Hopscotch – a specialist in all types of corporate communications (events, PR, digital, social networks) has several cards up its sleeve, which should enable the group to stand out despite a highly competitive environment. While we remain cautious on the future profitability of the company in a sector that tends to generate low margins, we believe that the group is in a position to record relatively high earnings growth in years to come, driven by a higher turnover and efficient cost management.
External growth strategy and reorganisation efforts: two sustainable growth drivers
Over the past 10 years, the group has delivered average annual growth of 3.2%. This is partly down to a series of takeovers, Hopscoth having bough specialised agencies of varying sizes, such as Heaven, Hmm! or Rouge. More recently, the stakes bought in Sopexa in 2016 should give a boost to the group’s international development and broaden its addressable market.
Last year’s steady orders contributed to the publication of encouraging preliminary results for 2016, with sales up by 2.1%. This was achieved despite baseline effects which could have threatened further growth, as Hopscotch had managed the media coverage of all COP 21 at the end of 2015. In recent quarters, the group also launched particularly effective initiatives: closure of main cash-drains, legal reorganisation, change of name, forgetting Le Système Public and preferring one single name, Hopscotch… These changes should set the company on a solid footing for the future, particularly as the related costs have already been accounted for in previous financial years.
Human capital, a key asset for value creation
We were particularly drawn to the company following a positive on-site visit in April 2016, in their new Paris offices. While competition is extremely high in the communications industry, known to be a fragmented sector, the quality of human capital - as a driving force for offering creative ideas and hence value creation - is a key differentiating factor. As far as Hopscotch is concerned, the group’s strategy when addressing its different stakeholders is reassuring, particularly with the adoption of new, nimble, working methods as part of the reorganisation efforts. The recruitment of a group HR Director in 2016 and the launch of employee satisfaction surveys also send out positive signals.
We believe that the changes already made will contribute to improving staff enthusiasm and productivity: a flatter hierarchy, the removal of personal offices to improve flexibility, the launch of a collaboration platform to facilitate communication, high levels of employee autonomy and training. Furthermore, employee stock ownership (8% of the capital) helps to ensure superior engagement and an alignment of interests.
The quality of human capital - as a driving force for offering creative ideas and hence value creation - is a key differentiating factor
Hopscotch’s ability to call upon over 1,500 freelancers throughout the world helps to manage the cost base and adapt if business slows down or picks up, without generating too much volatility on the company’s profitability.
Finally, the governance structure now seems improved. The departure of one of the Directors due to a divergence of views on strategy helped the implementation of the new organisation, and now enables all members of executive management to share the same vision. Furthermore, the structure of the Board of Directors offers sufficient countervailing power, as 5 of the 7 members are independent.
Valuation is relatively attractive
Looking beyond these improving fundamentals, the company’s valuation is relatively compelling. Players such as Publicis, Havas or GL Events – admittedly not pure comparisons as their business is more diversified – generate two-digit operational margins. These levels tend to confirm the conservative estimates on Hopscotch’s standard profit margins turned out by our model. The groups mentioned above have much higher valuations; and although a premium may be justified for these players relative to Hopscotch, we believe it might be excessive.
This publication is not intended to be an offer or solicitation for the purchase or sale of any financial instrument whatsoever. References to specific securities and issuers are for the purpose of illustration only and should not be construed as a recommendation to buy or sell these values. Communication promotional in nature. This communication has not been prepared in accordance with regulations to promote the independence of financial analysis. Sycomore Asset Management or management companies involved with the preparation of this document are not subject to the ban on conducting transactions on the instruments mentioned by the publication of this communication.