Q&A with Brendan D’Souza Analyst at WH Ireland

WH Ireland Analyst Brendan D’Souza caught up with DirectorsTalk to discuss SEC SpA (LON:SECG)

 

Q1: Now I wanted to talk to you about SEC given that they’ve made an acquisition announcement today, now I’ll come to that in a minute. First, can you us a bit of background about the company?

A1: Yes sure, so SEC have been around for a long time, the company started way back in 1989, the gentleman who started it Mr Fiorenzo Tagliabue is currently CEO and he is the largest shareholder in the company, the company, I’d say, put very simply they’re into public relations and advocacy which is essentially lobbying governments for local, national and even European. The business first expanded across Italy but it’s based in Milan so it expanded across Italy into the various regions and so on, after that they went on a European expansion, starting in 2012, and they expanded into Brussels, they expanded into Spain and then Germany and as of this morning they have just bought a business in the UK. SEC came to market at the end of July, I believe it was the second company only to come to market after Brexit so it’s a really good high quality business, it’s been run profitably for numerous years, it’s cash generative and really the strategy of the business is to acquire businesses in new geographies to take on majority stakes but have the management teams of those companies stay on and run the business. I think that’s where it’s unique compared to a lot of businesses where they effectively buy out 100%, they have a lock-in period for management teams and then the management team kind of exits and the new owners will just run the business, so in a nutshell that’s what SEC is and that’s what we think is very interesting about it.

 

Q2: You’ve touched on Brexit, what effect has it had or will it have on SEC SpA?

A2: That’s a good question and obviously Brexit is front and centre in everyone’s mind here in the UK and in the investment community, we think SEC is a beneficiary from Brexit and there’s three ways they’re going to benefit in our view:
 
Firstly SEC’s revenues was, until yesterday, entirely in Euros so they were both in Euros that they were collecting money but they also had their financials in Euros. Now this stock price being listed on AIM is in pence so just from a translation standpoint they’re just going to have higher earnings because the pound has gone down since the Brexit by about 10% or so firstly they’re going to benefit from the currency movement.
 
Secondly, SEC has a Brussels advocacy business, this business we believe should benefit from Brexit-related uncertainty and we think that this will be even more so once Article 50 is triggered by the UK government.
 
Thirdly, the acquisition that was done this morning of Newington, which is a London-based business that SEC bought, that has been materially cheaper but simply because of the weaker pound. It could also be argued that there’s a weaker business environment in the UK so that may have been able to knock down the price a little bit.
 
So oddly this is a business that is benefitting from Brexit.

 

Q3: Now you’ve mentioned that they’ve made an acquisition in the UK, what do you make of that?

A3: Firstly, it’s not a surprise about this acquisition because they had spoken about it very categorically in the admission document, they explained their strategy of expansion internationally, in Europe and beyond, and they had said back then that they were in talks with a company in the UK so it’s not a surprise but what is interesting is just a few things:
 
Firstly how they’ve done the acquisition, as I was saying earlier they’ve taken a majority stake in this business called Newington, this used to be called Bellenden. Newington, to give you just a bit of background, they’re based in London and they’re about a decade old or so, now we think the acquisition is very good on a number of fronts, firstly if you look at what they’ve paid for the business, it work out a .7 times Newington’s last year revenues. Now by contrast, a peer group that we benchmark SEC against, which is the AIM media sector, that’s trading at 1.8 times last years’ revenue and SEC itself is trading at 1 times previous year revenue so just from a point of view of how much they’ve paid, that seems like a good price that they’ve paid.
 
The second thing is SEC has always believed in not going into new markets and starting up from scratch, that takes a long time and it’s not really productive to try that out. So just the fact that they’ve broken into the UK market and they’ve bought a firm that does both public relations and advocacy, has a very similar DNA to SEC’s, it seems like an entrepreneurial firm, it seems like they and SEC should get on pretty well and benefit from each other. So SEC should benefit from obviously having a new foray into the UK market which is the biggest peer market in Europe and as for Bellenden, Newington as they now called, they should benefit from being part of a bigger group and being able to get bigger clients and so on.
 
So all in all we think the acquisition looks very good on paper.

 

Q4: What do you think we should be looking out for with SEC SpA in the next 3-6 months?

A4: I think the next 6 months if you look at slightly wider is going to be pretty busy but even the next 3 months is going to be fairly busy so firstly I would say the near-term news flow SEC should be putting out interim results at the end of September, I don’t think that’s going to be as exciting as probably some of the other things. Just coming back to the acquisition strategy that they detailed when they came to market they had said that they were going to acquire businesses, or they were looking to acquire businesses in France and in Poland, now there’s a possibility that by the end of this year they could be in one of those markets or maybe both the markets. I think France will come first because they have been spending more time there and there are more advanced stages in France so France would probably come before Poland so look for firstly the business for acquisitions and for SEC to be a far more kind of diverse business geographically. Another thing I think we believe SEC should be well placed to do is to win more clients and now win more clients could be even new clients that the company doesn’t deal with to date. It could be that SEC has some amazing clients like Amazon, Coca Cola, Deutsch Bank, Disney, it could just be that they represent them in one geography but not in the other or multiple geographies so there’s a possibility that there could be a pitch that comes up and SEC is already dealing with them in one geography so they could be able to go into other geographies with them. So yes, I think there’s going to be a fair bit of news flow from SEC, news flow I think material news flow, so this is definitely a stock to watch out for and it’s going to be a very interesting company going forward.

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