Stockwatch: Insider stakebuilding merits attention

With many stocks fully-priced after a six-year bull run, new ideas can require more by way of anticipation – which is admittedly a speculative approach, but if economic conditions stay fairly robust then some such firms will evolve. AIM-listed Porta Communications is a good example.

On the stockmarket fringe, its financial record (see table) is immature, and not even the company's broker – Sanlam Securities – is anticipating profitability to date. Yet the directors keep buying significant amounts of shares, implying they are positive about prospects.

From Porta's news feed, a remarkable nine of 21 announcements this year involve the directors buying – with some trades around 9p a share, higher than the current spread of 7.75/8.0p. Included is Bob Morton, non-executive chairman who now owns nearly 15.5% and has fans and critics as a veteran smaller companies promoter. Also, the chief executive has just bought £50,000 worth of shares for his SIPP, and the finance director £45,010 worth, both at 7p, which bodes well.

Looking more closely at the company, it achieved strong organic growth in the second half of 2014 – gross profit (fee income) rose 75% to £19.4 million for the year on a continuing operations basis. When reporting prelims last May, management indicated another strong year with all its 2014 acquisitions doing well, and exceptional costs likely lower this year.

Good marketing

Not surprisingly as the business cycle matures, more firms are confident to spend on marketing services. Porta has something of a unique selling proposition: "integrated, multi-service, multi-product", however worthwhile this proves. Essentially, the group comprises two divisions: Communications involving financial, corporate and consumer PR; and Marketing & Advertising, which embraces marketing communications, digital services and media planning/buying. Newgate Communications is the group's prime communications brand, augmented by the acquisition of PPS Group.

Redleaf Polhill, which was acquired on a 51% basis during the first half of 2014, is also doing well and expected to become increasingly important to group performance. Such financial PR businesses have benefited from rising stockmarkets encouraging flotations, i.e. their prosperity quite depends on markets holding up.

As we have seen this last week, bad news (on the US economic front) can be interpreted as good news (monetary stimulus to continue), so for now the macro-financial picture looks fair. Just bear in mind how financial PR tends to be cyclical, quite like corporate stockbroking. While Porta does not report by activity, only geography, implicitly Newgate and Redleaf are important contributors.

In marketing & advertising, the 2112 agency has built a decent client base and is said to be trading profitably, with a much better result expected for 2015. However, TTMV, a media buying agency in Tunbridge Wells, lost two major accounts and was closed last February. Still, Summit, a design studio also in Tunbridge Wells, is doing well. 13 Communications, a consumer PR start-up, is now profitable, augmented by the acquisition of Publicasity.

International capability

For a circa £22 million group, Porta has quite some international reach – if eastward, without American offices – with 10 of its 16 offices now overseas. In 2014 its client revenues comprised 65% UK, 33% Asia Pacific and 2% Europe. With eyes focused on what extent China is slowing down, significant Asian exposure may look risky, yet the median prospect looks like a rebalancing of the Chinese economy with growth possibly stabilising around 4%, which would not pull the rug.

Management says it has broadly completed a phase of start-ups, but intends to widen its service/geographic range as part of a goal to "double the size of the business through organic and acquisitive growth".

As regards financial capability to achieve this, the end-June balance sheet showed cash up slightly around the £1.9 million mark, albeit in context of £7.4 million short-term debt and £0.3 million longer-term debt, meaning a net finance charge of £582k. Such a bias to short-term debt appears to need restructuring.

The interim results, therefore, showed a £549k operating loss extending over £1.1 million at the pre-tax level. But adding back did help a near £1.4 million depreciation/amortisation charge helped the interim cash flow statement show an overall £721k net cash inflow from operations. Not surprisingly, management emphasises interim revenue up 75% to £17.4 million and gross profit up 69% to £13.9 million, with organic growth 17% higher. The share price did respond by way of a rise from 6.5p to near 8p, although in chart terms Porta remains well down, effectively in a sideways trend since 2012.

The directors are likely sensing medium-term potential for operating results able to make investors pay more attention. Presently, the chart, financial summary and AIM status mean Porta is largely off-radar.

Industry consolidation is another factor to be aware of longer-term, as bigger marketing services groups seek to enhance earnings, and there are many smaller firms/partnerships. For example, WPP and Providence Equity Partners bought Chime Communications last July for a 33% premium to prevailing market value.

Bob Morton's presence can convey something of a "wheeler-dealer" approach, for better or worse, yet a sense for an eventual exit by way of trade sale may part-explain his accumulating shares.

Speculative tuck-away

So the businesses' underlying momentum explains the directors' financial optimism, despite Porta's sketchy value credentials. Due to their acquisitions policy there will always be a gap between headline profits and those pre-goodwill amortisation; and a chief risk is the business cycle peaking before the company broker even publishes a profit forecast. But that's a matter for the crystal ball, while management gets on with honing a decent marketing services group, underlining this with share purchases. As a speculative tuck-away therefore, Porta merits attention.

For more information see portacomms.com

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.