Eley Griffiths on STW Communications (SGN)

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How long have you held the stock?

We first started buying STW Communications (ASX Code SGN) in February 2013. It has been well over 10 years since we last owned this stock.

What do you like about it?

Well it appears that their disappointing decade is now likely behind them. The stock had been a perennial underperformer – losing 30% over the 10 years to February 2013 versus the Small Ordinaries Index, which added 66% in the same time frame (both stock and index excluding dividends).

During this period, the company has put together a diversified media and advertising group and in the process looks to have arrested the return on equity compression that has plagued the group for much of this time. The company correctly foresaw the need to grow outside traditional advertising activities. On a 12 times 2013 PER and offering a 5% fully-franked yield, it is a reasonably priced counter, offering discretionary expenditure exposure – a theme that we, as a group, have been targeting.

How is it better than its competitors?

STW is a well-regarded and experienced force in Australia’s marketing and communications space. It has prioritised a push into digital media and these revenues will comprise 30% of total revenues by the end of 2013. At the urging of clients, they recently took the first steps to establish a nascent SE Asia business. Traction has been good at this early stage and management expect the region to contribute up to 10% of group revenues by the end of 2016. The company has recently been winning new accounts, as well as increased spend from existing clients, without conceding operating margins in most cases. A revival in business confidence is within line-of-sight and leverage to any uptick in economic activity should be felt across the group.

What do you like about its management?

The STW model draws heavily upon a deep pool of creative and financial management expertise that spans the group. Senior management are experienced, with CEO Michael Connaghan having ridden through several business cycles before. He has described the current advertising cycle funk as ‘not easy’ but continues to draw upon his group’s diversity as one of its key attributes. Connaghan and Lukas Aviani (chief financial officer) are as an impressive double-act as you will find among listed Australian small companies.

What is your target price?

We do not set target prices, rather we have an investment process that assesses the relative value of each stock in the portfolio on a daily basis.

At what point would you sell it?

When our process suggests it is expensive relative to small cap peers.

How much has it added (subtracted) to your overall portfolio over the last 12 months?

The stock has contributed significantly since our purchase in February 2013.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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