STW Comm: Interim result 2012

STW Communications' share price fell over 6% on the announcement it increased revenue 5% to $163.2m and net profit by 5% to $18.0m for the half year ending 30 June (it has a calendar year end). The board declared an fully franked interim dividend of 3.3 cents per share (ex-date 21 Aug) up 10% on the previous year.

The result was driven primarily by organic growth – an impressive achievement considering total local media spending is expected to grow less than 2% this year. Media spending is being buffeted by the duel headwinds of low business confidence and the fragmentation of the advertising market. This gives advertising clients more bargaining power. To combat lower local growth, STW is focusing on expanding its south-east Asian operations. It is actively scouting for new ventures and could spend up to $30m over the next half on acquisitions. This would add to the Buchanan Group, Edge Marketing, Yellow Edge and Amblique businesses already acquired this year.

These ambitions will require funding and, with management wedded to a high dividend payout ratio, debt has been increasing; rising 28% to $137m since December 2011 (including earn outs). So far STW’s acquisitions have added to earnings so the impact on gearing and interest cover has been modest but we remain watchful. We've also slightly adjusted the recommendation guide to reflect this increase in risk. With STW’s share price rising 10% since 21 Jun 12 (Hold – $0.92) it is currently trading around fair value and remains a HOLD.

Note: The model Income portfolio owns shares in STW Communications.