Aeorema Communications (AEO) is the AIM listed owner of events company Cheerful Twentyfirst. They have a very impressive client list including Microsoft, HSBC, Vodafone, and EY. The main activity is organizing events for these corporate clients – including running stands at trade shows and other exhibitions (they appear to do a lot at Cannes Lions), organizing internal conferences, and ‘external’ events such as organizing Sportswomen of The Year for New UK.
Financial performance in the last 5 years or so has not been anything special – revenue has fluctuated around £4m-£5m whilst remaining profitable. However, recently the company has made a number of changes aimed at improving this performance and returning the company to growth.
These changes mainly involve a change in senior management, with the two founders (CEO and Creative Director) leaving the company, and two new senior hires being made to replace them and drive growth.
This appears to be working – although H1 results reported flat revenue and a loss due to the additional cost, full year trading update has stated that revenues are ahead of expectations at £6.7m and profit before tax ahead at £0.35m.
That represents a revenue growth rate of around 40%. If even half of this level of growth is sustainable over the next few years then we will see profits grow significantly as well.
The company also has a lot of cash – £1m+ in net cash at the interims, and cash tends to be much higher at year end compared to interims, so I would expect cash to be around £1.5m when full year results are announced.
Risks
There are a number of risks associated with the business – the main ones are:
- Client concentration is very high – the top 4 customers accounted for 75% of turnover in 2018, with the top one over 25% of turnover. If one of these clients leaves that would more than wipe out the company’s profits, assuming it was not replaced. When this year’s results are out it will be important to see if growth has been driven by new clients, or existing clients. If new clients have been brought on board, this risk decreases.
- With these sorts of businesses there is generally high risk of key people leaving, particularly those with the client relationships. There isn’t much that can be done to mitigate this risk, and generally the smaller the company the higher the risk.
- Events (particularly internal corporate events) are likely to be one of the first spending cuts in poor macro conditions.
Valuation
Despite these risks, we think Aeorema is current very cheap:
| Market Cap | £2.35m | |
| Year End Cash (estimate) | £1.5m | Based on profitability and better YE cash balances |
| Enterprise Value | £0.85m | |
| 2019 EBITDA | £0.35m | |
| EV/EBITDA Multiple | 2.5x |
We believe a more reasonable (given the risks outlined above) EV/EBITDA multiple is somewhere in the region of 6-8x. If we 7x that gives us £2.45m, and adding cash onto that gives us c.£4m – a 67% increase on the current share price.
However, we are now into the 2020 financial year, so if we assume growth continues but at a slower pace, and profits come in around £0.5m for the year, then you get to £3.5m + £1.5m cash, which represents a 110% increase on the current market cap or around 55p per share, and still on a very reasonable EV/EBITDA value.
The best way for the company to realise this value for its shareholders is to return the excess cash by dividends or share buybacks, and we urge management to take this path. In last year’s annual reports they alluded to looking at acquisitions – we think this is a value destructive path and would much rather have cash returned to shareholders.
We hold shares in Aeorema Communications PLC