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STW Communications Group Ltd. tumbles on results: what you need to know

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Those betting on a turnaround in STW Communications Group Ltd. (ASX: SGN) performance at its half year result will be licking their wounds as shares in the perennial underperformer slumped to a two-month low.

Shares in Australia’s largest advertising and marketing group crashed 13% to 61.5 cents this afternoon when management revealed a 22.5% plunge in underlying net profit to $15.1 million even as revenue ticked up 3.3% to $194.4 million.

It’s an all-round disappointing result that has been exacerbated by a weak outlook with the group guiding for a 2015 net profit of around $40 million – 12.3% below 2014 (its financial year is the same as the calendar year) and about 10% below consensus estimates on Bloomberg.

There’s probably going to be disappointment on the dividend front as well with management declaring a 2.1 cent a share interim payout. The historical split between interim and final dividend is 40-60 and going by this formula, STW Communications will likely pay a full year dividend of around 5.25 cents a share when analysts are expecting a figure closer to 6 cents a share.

Management is asking shareholders to give it one more year as it believes the full benefits of its cost out program associated with its strategic review will be realised by then.

Group earnings have been hit by a weak advertising market but management has also dropped the ball on a number of occasions. One area management scores poorly in is its acquisition strategy as STW Communications bought a range of disparate businesses that have little synergies.

I think the group became too unwieldly and the loss of a number of key advertising accounts in 2014 is partially due to poor management oversight.

STW Communications’ decision to drop the number of brands in its stable in its strategic review is a move in the right direction but it could be a case of too little too late as management has really tested the patience and confidence of shareholders.

What’s more, STW may have to undertake a capital raising as gross debt and finance lease liabilities have increased to $228.6 million at June 30, compared with $212.7 million at the end of 2014 due to acquisitions.

Trying to raise equity when the share price is in the dumps is a recipe for disaster and I wouldn’t bank on the group being able to pay dividends in 2016 either.

While the stock may look cheap after today’s sharp fall as it is trading on a 2015 price-earnings multiple of 7x and it’s on a whopping 12% dividend for 2015 if franking credits are included, I wouldn’t rush to buy the stock because I think it is a value and dividend trap.

Management has so far failed to show investors the light at the end of the tunnel and I am not sure if the group deserves the benefit of the doubt.

The only silver-lining is a potential takeover bid from its major shareholder Cavendish Square Holdings, which is a subsidiary of London-listed advertising giant WPP.

STW Communications is asking for more time but it’ll soon find out that patience doesn’t come cheap.

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Motley Fool contributor Brendon Lau owns shares of STW Communications Group Ltd.. Follow me on Twitter - https://twitter.com/brenlau

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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