it reiterated its ‘buy’ recommendation.
Profitable from next year
Numis is predicting revenues from the existing businesses will be £9.1mln this year, rising to £13.2mln and £14.9mln. It will make a pre-tax profit of £1.5mln next year, rising to £1.8mln, the broker added.
“The market backdrop is highly favourable for Be Heard as it seeks to establish a mid-sized digital marketing group that has greater scale and infrastructure than a niche digital specialist, but is more fleet of foot than the global holding companies,” said Numis’ Richards.