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STW Communications Group Ltd. tumbles 6%: What investors need to know

What happened? Shares in advertising and marketing group, and potential takeover target, STW Communications Group Ltd. (ASX: SGN) plunged 6% in early trade on Wednesday after the company’s AGM presentation gave investors more reasons to question the profit outlook.

What’s happening to profit? The presentation appeared, from the slides and transcript at least, to be a relatively glum affair with seemingly endless references to the poor year the company experienced in 2014. The group’s results in 2014 were:

  • Revenue increased by 10.1% to $442.9million
  • EBITDA declined by 5% to $83.3million
  • Underlying net profit after tax fell by $3.9million to $45.6million
  • Full year dividend of 6.8 cents per share down 21% from 8.6 cents per share

The result was primarily due to increased competition from the likes of oOh!Media Ltd (ASX: OML), which appears to be taking margin share from traditional advertising, and APN Outdoor Group Ltd (ASX: APO), which reported a 25% jump in net profit in 2014.

Management did address some shareholder concerns, noting that the “board and management shares the concern that our debt is outside of our internal target range”. Thankfully, the chairman calmed those fears by commenting that the company does “not anticipate a need for the group to raise equity outside of the dividend reinvestment program”.

The reasons why the stock fell though came from the following quotes:

  • “A small number of companies are still continuing to report poor results and these companies have unduly impacted on our overall year to date trading performance.”
  • “The current year will be a transitional period”
  • “We have cyclical headwinds in Australia and seismic structural changes all around us”
  • “Year to date in 2015, before any restructuring costs our performance is marginally behind the same period for the prior year.”
  • “Our expectation is that underlying EBITDA and NPAT for 2015 will be in line with 2014 pre restructuring costs.”
  • “Whilst we are incurring costs related to the strategic review, the benefits associated with the restructure will not be realized until late 2015 and have a full year effect in 2016”

What now? The chairman noted that group’s performance is still being dragged back by a few businesses. This is in stark contrast to oOh!Media and APN Outdoor Group that have reported growing profit despite weak market conditions and highlights the risks in operating the many brands that STW does.

The next important announcement will be when STW provides the market with an update on the strategic review in June and following that, the half-year results in August.

One of the big buying points for STW was its dividend yield. Analysts are predicting somewhere between 5 and 7 cents per share for this financial year, however there could be further downside to that if market conditions deteriorate further.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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