Publicis has fully digested the impact of COVID-19 as it exceeds expectations (OTCMKTS:PBBCF)
In September last year, I made the bold claim that Publicis (OTCQX:PUBGY) (OTCQX:PGPEF) (OTCPK:PBBCF) would generate €1.2 billion in free cash flow in 2021. Same as 2022 is now well engaged with the PR and marketing company Already posting a business update for the first quarter of the year, I thought it would be a good time to catch up on business performance.
Publicis has its main listing on Euronext Paris where it trades with PUB as its ticker symbol. With nearly one million shares traded daily, the Paris listing of Publicis is certainly the most liquid listing for trading the company’s shares.
Fiscal 2021 went as usual
Total revenue generated by Publicis in 2021 was approximately €11.7 billion, an increase of approximately 10% over fiscal year 2020 revenue. All operating expenses grew roughly in line with revenue and EBITDA amounted to €2.32 billion. The total amount of depreciation and amortization decreased by more than 20%, resulting in a sharp increase in the “operating margin”.
As the company also reduced its impairment charges as well as the amortization of intangible assets, operating income increased by almost 50% to 1.43 billion euros. Publicis remained a cash cow in 2021, and as net debt declined while the average cost of debt also fell, net interest expense declined significantly. With a net profit of 1.04 billion euros, of which 9 million euros is attributable to non-controlling interests, the net result shows a net profit of 1.027 billion euros, or 4.13 euros per share . This is a substantial increase from the EPS of 2.40 recorded in fiscal 2020 despite an increase in the number of shares of more than 3%.
But when I talked about Publicis last time, I was more interested in the company’s free cash flow result because that’s what will allow Publicis to continue its M&A activities. Additionally, a significant portion of operating expenses are non-cash expenses, and even the amortization of intangible assets after an acquisition is completed weighs on the bottom line.
In fiscal 2021, Publicis reported operating cash flow of €1.8 billion, but that includes a €216 million investment in working capital. At the same time, the EUR 9m paid to non-controlling interests and the EUR 295m in rents must be deducted. And finally, the 156 million euros of net interest payments must also be deducted.
This means that the adjusted operating cash flow was 1.6 billion euros (because I also added back the difference between taxes due and taxes paid). As you can see, the capex was only €139 million, which means Publicis generated €1.46 billion in free cash flow. That’s over 20% more than I expected.
Spread over the 248 million shares outstanding, free cash flow per share was approximately EUR 5.9, meaning Publicis is currently trading at a free cash flow yield of approximately 10%. Which isn’t bad at all.
2022 has started well for Publicis
Of course, a big question was whether or not Publicis can stay on track in 2022, and whether 2021 results were boosted by pent-up demand after an intense year in COVID.
Surprisingly, Publicis noted a very good start to 2022 despite the uncertainty generated by the war in Ukraine in the second half of the quarter. Organic revenue growth was double-digit, with Europe and the Asia-Pacific region posting revenue growth of more than 14%.
This has now allowed Publicis to firm up its guidance for the full year and the company now expects to hit the upper end of its revenue growth target of 4% to 5%. This should have an immediate positive impact on both the net result and the free cash flow result and Publicis is now targeting a free cash flow result for the full year of 1.4 billion euros. I think he may be able to do better than that, but we shouldn’t rush because we haven’t even completed a third of the fiscal year.
As mentioned in my September article, I had sold my entire position at Publicis. Luckily for me, the company’s financial performance exceeded my expectations while the share price remained virtually unchanged, so there appears to be an opportunity to return to current levels. At the end of 2021, Publicis had net cash (excluding rental debts which are obviously amortized over time) and an EBITDA of 2 billion euros (excluding rental debts), the current market capitalization (and the enterprise value ) less than 15 billion The euro seems very reasonable, especially since Publicis will continue to strengthen its net cash this year.
I still don’t have a position right now but I’m watching option premiums as put options are quite attractive. I haven’t made a decision yet, but Publicis is now sufficiently attractive from an FCF point of view as well as from a balance sheet point of view to come back to it.