Due Diligence and Valuation Report
Arrowhead Code: 64-01-02 Company: Communisis plc Coverage initiated: 02 June 2014 Ticker: LSE:CMS This document: 5 May 2015 Headquarters: London, U.K. Fair share value bracket (DCF): £0.66 and £0.84 Chairman: Mr. Peter Hickson Share price (1 May 15): £0.57i CEO: Mr. Andy Blundell Analysts S&C Development Director: Mr. Nigel Howes Snehal Mahajan Finance Director: Mr. Mark Stoner [email protected] Website: www.communisis.com +1 (212) 619-6889 Market Data Multi-Channel Diversified Offerings And Relentless 52-Week Range: £0.47 - £0.70ii Focus On Acquiring New Contracts To Fuel Growth Average Daily Volume (3M): 385,266iii Arrowhead is initiating coverage on Communisis plc with Market Cap. (01 May 15): £117.2 MM a fair value bracket of £0.66 (Low-Bracket estimate) and £0.84 (High-Bracket estimate). Financial Forecast (in £) (FY ending - Dec) Key Highlights: (1) Client confidence in Communisis’ '15E '16E '17E ‘18E ‘19E ‘20E '21E quality of service offerings, as evidenced by the High NI 9.48 12.52 14.55 16.82 18.84 18.91 20.70 Company’s track record of consistently winning large and £ MM long-term contracts from blue-chip firms such as LBG, High EPS* 5.95 7.05 8.14 9.07 9.95 9.98 10.82 Low NI AXA UK, Nationwide Building Society (NBS), and Proctor 6.14 8.45 11.01 13.38 14.30 14.61 16.18 £ MM & Gamble (P&G); (2) Communisis through its diversified Low EPS* 4.38 5.14 6.48 7.46 7.82 7.96 8.70 service offerings positions itself as a perfect partner to *Adjusted Diluted EPS in pence provide communication more effectively and profitably Company Overview: Based in London, Communisis plc across multiple channels; (3) Communisis is well- (hereafter referred to as “Communisis” or “the Company”) positioned to take advantage of the growing preference is a leading multi-channel customer communication for digital marketing; (4) The Company has access to services provider with expertise in transactional, market leading technology and has successfully deployed marketing, and regulatory communications. Communisis is the Hewlett Packard (HP)-T series high-speed digital engaged in, platforms, gaining competitive advantage; (5) The (1) Creation of brand communication strategies, data- Company aims to strengthen its presence in the driven marketing campaigns, and creative content; international market and to achieve 20% of its revenue (2) Production of personalized printing of transactional and from the overseas market; (6) With a D/E ratio:0.52x & direct mail, inbound services; Cash:£24.5MM (As on Dec 31, 2014), the Company is in (3) Deployment that involves the management of third a strong financial position to leverage any acquisition party supply chains together with the fulfillment and opportunities; (7) With an experienced management distribution of marketing collateral. team, Communisis has the ability to efficiently capture The Company offers services across a wide range of sectors future growth opportunities; (8) Improvement in the UK such as Financial Services, FMCG, Retail, Utilities, and & global economy is expected to boost marketing Telecommunications, with the majority of the contribution budgets in the coming years. Global digital marketing coming from the Financial Services (43% of the total budgets are expected to grow at a CAGR of 14% over revenue in FY2014). The Company provides services across 2012-2016E to reach $160.2B.iv 16 countries and has a strong client base, which includes Key Risks: Key risks include safeguard of private and numerous blue-chip companies. sensitive data, growth in paperless billing and payments FY2014: Revenue increased by 27% Y-o-Y to £343MM in by banks, integration risk related to acquisitions, high FY2014, owing to numerous acquisitions in the digital and client’s concentration, and economic slowdown. creative marketing divisions, contracts wins and business Valuation and Assumptions: On the basis of due expansion overseas. The overseas revenue grew by 36% Y- diligence and valuation estimates, Arrowhead believes o-Y to £66.5MM and contributes 19% to the total revenue. that Communisis’s fair share value lies in the £0.66 to While, the Company’s adjusted operating profit grew by £0.84 bracket using the Discounted Cash Flow (DCF) 21% to £16MM, its margin slightly dipped to 4.7% in valuation method.v Relative Valuation:£0.71. We assume FY2014 as compared to 4.9% in FY2013 due to increase in that the Company will be able to grow its revenue by transitional costs on major new contracts. The Company’s focusing on winning new contracts and by capitalizing on revenue excluding pass through revenue to third party changing market trends through strategic acquisitions. suppliers grew by 19.7% Y-o-Y to £232.4MM.
Communisis plc – Arrowhead BID 1 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Table of Contents 1. SUMMARY AND OUTLOOK ...... 3 2. BUSINESS OVERVIEW...... 4 2.2 Business Model ...... 6 2.3 Products and Services ...... 7 2.3 Solutions ...... 8 2.2 Segment Analysis ...... 9 2.6 Company Premiums ...... 10 2.7 Company Risks ...... 11 2.8 Corporate Strategy ...... 12 2.9 Communisis’s Shareholding Pattern ...... 13 2.10 Listing and Contact Details ...... 13 3. KEY VARIABLE ANALYSIS ...... 14 3.1 Variable 1 – Design Segment Growth Rate ...... 14 3.2 Variable 2 – Produce Segment Growth Rate ...... 14 3.3 Variable 3 – Deploy Segment Growth Rate ...... 14 3.4 Variable 4 – Design Segment Contribution Margin ...... 14 3.5 Variable 5 – Produce Segment Contribution Margin ...... 15 3.6 Variable 6 – Deploy Segment Contribution Margin ...... 15 4. NEWS ...... 16 5. MANAGEMENT AND GOVERNANCE ...... 17 6. TECHNOLOGIES AND MARKETS ...... 19 6.1 Computer Integrated Manufacturing (CIM) in Printing ...... 19 6.2 Integration of Print Production Workflows ...... 19 6.2.1 Digital Workflow ...... 19 6.2.2 Print Production Workflow ...... 19 6.3 HP T-series Printing Technology ...... 20 6.4 Digital Asset Management (DAM) ...... 21 6.5 Big Data Analytics ...... 21 6.6 Multi-Channel Marketing Communication Services Industry ...... 22 6.6.1 Industry Overview ...... 22 6.6.2 Demand Drivers ...... 23 6.6.3 Industry Trends ...... 24 7. VALUATION ...... 26 7.1 Discounted Cash flow Method ...... 26 7.2 Relative Valuation Method ...... 28 8. APPENDIX ...... 30 8.1 Communisis’s Financial Summary ...... 30 8.2 Communisis’s Balance Sheet ...... 32 9. ANALYST CERTIFICATIONS ...... 33 10. NOTES AND REFERENCES ...... 34
Communisis plc – Arrowhead BID 2 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
1. Summary and Outlook We initiate coverage on Communisis plc, which is a UK-based leading multi-channel customer communication services provider. The Company’s services are focused on the integrated design, production, and deployment of personalized customer communications. These communications are typically of marketing, regulatory or transactional nature and can be distributed either in paper form or in digital formats. Communisis, through its varied offerings, assists its clients at every stage of communication: From content creation for marketing purpose to multi-channel distributing of information among their customers. Key Highlights: (1) Blue-chip clients share their customers’ private and confidential data with the Company, which projects confidence in Communisis’ abilities and professionalism. This has helped the Company to not only consistently win new contracts but also renew old contracts on a consistent basis. The Company has won numerous long term contracts such as 10- years contract from LBG, 6-Years contract AXA UK and a 9-years contract from NBS, and also renewed an important contract with P&G for a further five year term. Nearly 70% of the revenue is supported by contractual arrangements helping the management team to estimate future revenue and accordingly implement growth strategies. (2) In order to consistently meet customer demands in a continuously changing market, companies have started adopting ‘Single Customer View’ to gain better insights into consumer preferences aiding them to provide their customers’ relevant information using the most preferred media channels. Further, Communisis offers diversified services and has the ability and experience to add value at every stage i.e. across all segments making it a one-stop destination for all services. (3) There is a growing preference for the use of digital media such as e-mail, text message, mobile content, and social media for marketing purposes. To capture this shift in demand, the company plans to focus on the development of the Design segment. In-line with this goal, the Company has made some significant acquisitions: Jacaranda Productions Ltd. (Video & Film production), Public Creative Ltd. (Brand awareness), The Communication Agency Ltd. (Customer Relationship Management), Editions Publishing Ltd. (Content Marketing Agency), and Life Marketing Consultancy ltd (Marketing Agency). (4) To provide better quality of services as well as higher returns on the client’s marketing spends, Communisis has deployed a market leading technology, HP - T series high-speed digital platform. The Company has made significant amount of investments in technology giving them competitive advantage over its peers. Currently, eight machines have been installed and commissioned (total aggregate capital value is approximately £30MM). (5) Communisis offers services across 16 countries and has managed to scale up its overseas contribution to the total revenue to 19% as on FY2014 from 7% in FY2012 and targets to reach 20% in the near future. This accelerated growth in the overseas markets includes external brand building services provided to P&G. On April 15, 2014, the Company managed to secure contract extension with P&G Europe SA till December 31, 2019. (6) The Company has a total debt of £60.4MM and Cash & Cash equivalents of £24.5MM as on December 31, 2014. With a total Debt/Equity ratio of 0.52x and Net Debt/EBITDA of 1.35x, Communisis is financially strong to take advantage of any acquisition related opportunity. Further, the Company follows a progressive dividend policy and has announced a dividend of 2.0 pence per share in FY2014, an increase of 11% Y-o-Y. (7) The management team of Communisis is highly experienced, which helps understand and forecast the continuously changing market situation and adapt accordingly. The rich industry experience of the management team helps the Company capitalize on both, present as well as future opportunities (Refer section 5 for more details). (8) The UK economy grew at a much faster pace in 2013 than the previous year, giving an early sign of corporates gaining in confidence, which may lead to an increase in marketing budgets in order to drive business growth. Also, market trends such as an increase in outsourcing of both inbound and outbound customer communications is expected to drive growth. (9) According to PWC, the Global Internet Advertising industry generated revenue of $117.20B in 2013, which is expected to reach $194.5B in 2018. vi In addition, the global digital marketing budgets are expected to grow at a CAGR of 14% over 2012-2016 to reach $160B in 2016. Furthermore, a report by Generator Research projects the total number of social networking users to rise by 38% from 1.8B in 2013 to 2.5B by 2017 globally. vii The use of multiple platforms for marketing and advertising would assume primary importance for all marketers in the future on the back of rapid expansion of big data, broadening reach of the Internet, growth in the usage of smartphones, and gradual migration of companies toward digital platforms and real-time marketing.
Key risks: Key risks for the Company will be safeguard of private and sensitive data, growth in paperless billing and payment by banks, integration risks related to its recent acquisitions, high client concentration, and economic slowdown.
Communisis plc – Arrowhead BID 3 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
2. Business Overview Headquartered in London, UK, Communisis is one of Europe’s leading providers of customer communication for major brands. It is listed on the London Stock Exchange with the ticker ‘CMS’. The Company has divided its services into segments, namely Design, Produce, and Deploy, to have a clear and logical process flow across the three segments. The way segments are divided demonstrates how content, the ultimate source of value, is first created (in Design) and then produced and distributed on a targeted basis either through specialist manufacturing (Produce) or through managed services in the third-party supply chain (Deploy). Communisis through its services and solutions helps their clients communicate with their customers in a more efficient, timely, and profitable way, both online and offline. The Company’s clients include all major UK banks, major telecoms and media groups, global consumer goods distributors, high street retailers and supermarkets. This strong client base has helped the Company earn a reputation of excellence and innovation in delivering personalized customer communication accurately, securely, reliably, and at a scale. Through its various offerings and consistent innovation, the Company continuously strives to partner their clients through every stage of personalized communication for their customers. As on March 2014, the Company operated from six principal locations in the UK, one in India, and from 18 satellite offices or client sites in both the UK and Europe. The operational footprint of the Company has extended following the recent contract wins with LBG for inbound imaging and mail processing services. Following the expansion, the Company employs around 2,300 people. In addition to providing its traditional services of print and direct mailing, Communisis has consistently innovated its business and services portfolio to remain competitive and efficient in line with ever-evolving technology. Currently, the services provided by the Company are focused on the integrated design, production, and deployment of personalized customer communications. These communications are typically of a marketing, regulatory or transactional nature and can be distributed either in paper or in digital formats, through e-mail, text message, mobile content, and social media. Design Segment - Provides brand communication strategy and implementation, content management and insight and measurement services that cover creative, data analytics, and digital marketing activities. Due to the shift in the consumer preference toward digital platforms, the Company plans to pursue an inorganic growth strategy to develop the Design segment. Therefore, the Company has acquired a few firms in recent times, with the latest acquisition of ‘Life Marketing Consultancy Limited’ (A research and insight-led shopper marketing agency). Produce Segment – The Company offers specialist, high volume, and predominantly personalized printing of transactional and direct mail, shareholder mailings such as Annual General Meeting notices and dividend cheque, invoices, statements, and cheque books. Deploy Segment – This Segment mainly handles management of third-party supply chains along with the fulfillment and distribution of marketing collaterals. Pass through Segment - Pass through revenue are basically pre-agreed or contracted revenue representing charges for print, postal and other marketing material, which are passed onto clients at cost as part of a wider service. So, the Company doesn’t make any profit from this segment. The Company offers the above-mentioned range of services that can be delivered either individually or in combination to make its clients’ communications with their customers more targeted and efficient. Many of these services are business-critical and of operational necessity for clients, thus providing a degree of stability and predictability in revenue streams irrespective of macro-economic and other market conditions. Also, the Company’s commitment to market- leading technology is a source of competitive advantage, mainly its deployment of HP - T series high-speed digital platforms. The Company aspires to become a market leader and preferred partner in providing personalized customer communication services in the UK and internationally. The key financial targets for the medium term are to deliver a double-digit margin on sales (excluding pass through) and to derive more than 20% of total revenue from overseas sources, while continuing to develop its UK business. In March 2013, Communisis raised £20MM via share issue, which was substantially oversubscribed. The principal purpose of the fund-raising activity was to support the next phase of profitable growth by making investments in new contracts and seizing inorganic growth opportunities. As on December 31, 2014, the gross debt and cash & cash equivalents for the Company were £60.4MM and £24.5MM, respectively. The Company follows a progressive dividend policy and thus, declared a full-year dividend of 2.0 pence per share in FY2014 (11% growth Y-o-Y).
Communisis plc – Arrowhead BID 4 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
The Company has done a few acquisitions in order to add new capabilities to support its integrated agency model and to become a leading provider of personalized customer communication services.
September 2013 - Editions - UK content marketing agency
April 2014 - Jacaranda - Video/film production
April 2014 - Public Creative - brand awareness through digital media
June 2014 - The Communications Agency - broader based London agency
January 2015 - Life Marketing Consultancy Ltd. (Life), a research and insight-led shopper marketing agency
Of these acquisitions, Life is identified as the largest acquisition by the existing management team Exhibit 1: Life Marketing Consultancy Limited – Acquisition Details viii
Life Marketing Consultancy Business Details:
Award-winning, research and insight-led shopper marketing agency
Client base includes leading consumer goods groups in the food, drinks, technology and pharmaceutical sectors
Operates from offices in Birmingham and London, and has 63 permanent employees
FY2014: Adjusted EBITDA*(on a normalized basis before non-recurring items) is expected to be approximately £1.4MM
FY2013: Adjusted EBITDA* of £1m on turnover of £7MM (£4.6MM net of recharged third-party costs). Gross assets of Life at that date were £3.6MM
Acquisition Details:
Initial consideration £14MM
Satisfied through the issue of two-year bank guaranteed promissory note £9.3MM, cash £0.7MM and around 7.9MM new ordinary Communisis shares
Additional consideration up to £9.3MM payable upon meeting of Adjusted EBITDA targets in 2015 and 2016 and contribution from defined synergies realized over the three financial years ending December 31, 2017
Satisfied via cash of up to £7.3MM and issue of new ordinary shares up to £2MM
Total maximum consideration £23.3MM
Communisis plc – Arrowhead BID 5 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
2.2 Business Model Communisis focuses on generating revenue through the following sources: The sale of products and services (Refer Exhibit 4, 5, 6) preferred by the Company’s clients for their customer communication The sale of solutions (Refer Exhibit 7) such as marketing technology platforms and onsite solutions enabling the customer communication process
Exhibit 2: Communisis Business Model
The aim of a typical customer-oriented company is to put across its message effectively, through all relevant communication platforms. The process of communicating information or sensitive data is a costly process, and may not be a company’s core business contributing to its topline. Thus, customer-oriented organizations choose to outsource their communication process to companies such as Communisis. Communisis is focused on providing integrated marketing services, including intelligence-driven communications and specialist production and sourcing, so that its clients can develop better relationships with their customers at reduced costs. Its business model typically includes designing, producing, and distributing customer communications. The communication data that the Company generally deals with are that of marketing, regulatory or transactional nature and are distributed either in the paper format or in digital formats, through e-mail, text messages, mobile content, and social media.
Communisis’ client portfolio includes many big corporate Exhibit 3: Communisis Revenue by Sector – 2014 ix brands from different sectors such as major UK banks, major telecoms and media groups, utilities, global consumer goods distributors, high street retailers and supermarkets, government departments and charities. The Company’s Financial Services customers are the primary contributors to the topline, which is evident from the fact that the segment accounts for 43% of the total revenue in FY2014 followed by Consumer Goods accounting for 24%.
Communisis plc – Arrowhead BID 6 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Historically, it has been observed that the Company derived a Exhibit 4: Communisis Geographic Revenue major portion of its revenue from the UK. However, the Breakup – 2014 x Company strategically decided to expand its business overseas, specifically in continental Europe. The Company intends to achieve 20% of its revenue from overseas markets (overseas revenue contribution of 19.4% in FY2014), along with double-digit margins (excluding pass through) in the medium term. Hence, in line with the above-mentioned objective, the Company extended the existing contracts with global Consumer Goods brands such as P&G, which has recently expanded its business in many regions. These teams associated with the new contracts in the industry are leveraging Communisis’s technology to augment P&G’s supply chains in the International markets.
2.3 Products and Services Communisis provides a host of services under the Design, Produce, and Deploy segments, offering an entire campaign right from inception to delivery to engaging audiences, intensifying the market share, and strengthening customer relationships. More precisely, it has been creating exceptional brand experiences and offering data-driven communication services, enabling its clients to experience economies of scale, greater brand control, and process efficiencies. Following is the list of products and services offered through various segments:
Exhibit 5: Design - Products and Services Offered Products Services Offered
Monitoring - Provides business intelligence to identify, envisage and respond to consumer behavior Strategy – Offers services to set goals and objectives, determining audiences, deciding the platforms to communicate data, gathering resources, creating content Social Media Campaigns - Offers a focused and integrated campaign to provide desired results Profile - Helps in building an impactful and a valuable profile Reputation - Measures effectiveness of the marketing campaign and provides insights into brand reputation
Analysis - Analyzes large volumes of consumer lifestyle and credit data Modelling - Creates accurate data sets for use in highly-targeted marketing campaigns Consumer Profiling - Helps clients in categorizing its customers so that they can be Data segmented for marketing and advertising purposes Targeting – Offers a broad pool of customer data to support targeted marketing strategies, which can be used to draw consumers in-store
Design – Provides creative services focused on turning customer’s brand communication strategies into highly creative content Photography - Assists in creation management and control of artwork files and other brand assets to enable the Company’s clients to gauge the impact of content and images across Creative multiple media channels Illustration Copywriting Video and Animation Digital
Communisis, together with its partners, provides interactive marketing messages in the Online Media emerging range of online channels: Microsites, Intranets, Portals Artwork and Pre-Press ,Digital Delivery, Online Build Reprographics
Communisis plc – Arrowhead BID 7 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Exhibit 6: Produce - Products and Services Offered Products Services Offered
Direct Mail Printed Media Transactional Print Cheque and Security Print
E-mail Digital Channels SMS Augmented Reality Apps
Postal services -
Inbound services Inbound and mail processing services
Exhibit 7: Deploy - Products and Services Offered Products Services Offered Business Process Fundamental redesign of core business processes to attain improvements in productivity Re-engineering Warehousing Marketing Supply Chain Stock Control Systems Management Onsite Fulfillment Lines
Sourcing and production Retail Point of Sale Distribution and the ongoing review and improvement of installed assets
e-Procurement and Source and purchase stock and services on client’s behalf in line with the Chartered sourcing Institute of Print and Supply’s (CIPS) charter
2.3 Solutions
Exhibit 8: Deploy - Products and Services Offered Solutions Features
Customer Marketing Builds a single customer view and actionable audience segmentation enabling effective Database customer communication
Utilizes latest digital printing technology to improve transactional communication with Intelligent Targeting personalized content, turning business-critical customer communications such as account Solutions statements into value-added data-driven marketing tools
Technology Platform Offers process redefinement and marketing technology platforms
Onsite Solutions Provides marketing skills insourcing via onsite personnel and resources
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2.2 Segment Analysis Communisis, through its three segments, namely Design, Produce, and Deploy, provides services, which help its clients with customer communication. It delivers seamlessly integrated, personalized, and captivating brand-marketing services. The divisions are created by the Company on the basis of logical flow across the segments. The Design segment demonstrates how content is created and then produced and distributed on a targeted basis, either through specialist manufacturing (Produce) or through managed services in the third-party supply chain (Deploy).
Exhibit 9: Client Service Model xi
Design Segment: In FY2014, the Design segment registered a growth of 26.5% Y-o-Y yielding a revenue of £26.5MM. EBIT and central costs (hereon referred to as ‘Contribution’) for the segment was £2.7MM, with an EBIT margin (hereon referred to as ‘Contribution Margin’) of 10.4%. Through this segment, the Company offers services such as brand communication strategy and implementation, content management and insight and measurement services that cover creative, data analytic and digital marketing activities. It provides creative strategy and audience engagement ideas to multi-stream content creation, master artwork and social network marketing. It also provides insight-driven brand, brand-response and direct-response creative solutions of all shapes and size across print, digital, web, mobile and social channels. With most of the brand awareness and marketing happening over digital media, the Company is constantly trying to cater to the changing requirement of its clients. The recent acquisitions of Life Marketing Consultancy Ltd. (Shopper Marketing Agency), Jacaranda Productions Ltd. (Video and Film Production), Public Creative Ltd. (Brand Awareness), and The Communication Agency Ltd. (Customer Relationship Management) are in line with the objective of strengthening their Design segment. Further, in order to successfully integrate these acquisitions, the Company created and launched an agency called ‘PSONA’. Produce Segment: The Produce segment forms the largest part of the overall revenue for Communisis. In FY2014, the segmental revenue grew by 28.4% Y-o-Y to £150.7MM. Two new contracts from LBG during the year have been the primary reason for this significant increase in the revenue, which was offset by 8% reduction in demand for transactional documents and higher margin cheque books. Contribution during the year stood at £18.5MM, with a Contribution margin
Communisis plc – Arrowhead BID 9 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
of 12.3%. Despite realizing higher turnover during the year, the Company has experienced a lower overall contribution margin owing to factors such as non-recurring expenses realized during the transition phase of new contracts, and a loss of contribution from changes in product mix. The Company through this segment provides both inbound and outbound services. It provides personalized printing of direct mail, shareholder mailings such as Annual General Meeting notices and dividend cheque, invoices, statements and cheque books for their clients. The Produce segment includes the following services: Transactional Communications: The Company, through this offering, provides its clients with high complexity business-critical transactional communications such as bank account statements and utility bills, invoices and local authority correspondence. Direct Mail: Through its scale and flexibility to produce direct mailings of all kinds in a cost-effective manner, the Company delivers customer acquisition campaigns sent to millions of households to high integrity projects such as dividend and AGM mailings where accuracy and data security are business-critical. Cheque and Security Print: Communisis is the market leader in the production of bespoke security print. The Company owns fleets of specialist security print presses that produce a wide range of secure products including cheques, passbooks, investor dividends, payroll and other cash or near-cash customer communications. Postal Inbound services: Inbound mail processing services.
Deploy Segment: Through this segment, the Company provides services for management of third-party supply chains together with the fulfillment and distribution of marketing collateral. In FY2014, the segment revenue decreased by 1.3% Y-o-Y to £55.2MM. This marginal decline in revenue was the net effect of 13% increase in managed fee income associated with P&G’s brand deployment programs in the international markets, and 14% decrease in revenue from withdrawal or outsource of low margin commodity print management services. These factors coupled with 45.7% increase in pass through revenue associated with the growth in overseas revenue helped the Company to earn EBIT of £13.8MM in FY2014 (£9.6MM in FY2013) with contribution margin improving significantly to 25% in FY2014 (17.2% in FY2013). During 1HFY2014, the Company was awarded a five year extension of an existing contract for external brand building services with P&G Europe SA through to December 2019. 2.6 Company Premiums - Long-term Contract Wins provides visibility of earnings: Communisis is leading European producer and supplier of cheques, credits, clearing vouchers, dividend mailings and high volume transactional documents, entrusted by numerous blue-chip clients across varied sectors. Some of the significant multi-year contracts won in the year 2013 and 2014 were from LBG, NBS, Yorkshire Building Society, Thames Water, P&G and AXA UK, with few recent contract extensions in case of Financial Services’ clients. Most of these contracts demand high level of confidentiality and require all the communication to be made reliably, securely, and at a scale. Therefore, the long- term contracts display the faith gained by the clients in the Company’s capabilities. Further, nearly 70% of the Company’s revenue is generated through contractual arrangements, thereby providing good future earnings predictability. Additionally, long-term relationships with clients have also created a possibility of cross-selling and winning new contracts from the existing client. - One-Stop Destination: The Company has offerings across all segments, Design, Produce, and Deploy, making it a one-stop destination for its clients. The management team created these segments to have a clear and a logical process flow. The segments are divided such that it demonstrates how content, the ultimate source of value, is first created (in Design) and then produced and distributed on a targeted basis either through specialist manufacturing (Produce) or through managed services in the third-party supply chain (Deploy). This segmentation also demonstrates to the client that the Company has the ability and the know-how to partner at every stage of personalized communication and through every possible channel. The segmental view also enables the management team to plan and implement more focused and effective growth strategies. - Cutting Edge Technology: Communisis possesses cutting-edge technology, HP-T series high-speed digital platform, which provides superior quality, fully variable, digital color output at high speed. The Company in aggregate has installed a base of eight machines to support business expansion from new contracts. The Company has worked with many big corporate brands to realize the benefits of these technology platforms. The fleet of eight machines has a capital value of around £30MM, which is unmatched in the UK and the largest in Europe for
Communisis plc – Arrowhead BID 10 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
transactional applications, giving it a competitive advantage. Additionally, operational expertise gained over the past several years forms a strong barrier to entry. - Experienced Management Team: The management team of Communisis includes qualified experts having considerable experience in the field of data intelligence, brand marketing and commercial printing. The presence of these eminent professionals has helped the Company develop and expand the business by building quality objectives and delivering successful results. The track record of the management team can be judged from the fact that their efforts have enabled the Company to increase its profit from £6.6MM in FY2009 to £16MM in FY2014. Further, the management’s efforts in defining the business objectives have resulted in the longevity of working relationships with banks such as Barclays and LBG. - Awarded CIPS Gold Certification: In FY2011, the Company’s strategic expertise in purchasing and supply chain management was awarded a gold certification by the Chartered Institute of Purchasing and Supply (CIPS). Additionally, the sourcing process of Communisis has been recognized as ‘world class’, which is an important factor in building the client’s confidence in the Company’s purchasing and supply chain processes.
2.7 Company Risks xii - Safeguard of Sensitive Information: The Company handles a bulk of private and confidential data as part of its transactional and marketing services. It deals with the printing of shareholder mailings such as dividends and also bank statements and invoices. Here, the Company could be at the risk of system failure, human error, equipment malfunction or deliberate unauthorized action, which may lead to the above-mentioned confidential data to be compromised. To counter this risk, the Company has in place several control measures such as regular investments in robust IT infrastructure, security and monitoring, and third-party audits to safeguard personal and sensitive information. Furthermore, important areas of the Company are subject to certification, which includes the ISO/IEC 27001 demonstrating a set of standards associated with the security of assets such as financial information, intellectual property, employee details or information entrusted to companies by third parties.xiii - Integration Risk: In recent times, the Company has started to pursue growth opportunities through the acquisition route, wherein the Company has undertaken several acquisitions. This gives rise to integration risk such as realization of lower-than-expected cost synergies as well as lower-than-expected increase in revenue. However, the Company has considerable experience in acquisitions and has chalked out clear and sustainable growth strategies. It also conducts thorough due diligence before acquiring businesses so as to align its activities with its strategies. - Change in Customer’s Preferences: Customers’ increasing preference for more virtual version of documents than hardcopy has a possibility of affecting the business of commercial printing companies. Easy access and availability of Internet has led to a rise in demand for receiving information from digital forms such as emails, text messages, social media, etc. and at the same time also led to a decline in the need for paper-based marketing and materials, hampering print operations. Additionally, increased awareness of environmental impact of printing and paper consumption has motivated customers to adopt digital printing over paper-based printing. However, Communisis is well-positioned to handle this shift in demand by steadily investing in new digital technologies. Moreover, the practice of paperless billing by the UK banks is growing, albeit at a relatively lower rate of less than 15-20%. xiv - Client Concentration: In FY2013, 55% of sales were contributed by the top five clients of the Company. This exposes the company to substantially high risk arising out of client concentration as the loss of one or more of the top clients would result in a significant decrease in profitability. However, the management team has addressed this risk and has been working on reducing its reliance on the Financial Services sector by conducting promotional activities in the international markets to promote its wide range of services. This has to some extent helped the Company to reduce the Financial Service’ contribution to the total revenue to 43% in FY2014 from 46% in FY2012 and a relative increase in contribution from all other sectors. - Technology Obsolescence: Risks developing from changes in technology and earlier-than-expected replacement of systems and equipment could pose significant problems for the company. Inability to hedge these technological risks by either investing in new technology or diversifying sufficiently into various markets could lead to a reduction in revenue and subsequently affect profitability due to high operational gearing. Risk management in the above- mentioned context is carried out by the Company by making significant investments in market-leading technologies. For instance, the Company has deployed high-speed digital platforms, which comprise of the largest fleet in Europe for transactional applications. Furthermore, the Company has consolidated all its client-facing software into one platform named “Mantl,” which marks an important technological development. - Economic Slowdown: The Company is a provider of marketing services to businesses, which in turn supply goods
Communisis plc – Arrowhead BID 11 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
and services to consumers. So there lies a risk that macro-economic conditions may affect consumer expenditure, which in turn could reduce client’s discretionary market spend with Communisis. To mitigate this risk, Company continuously monitors market trends and are factored in during business planning, budgeting and management processes. Also, wherever possible volume erosion protection clause is included in the contracts.
2.8 Corporate Strategy The primary objective of the management team is to be a market leader in providing personalized communication services to meet the specific and ever-changing needs of the clients. In addition, the Company’s financial objective is to increase the profitability with an intention to deliver double-digit operating profit margins on sales (excluding pass through) over the medium term. In order to achieve these objectives, the Company has implemented many strategic initiatives, which are as follows: - Expanding Business through Organic Growth, augmented by Acquisitions: Communisis’s primary objective is to be the UK’s leading integrated marketing services provider by improving profits and gaining competitive advantage. Communisis has been growing as a result of strong organic growth, The company has also been acquiring suitable companies to develop and expand its capabilities in multi-channel personalized communication services. Further, via these acquisitions, the Company intends to serve the acquired companies’ chief clients and eventually help Communisis win new contracts from large corporate brands. The recent acquisitions of the following companies and their successful integration with the Company illustrate Communisis’s expansion by acquisition strategy: The acquisition of Life Marketing Consultancy will enable Communisis to take advantage of its strong brand image. Further, it shall facilitate Communisis to expand its brand deployment services to provide more value to its growing customer base in Design and Deploy segments (high margin businesses). It can also boost its revenue through cross-selling marketing services in social media, video, digital production and content marketing. The acquisitions of the digital business of Public Creative and the video business of Jacaranda Productions to build expertise in its design segment, offer a comprehensive range of integrated services, including engaging content for video and film across all digital channels, and thus provide revenue synergy opportunities from its existing client. The acquisition of The Communications Agency (TCA) to take advantage of TCA’s long-established capabilities across platforms and venerable client relationships in the retail, consumer goods, and financial services sectors and also to cross-sell to TCA’s existing clients. The acquisition of Editions Publishing Limited to strengthen the Company’s expertise in content marketing services and to fortify its already strong position in the financial services sector. - Launched Agency Brand – PSONA: With an increase in the demand for digital communications, Communisis created an independent digital division ‘PSONA’, to generate cross-selling opportunities within the Company’s traditional business of social media, video, digital production and content marketing. Psona, an ‘integrated digital agency’, is made up of five agencies that the Company had acquired in 2014 in the digital and creative marketing areas (TCA, Geronimo, Jacaranda, Public Creative, and Life). Additionally, in order to expand this high margin creative/digital marketing division, the Company has been investing regularly. A total of £40MM has been invested in the Design segment to date. Psona Group includes Psona, Psona Films, and Psona Glasgow. Further, Psona includes three agencies, TCA, Geronimo, and Public Creative. While ‘Psona Films’ includes Jacaranda, ‘Psona Glasgow’ includes Yomego, a social media shop which was acquired in 2012. xv xvi - Carrying out Client-led Overseas Expansion: Communisis has been steadily working on attaining growth from managed services contracts in overseas markets, wherein the Company has deployed its technology and people to carry out the promotional activity on behalf of its client in the overseas territories, rather than the clients bearing the huge cost of non-core activities. Assuming the huge demand of these non-core activities, specifically from Consumer Goods companies, Communisis aims to derive 20% of its revenue from the client-led international sources in the medium term. In order to achieve this, the Company has developed its on-site operations across Europe, wherein it supports clients in 16 countries operating from 11 European sites. This client sponsored approach allows a de-risked model of expansion. As a result, the contribution from the overseas sources to the total revenue has increased significantly from 3.6% in FY2009 to 19.4% in FY2014. - Reducing client concentration in Financial Sector: The Company has the highest client concentration in the Financial Services sector, which accounted for 43% of the total revenue in FY2014. However, the Company’s focus is on expanding its client portfolio across sectors. The Company has been diversifying its client portfolio in the recent
Communisis plc – Arrowhead BID 12 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
years and currently has clients from various other sectors such as Consumer Goods, Retail and Distribution, Telecommunication, Media, Utilities, and the Public sector. International expansion has helped the Company to grow its operations in the Consumer Goods industry, resulting in a jump in contribution from the sector from 8% in FY2012 to 24% in FY2014. - Investments in Specialist, Market-leading Technologies: The Company has maintained its competitive advantage by investing in market-leading technologies. The Company is committed to invest highly in technology and the current market value of the fleet of eight machines is around £30MM, which is the largest investment made in Europe for transactional applications. In addition, HP technology uses white paper instead of pre-printed paper, which reduces stockholding and production costs and allows for intended customization. The use of the “Digital Production WorkFlow” platform commenced during FY2014, which will enable the Company to manage its operations efficiently. - Restructuring and Cost-cutting Program: The Company has a history of restructuring the business and implementing cost-cutting programs in order to run the business effectively and efficiently in fast changing market conditions. Recently, the Company announced its restructuring process wherein it decided to close down the cheque production facility at the Trafford Wharf site, transfer the production facility to its sites in Leeds & Crewe and outsource production of more commoditized lower margin print. The objective was to concentrate on high margin specialist production, which would help the Company to improve margins by reducing cost and improving capacity utilization. 2.9 Communisis’s Shareholding Pattern Communisis’s total basic shares outstanding as of February 2015 were 208MM, with the following shareholding pattern.
Exhibit 10: Shareholding Pattern xvii
2.10 Listing and Contact Details Communisis is listed on the LSE (Ticker: LSE: CMS, Date of Listing – June 27, 1994) Contacts: Communisis plc, Communisis House, Manston Lane, Leeds LS15 8AH, United Kingdom Email ID: [email protected] Phone: +44 (0) 113 277 0202
Communisis plc – Arrowhead BID 13 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
3. Key Variable Analysis xviii 3.1 Variable 1 – Design Segment Growth Rate Taking into account the increasing use of digital platforms such as videos, emails, text messages, and social media in advertising, we expect the Design segment to benefits in the coming years. Favorable market trends are expected to drive expansion.
Exhibit 11: Design Segment Growth Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 35% 25% 12% 10% 7% 1% 1% High estimate 49% 27% 19% 16% 19% 2% 1%
3.2 Variable 2 – Produce Segment Growth Rate The Produce Segment accounted for 64.9% of the overall revenue (excluding pass through) in FY2014, which is the largest contributing segment for the Company. The recent outbound communications contract wins from LBG and NBS along with the deployment of HP T–series printer for providing high quality services at a scale are expected to drive growth in this segment in the near term.
Exhibit 12: Produce Segment Growth Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate (4%) 0% 1% 1% (1%) (2%) (2%) High estimate (4%) 0% 1% 1% 1% (2%) (2%)
3.3 Variable 3 – Deploy Segment Growth Rate The recent renewal of the P&G contract for providing external brand building services across its European operations and the Company’s objective to grow its overseas revenue are expected to drive growth in this segment. For FY2014, the Deploy segment contributed 23.7% of the total revenue of the Company.
Exhibit 13: Deploy Segment Growth Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 8% 4% 4% 3% 3% 1% 1% High estimate 13% 5% 7% 6% 6% 1% 1%
3.4 Variable 4 – Design Segment Contribution Margin For FY2014, the Design segment generated contribution margin of 12.7% and with acquisition of higher margin creative services, we expect its contribution margin to gradually increase to 23.0% in Low Bracket and 23.3% in High Bracket in FY2021E.
Exhibit 14: Design Segment Contribution Margin 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 21.0% 22.0% 22.1% 22.5% 22.6% 22.9% 23.0% High estimate 23.0% 23.1% 22.3% 23.1% 23.0% 23.0% 23.3%
Communisis plc – Arrowhead BID 14 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
3.5 Variable 5 – Produce Segment Contribution Margin Deployment of HP-T series platform will help the Company to achieve economy of scale which will lead to increase efficiency in its operations. We expect the contribution margin to be around 15% to 16% level (Low and High Bracket) in coming years. Exhibit 15: Produce Segment Contribution Margin 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 15.8% 15.0% 15.0% 15.1% 15.2% 15.5% 16.4% High estimate 15.9% 16.0% 16.0% 15.9% 15.6% 15.5% 16.4%
3.6 Variable 6 – Deploy Segment Contribution Margin With increase in efficiency in the Deploy segment, Arrowhead expects the contribution margin to improve from 25.0% in FY2014 to 23.5% in FY2021E in the High Bracket scenario. Exhibit 15: Produce Segment Contribution Margin 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 22.2% 22.0% 24.0% 23.8% 23.5% 23.0% 23.5% High estimate 24.2% 24.9% 24.9% 23.3% 23.0% 23.0% 23.5%
Communisis plc – Arrowhead BID 15 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
4. News xix - Acquisition of Life Marketing Consultancy Ltd.: On January 05, 2015, Communisis completed the acquisition of Life Marketing Consultancy Ltd., a research and insight-led shopper marketing agency for a maximum consideration of £23.3MM spread over three years. According to the agreement, the Company will pay an initial consideration of £14MM, comprising a £9.3MM two-year bank guaranteed promissory note, £0.7MM cash and the issue of around 7.9MM new shares in Communisis. It also includes an additional consideration of £9.3MM payable on the basis of Life’s financial performance in 2015 and 2016, including its average EBITDA and the contribution from defined synergies realized by the end of December 31, 2017. This additional consideration will be satisfied by £7.3MM in cash and the issue of shares worth £2MM. The acquisition complements well with the Company’s objective to expand in higher margin business while allowing it to broaden its range of services. - Acquisition of TCA: On June 09, 2014, Communisis acquired TCA, a brand response and customer relationship management firm, for £7.44MM including acquired cash of around £0.52MM. The company paid £5.30MM in cash and £1.45MM by issuing 2,404,643 new ordinary shares in Communisis. Through this acquisition, the Company intends to broaden its integrated business model and consequently experience growth and revenue synergy by offering its existing clients with services in social media, video, digital development, and content marketing. - Acquisition of Jacaranda Productions Limited and Public Creative Limited: On April 25, 2014, Communisis acquired Jacaranda Productions Limited, and Public Creative Limited. London-based Jacaranda Productions is identified as one of the leading companies in independent production, particularly in Televisuals. Public Creative, also a London-based company, specializes in brand management and utilizes digital media such as web and mobile applications to build loyalty and encourage customer advocacy. Jacaranda Acquisition: Communisis acquired Jacaranda for an enterprise value of £1.5MM plus surplus cash. This consideration was satisfied by paying £0.9MM in cash and by issuing 913,242 new ordinary shares worth £0.6MM; further, an aggregate amount of £0.5MM was to be paid by the Company, depending on the gross profit earned in the forthcoming three years after the acquisition. Public Creative: Communisis acquired Public Creative for a total consideration of £0.36MM in cash. The rationale behind these acquisitions is that this will provide the Company with necessary expertise to build a comprehensive range of integrated services in its Design segment, thus providing Communisis with an additional source of revenue from existing clients. - Contract with P&G Europe Extended: On April 15, 2014, Communisis announced that the contract for the provision of external brand building services to P&G Europe SA had been extended until December 31, 2019. - Contract Finalized with LBG for Inbound Imaging Process: On March 27, 2014, Communisis announced that the contract with LBG was approved by the LBG Board and executed by both parties, in order to provide inbound imaging and mail processing services. According to the agreement, the contract commenced from April 1, 2014, and shall remain in force for an initial term of 10 years, with a further 5-year renewal option. - Contract Finalized with LBG for Outbound Transactional Communications: On September 25, 2013, Communisis announced that the LBG board had ratified and approved the contract for the production of all transactional customer communications in the UK between LBG and the Company, and that the contract was executed by both the parties. - Acquisition of Editions Publishing Limited: On September 4, 2013, Communisis acquired Editions Publishing Limited, which is the UK’s content marketing agency in the Financial Service sector. The acquisition was made at an enterprise value of £5.76MM (on cash and debt-free basis) including Editions’ net assets estimated at £0.1MM. This consideration was satisfied by paying approximately £5.24MM in cash including acquired cash of £1.2MM and through the issue of 3,003,533 new ordinary shares worth £1.7MM. The rationale behind the acquisition was to buy businesses in specialist complementary areas, which would help the Company in amplifying its service offering. The Company found Editions to be a suitable company for acquisition in order to strengthen its already strong position in the financial services sector. - Contract Finalized with Lloyds Banking Group plc for Transactional Communication: On July 11, 2013, Communisis announced that it finalized a 10-year contract with the Lloyds Banking Group for transactional communications in the UK. As per the contract terms, Communisis would assume responsibility for Lloyds Banking’s manufacturing sites in Copley and Crawley.
Communisis plc – Arrowhead BID 16 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
5. Management and Governance The management team comprises experienced professionals, having significant experience in the field of data intelligence and commercial printing. The presence of these experienced team members has enabled the Company to execute actions to revitalize its business model at regular intervals and take advantage of the opportunities available in the Commercial Printing industry. Further, various steps have been taken for product development in the Data Intelligence segment, which has helped the Company win several business contracts.
Exhibit 17: Management Team Name Age Designation Background He is a member of The Institute of Chartered Accountants in England and Wales xx In December 2007, he was appointed the Chairman of Communisis plc. Currently, he is serving Chemring Group, a defense company as the Chairman; and as Senior Independent Director of Coalfield Resources plc. Mr. Peter 68 Chairman He also serves as a Trustee of the ORBIS Charitable Trust Hickson In the past, he has worked with several companies holding key responsibilities, e.g., Anglian Water Group as Chairman, PowerGen plc as Finance Director, and Non-Executive Directorships for companies including Kazakhmys plc, London and Continental Railways Limited, Scottish Power plc, Marconi Corporation plc, and RAC plc. Since January 2008, he has been working with Communisis; he joined as Managing Director of Print Sourcing, and was appointed as Group Sales Director in November 2008 Mr. Andy Chief Executive 54 In August 2009, he was appointed as the CEO and has been permanently Blundell Officer serving his key responsibilities since October 2009 In the past, he had served companies such as BemroseBooth Limited, and De La Rue plc holding a Managing Director designation
He has an LLB and holds an FCA xxi Since December 2007, he has been serving Communisis, wherein he joined as Non-Executive Director; in September 2010, he was appointed as Executive Strategic and Director in the role of Strategic Planning and Development Director; in March Mr. Nigel Corporate 2011, he was elected as Finance Director; and recently has been appointed 63 Howes Development as the Company’s Strategic and Corporate Development Director Director At present, he is serving Acceleris Marketing Communications Limited as Non- Executive Chairman In the past, he had served SCS Upholstery plc and Wraith plc as Non-Executive Director; and Deloitte and Arthur Andersen as Audit and Advisory Partner
He is a Chartered Management Accountant Recently has been nominated as the Company’s Finance Director after serving Communisis for over six years holding number of senior financial and Mr. Mark 45 Finance Director operational management roles Stoner Prior to joining Communisis, he was employed with NASDAQ quoted Atmel Inc and also held finance roles in companies such as KPMG, Siemens plc, Rolls Royce Industrial Power Group, and British Steel plc.
Since 2003, he has been serving Communisis, wherein he joined as a General Manager for Transactional Print. Over the years, he has worked closely with various departments: in 2007, he was appointed as Managing Director of Mr. Dave Group Managing Direct Mail; in 2008, as Group Operations Director; in 2009, he was appointed 52 Rushton Director to the Executive Board; and in 2011, was appointed as Group Managing Director In the past, he had served companies such as St Ives plc, Rexam plc and Avery Dennison Corporation holding a General Management Position
Communisis plc – Arrowhead BID 17 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
In May 2012, she was appointed as Communisis’s Non-Executive Director. Currently, she is working with Christie Manson & Woods Limited, as Marketing Director EMERI Ms. Jane Non-Executive 49 Previously, she had served Citibank NA as Marketing Director EMEA, and has Griffiths Director also served various advertising agencies, including Ogilvy/OgilvyOne in London, New York and Korea, Arc Worldwide London (part of the Leo Burnett Group) and TBWA/GGT London holding senior executive position in each firm
In July 2013, he was appointed Communisis’s Non-Executive Director. Currently, he is serving Next Fifteen Communications Group plc as an Interim Finance Director Mr. Peter Non-Executive 51 In the past, he had served companies such as Centaur Media plc, and Bell Harris Director Pottinger LLP holding Interim Finance Director Position; and Engine Limited and, Capital Radio plc holding Finance Director and Group Finance Director Positions, respectively In August 2014, she was appointed as Communisis’s Non-Executive Director. Currently, she holds the position of Non-Executive Director of Majestic Wine plc and Domino's Pizza Group plc and was previously a Non-Executive Director Ms. Helen Non-Executive of Mattioli Woods plc. - Keays Director She has considerable marketing and consumer communications experience across a number of sectors including retail, telecommunications and financial services having held executive management positions within Vodafone plc, Sears plc and GE Capital
Communisis plc – Arrowhead BID 18 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
6. Technologies and Markets 6.1 Computer Integrated Manufacturing (CIM) in Printing xxii CIM refers to the use of computers in the entire manufacturing process. The production of printed products has evolved from a craftsmen’s trade to industrial production. As in other industrial sectors, CIM is gaining in importance in the Print Industry. The purpose of CIM is to have a completely automated unit of the entire factory without any human labor. 6.2 Integration of Print Production Workflows 6.2.1 Digital Workflow Workflow is one of the several solutions to control production processes. It is a sequence of tasks assembled to accomplish a certain objective. Production processes implemented through a workflow require an information system to ensure that the instruction or message is immediately delivered to the addressed party. Networking can be implemented through an external medium or the Internet. The progress of the process can be monitored by the control staff. This monitoring enables schedule correction on the job. Advantages of using workflow systems are as follows: rapid or automated ignition of repetitive tasks, partly automated and faster administrative tasks, fast and accurate verification of the job through visual and textual report, integration of distant jobs into groups, flow traceable by customers and partners, and use of standardized communication channels 6.2.2 Print Production Workflow Printing houses have a complex production unit structure, and controlling the workflow is a challenge even for experts. The print production process can be divided into three tasks: prepress, press, and postpress. An effective workflow system is required for achieving harmony between these three tasks. Process control in the Print industry encompasses the complete control of the production process from idea generation through printing to the end product.
Exhibit 18: Development of the Digital Workflow in the Print Production Process xxiii
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Workflow in the Print industry was based entirely on analog data until the 1970s. The digitization of the offset workflow comprises the following process: First, data is digitized using color scanners and phototypesetting systems. Drum scanners are used to read the originals electronically, perform color corrections and color separations in the processing unit, and record the result on film, thus rendering the text, image, and graphics in digital form. The second stage involves the use of Desktop Publishing (DTP). DTP allows the compilation of text, image, and graphical elements digitally into complete pages with the help of layout programs and the use of laser imaging units on the film for deriving the output. The digitalization of prepress ends with Computer to Plate (CtP) technology. The information is directly transferred to the printing plate from the digital sheet assembly without generating any film. The last stage involves CIM. 6.3 HP T-series Printing Technology Modern equipment has revolutionized the Print industry’s approach to printing, storage, and distribution. Contemporary and ever-evolving technology in printing has enabled the production of high volumes of print at effective costs. The advent of digital printers, such as laser and inkjet printers, allows the printing of digital data, eliminating the need to create printing plates. Digital files can be directly sent to the printer, resulting in faster turnaround times. The HP T series Printer family provides outstanding print quality with fast print speeds. The T Printer series technology uses three-black ink sets that produces neutral grays, resulting in better image detail. It also incorporates large printheads, enabling accuracy up to 0.1%.xxiv The HP T series family of printers includes the HP Designjet ePrinter series and the HP Inkjet Web Press series. In 2013, HP introduced the HP Designjet T2500 Exhibit 19: HP T400 Color Inkjet Web Press xxv eMultifunction Printer (eMFP), which offers customer-driven design features in a single device. Besides printing and copying capabilities, the device provides an integrated scanner with which it is possible to scan and send sketches to team members and also work with clients in real time. The eMFP enables users to connect to the cloud using the ‘HP Designjet ePrint & Share’ feature that allows access to the Web. Using this feature, users can save copies of projects to the cloud and also email projects.xxvi In 2011, HP introduced the world’s first 42-inch digital high-speed color press, the HP T400 Color Inkjet Web Press, which allows 5,000 full-color images and around 7,000 mono images per minute.
The HP web press systems have revolutionized useful business activities such as publishing, transpromo, and direct mail. The HP Web Press portfolio applications include direct mail, transactional printing, books, periodicals, journals, and manuals. The high capacity of the web press devices enables mass personalization and customization. HP T200, T300, T350 and T400 have particularly been useful in the marketing communication industry. With T400, HP introduced the concept of mass customization in printing by merging the personalization features of digital printing with high-volume production.xxvii High-volume transactional printing is one of the most significant applications of HP Inkjet Web Press technology. HP also launched the Magnetic Ink Character Recognition (MICR) system on its web press devices, which is commonly used in chequebook printing. The MICR solution allows the single step production of balance cheque mailers, rebate cheque mailers and other direct mail products, and helps avoid the cumbersome document security and inventory storage demands such as preprinting and locking away of valuable MICR documents.xxviii On June 10, 2014, HP announced the expansion of its product portfolio and scaling up of its PageWide Technology. The PageWide Technology offers large-format printing, delivering high-quality prints at faster speeds and lower costs. It encompasses more than 200,000 nozzles on a stationary print bar and extends over the width of the page. This technology is expected to disrupt the $1.3B production printing market, which is currently led by monochrome Light- Emitting Diode (LED) printers. Within its product portfolio, HP plans to launch the HP T3500 eMFP, which is one of the most productive large-format multifunction printers; the HP Designjet T200 Production printer, which caters to high- volume demands; and the HP Designjet SmartStream, which simplifies the entire printing workflow.
Communisis plc – Arrowhead BID 20 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
6.4 Digital Asset Management (DAM)xxix Digital assets consist of digital material created or owned by Exhibit 20: Digital Asset Management Lifecycle an organization. The term 'media asset' may also be used to refer more narrowly to audio or video content. Digital assets exist in various formats such as text, web, audio, video, and image files. Examples of digital assets are digital images of objects, logo image files, corporate presentations, and any other digital resources created by an organization that generate revenue or provide valuable content to employees or clients. Applications of digital assets may be in sales, marketing, education, web development, collections management, and digital preservation. With the growing volume of digital resources, digital asset management has become a crucial aspect for organizations who wish to easily retrieve and use these assets. Digital Asset Management (DAM) encompasses the creation, classification, storage, retrieval, and backing up of these assets. The objective of DAM is to integrate best practices within workflows to enable access to these resources and make them available for reuse. Simply put, a DAM is a set of database records which contain metadata denoting the name of the file, its format, and information about its content and usage. xxx 6.5 Big Data Analytics Big Data refers to the exponentially and rapidly rising volume of data. Big Data may be structured or unstructured. Big data is vital to businesses as it may comprise useful insights such as customer data and preferences that help increase the efficiency of business through better decision-making. Much of the Big Data available is unstructured and requires analysis in order to extract usable information. Data Analytics refers to the process of collecting, organizing, and analyzing these large volumes of data so as to gather information and notice trends.
Communisis plc – Arrowhead BID 21 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
6.6 Multi-Channel Marketing Communication Services Industry 6.6.1 Industry Overview Multi-channel marketing refers to communicating with customers through various channels such as direct mailing, social media, retail outlets, print media, mobile, and email. Multi-channel marketing focuses on interacting with customers on more than a single platform, thereby increasing the visibility, awareness, and brand recall of products and services. According to comScore, multi-platform users in the UK consume 23% more content than PC-only users. xxxi The smooth execution of a multi-channel marketing strategy requires the seamless integration of various platforms and aspects of marketing such as data intelligence, data driven-communication, branding and advertising, digital marketing, and the efficient use of resources such as print via an optimum supply chain and distribution network. It also involves adapting to newer than traditional channels of marketing that is, being present where the customer is.
Exhibit 21: UK Industry Classification – 2013 xxxii Exhibit 22: Global Internet Advertising Revenue xxxiii
The Global Internet Advertising Industry generated revenue of $117.2B in 2013 and is expected to reach $194.5B in 2018, according to PWC. xxxiv The Gross Value Added (GVA) to the UK economy by the UK advertising and marketing industry in 2012 was £10.2B. xxxv In 2012, the advertising and marketing industry in the UK accounted for 18% of the total employment in the creative industry group in the UK, which is the second highest in the group. xxxvi
The transformation of the Internet as a prime communication Exhibit 23: GVA - UK Advertising and Marketing and selling medium can be attributed to Digital Marketing. Industry xxxvii Broadly, Digital Marketing refers to the marketing of products and services using electronic media. Digital marketing is no longer limited to search engine optimization and banner advertisements. It has expanded to cover various types of data such as video clips, targeted emails, and social media content. Globally, the digital marketing budgets are expected to reach $160B in 2016 from $102B in 2012, at a CAGR of 14%. xxxviii According to a comScore report “From Platform to People,” the total number of people in the UK on the digital space was 46.2MM in July 2013, and the monthly online time spent per person in the UK on an average was 29 hours and 14 minutes in December 2013, higher than that in the U.S. and Italy. xxxix xl
One of the most important sub-segments of digital marketing, social media marketing, has been growing on the back of the marketers’ attempts to establish a connection between big data and social media. According to Generator Research, the total number of global social networking users is projected to rise from 1.8B in 2013 to 2.5B by 2017, an increase of nearly 700MM or 38%. xli The global social networking
Communisis plc – Arrowhead BID 22 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
penetration is currently only 26%. xlii The presence of such a wide base of audience presents tremendous potential for the social media marketing industry. The UK Advertising industry generated a revenue of approximately £18B in 2013.xliii Advertising expenditure in the UK is highly correlated to the economic cycle, and it also forms the largest component of marketing spend in the country at around 31% of the total marketing expenditure. xliv In the year 2012-13, Internet adspend grew by 15.6% in UK, higher than all others media of advertising. xlv Driven by digital, ad spend in the UK is expected to exceed £20B in 2015xlvi. Global spending on mobile advertising was $13.4B in 2013. xlvii The Print Industry in the UK contributed to a positive trade balance of £700MM in 2012 and added more value than any industry other than manufacturing. The UK ranks fifth in the world in the production of printed products. Marketing and printing are closely related with respect to point-of-sale, direct mail, poster advertising material as well as channels provided through newspapers, magazines, and brochures, brand identity on printed packaging and labels. In 2011, advertising literature, event programs and tickets dominated the sales in the Print industry, contributing around 37% to the total turnover of printed products, whereas security printing products contributed 4% to the total turnover. Print communication occupied the largest share of advertising expenditure at nearly 40% in 2012. xlviii
6.6.2 Demand Drivers – Internet Take-up and Digital Inclusion: The total number of people having Internet access was 2.6B in 2013 and is expected to reach 3B in 2014, according to the United Nations (UN).xlix According to Communications Market Report 2013, Four in five households in the UK had access to the Internet in 2013. Internet take-up reached 80% in the UK, with mobile Internet reaching 49% in 2013. This means that almost half the adults in the UK could access the Internet on mobile devices.l The presence of a large number of people on the online space provides a wide target audience base for marketers to implement their digital marketing strategies. According to a Nielsen report, people in the U.S. spend around 34 hours per month and those in the UK spend nearly 41 hours per month online using smartphone apps.li As consumers spend more time online, they leave more information behind for marketers to engage in data-driven communication and well-targeted marketing.
Exhibit 24: Number of Internet Users Worldwide lii Exhibit 25: UK Internet and Web-based Market - Internet Take-up (%) liii
– Outsourcing of Print Management Services:liv lv Print communication plays an extremely important role in the multichannel marketing mix as customers now prefer to be communicated through channels of their choice. Print outsourcing refers to consulting services that optimize production, distribution, and coordination of print communication across multiple channels. As print management is not the core competence of many companies, they prefer outsourcing these activities to achieve balance between costs, capabilities, and quality of print communication. Thus, there is a rising demand for print service providers who possess expertise in management of complex data, multichannel communications, integrity, data security and a strong track record. Furthermore, companies can gain leverage from the massive volumes of print management companies whose equipment is more sophisticated and less error-prone, enabling cost savings and faster delivery. With rising customer demand for personalization and privacy, there is a growing need for outsourcing print services among companies. Another advantage of outsourcing print services is that companies can reach the customer faster with better production and distribution capabilities, especially in the case of critical customer communications. According to International Data
Communisis plc – Arrowhead BID 23 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Corporation (IDC), global print sourcing and procurement is projected to grow at CAGR of 14.8% from $6.6B in 2011 to $13.2B in 2016. lvi – Rapid Expansion of Big Data: The Internet has proven to be an effective tool to interact with customers. Customers spend considerable time on the Internet (upwards of 29 hours per month on an average in the UK in 2013) leaving behind personal information such as their profiles, their interests, and likes. In 2012, 4 exabytes of data was generated by Internet users. Despite the abundance of available information, marketers have not completely succeeded in using this data for super-targeted communication. However, there is increasing willingness among companies to apply data analytics for better market insights.lvii Marketers have started using large samples of Web users and collecting their histories, cookies, etc. to identify behavioral patterns and to find the correlation between customer profiles and sales conversion rates. There is an increased use of algorithms in digital advertising. According to IDC and The International Institute of Analytics (IIA), the market for big data is expected to reach $16.1B in 2014, which portrays growing at six times faster than the overall IT market.lviii Applications allowing reporting, planning, and predictive analytics are on the rise across various platforms such as transactional, social, and mobile.lix As far as social media is concerned, marketers are beginning to establish a more direct connection between big data and social media for finding consumer patterns. The identification of these behavioral trends is allowing marketers to better communicate with target customers and has majorly contributed to the growth of the multichannel marketing communication industry. – Increase in the Use of Mobile Devices: Consumers Exhibit 26: Global Smartphone Shipments lx are increasingly leveraging smartphones and tablets as a communication gateway due to the availability of richer digital media. According to KPCB report, the average prices of smartphones are falling, from an average of $430 in 2008 to $335 in 2013, these devices have become more affordable. lxi More than half the adults in the UK own smartphones. Access to the Internet using a mobile phone more than doubled between 2010 and 2013, from 24% to 53%.lxii Mobile advertising expenditure rose by 148% from 2011 to 2012.lxiii In February 2013, more than 30% of webpage traffic came from mobile phones and tablets. lxiv According to OfCom, smartphone owners are six times more likely to recall mobile advertising than non- smartphone owners.lxv As mobile technology is growing continuously and becoming more sophisticated by the day, mobile campaigns are also gaining momentum. This has further caused more and more marketers to harness location-based advertising to deliver personalized and relevant content so as to engage consumers at the point of sale.
6.6.3 Industry Trends – Rising Use of Automation Techniques and Multiple Channels by Marketers: lxvi According to a study conducted by Forrester consulting, around 71% of UK marketers are now leveraging marketing automation techniques in order to gain insights into their marketing campaigns and to increase the Return on Investment (ROI) of these campaigns. More than half the marketers in the B2B and B2C segments are in the process of adopting multichannel marketing practices. Major trends include increased personalization on all fronts and supply chain consolidation as customers increasingly demand single points of contact. The incorporation of consumer behavior in the marketing models has helped firms realize higher ROI and increased sales volume, according to the study. – Email Becoming a Purely Relationship Tool than an Acquisition Tool:lxvii There is a shift in the acceptability and perception of customers with regard to email marketing. According to a study conducted by Steve Abbott, Director at The British Consumer Index, “cold email” may risk damaging brands and lead to wastage of money and marketing efforts as there may be concerns regarding the volume of emails received and the means of procuring email addresses. Furthermore, it was found that “warm email”—email that is sent to people who are existing customers or have opted for such mails—was more appreciated and accepted by people as a means of being informed about things that people wanted to be informed about. The acceptability pattern of personalized emails makes them more effective as a customer relationship management tool than a customer acquisition tool.
Communisis plc – Arrowhead BID 24 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
– Mobile Advertising Driving Global Ad Spend Growth: According to eMarketer, Global Mobile Ad Spend grew 105% in 2013. It further estimates 75% growth in global mobile adspend to $31.5B in 2014.lxviii Mobile ads have occupied a substantial share in the overall digital spend. In addition, advertisers are willing to spend more on advertising in the Eurozone as it is set to witness its first adspend growth after the recession since 2010. In the UK, mobile adspend was 127% higher in the first half of 2013 rising to £429MM compared to the same period in 2012. lxix Migration to Digital Platforms: According to PWC’s – Exhibit 27: Global Mobile Internet Adspend lxx global entertainment and digital outlook 2014-18, revenue from digital advertising grew from 14% of total advertising revenue in 2009 to 25% in 2013, and is expected to be 33% by 2018. On the other hand, non-digital advertising revenue is projected to grow at a CAGR of only 1.9% through 2013-18.lxxi Furthermore, by 2018, digital advertising is expected to account for 33% of the total entertainment and media advertising revenue. The main factor behind this rise in revenue from digital is the growing Internet access of consumers. The UK market for digital video advertising on social networks and news websites is expected to grow by nearly a quarter every year for the next five years, according to the PWC report.lxxii – Data Privacy Becoming a Critical Factor for Marketers and Businesses:lxxiii For businesses to acquire new customers, protecting consumer data privacy is an important brand differentiator. The customers’ decision to share personal information depends on trusted channels and transparency of companies’ privacy policies. According to the Customer Acquisition Barometer 2014, 85% of the consumers would share personal data only if they were assured that data would be used only by the company collecting it, and 32% admitted that they would share data only if a clearly worded privacy policy was displayed on the website. This ambivalence of consumers being unwilling to share data poses a serious challenge for marketers in their pursuit of acquisition of new customers. – Rise of Real Time Marketing:lxxiv Real-time marketing (RTM) is referred to as personalizing content in response to consumer interactions. According to a February 2014 survey conducted by Evergage, more than 33% of marketers globally considered RTM to be of considerable importance to their firms. Social media was the most widely used medium of RTM, followed by websites and email. More than 80% marketers reported an increase in customer engagement due to RTM. – New Technology Driving the Commercial Printing Industry: lxxv The need for tighter security with respect to document printing has driven the development of new technology in the commercial printing industry. Various types of inks like magnetic ink, thermochromic ink, and infrared ink are being used for security printing. The introduction of digital-plate making has enabled an effective printing process. Owing to the rising use of digital files, commercial printers now come with digital inventory services. – Content Marketing Top Priority for 2014: An extensive study by Adobe and Econsultancy has concluded that 36% of marketers in 2014 rated content marketing as their top priority among the various marketing channels. The channel is also seen as the most promising opportunity for marketers catering to organizational clients, with 24% picking it as their top opportunity for 2014.lxxvi – Growing Significance of Single Customer View:lxxvii A Single Customer View is a combined and holistic representation of an organization’s customer data. The biggest benefit that companies realize by adopting single view is that it allows for an aggregated representation of personal data and consumer behavior. In the absence of such a holistic representation of the customer, organizations would lack the vision needed to grow their business efficiently. A single view supports the sales members as it provides them with relevant information required to gain a complete understanding of prospects and customers. Other advantages include simplifying processes and minimizing costs for businesses as not only do companies gain an edge over their competitors in terms of better target recognition but they can also reduce costs by avoiding ineffective marketing strategies and tactics. Multiple benefits across various areas of business along with the widespread need of growing organizations to continuously enlarge customer engagement channels have primarily contributed to the increasing adoption of single customer view as a multi-channel marketing technique.
Communisis plc – Arrowhead BID 25 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
7. Valuation The Fair Market Value for all of Communisis’s shares stands between £136MM and £175MM as of May 05, 2015. The Fair Market Value of one of Communisis’s publicly traded regular shares stands between £0.66 and £0.84 as of May 05, 2015. The valuation approach followed is the Discounted Cash Flow method.
7.1 Discounted Cash flow Method
Valuation Figures are in ‘000 £, unless indicated otherwise. WACC Key Variables
Risk-free rate 1.6% lxxviii Forecast of growth rate for Design, Forecast of Contribution margin for Beta 0.8 lxxix Produce & Deploy segment Design, Produce & Deploy segment Market Return 10.3 lxxx Additional Risk Premium 5.2% Refer to the Key Variable Section 4 Refer to the Key Variable Section 4 Cost of Equity 12.55% Cost of Debt 2.85% Terminal Growth Rate 1.0%
Year ending 2015E 2016E 2017E 2018E 2019E 2020E 2021E 31st December FCFF (High) Net cash from operating 23,698 26,361 27,680 29,141 29,803 30,062 31,960 activities Capital Expenditure (7,500) (6,263) (5,794) (5,326) (5,158) (7,488) (14,294) Net Debt Addition 0 0 0 0 0 0 0 Free Cash Flow to Firm 16,197 20,099 21,886 23,815 24,645 22,575 17,666 Discount factor 0.91 0.83 0.76 0.69 0.63 0.58 0.53 Present Value of FCF 14,773 16,720 16,606 16,480 15,555 12,996 9,275 FCFF (Low) Net cash from operating 19,621 22,284 24,159 25,668 25,167 25,921 27,592 activities Capital Expenditure (7,405) (6,178) (5,656) (5,172) (4,952) (7,059) (13,223) Net Debt Addition 0 0 0 0 0 0 0 Free Cash Flow to Firm 12,217 16,106 18,503 20,496 20,215 18,861 14,370 Discount factor 0.91 0.83 0.76 0.69 0.63 0.58 0.53 Present Value of FCF 11,142 13,398 14,039 14,184 12,759 10,858 7,545
Arrowhead Fair Value Bracket High Low Terminal Value (TV) 206,497 167,969 Present Value of TV 108,422 88,193 Present value of FCF 102,405 83,925 Present Value of (FCF + TV) 210,827 172,118 Net Debt 35,847 35,847 Equity Value Bracket 174,980 136,271 Shares on issue (000’s) 208,000 208,000
Fair Share Value Bracket (£) 0.84 0.66 Current Market price (£) 0.57 0.57 lxxxi Current Market Cap. (£) MM 118 118 Target Market Cap. Bracket (£) MM 175 136
Communisis plc – Arrowhead BID 26 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Approach for DCF Valuation Time Horizon: The Arrowhead fair valuation for Communisis is based on a DCF method. The time period chosen for the valuation is 84 months (2015E-2021E). Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 1.0%, representing an increase in the sale of Communisis’s services and solutions. Prudential Nature of Valuation: It should be noted that this Arrowhead Fair Value Bracket estimate is a relatively prudential estimate, as it discounts the eventuality of any of new product launched in the market or any significant change in the strategy. Key Variables: The upper and lower bounds in the estimation correspond to the extreme positions taken by the following key variables: Variable 1 – Design Segment Growth Rate Exhibit 28: Design Segment Growth Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 35% 25% 12% 10% 7% 1% 1% High estimate 49% 27% 19% 16% 19% 2% 1%
Variable 2 – Produce Segment Growth Rate Exhibit 29: Produce Segment Growth Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate (4%) 0% 1% 1% (1%) (2%) (2%) High estimate (4%) 0% 1% 1% 1% (2%) (2%)
Variable 3 – Deploy Segment Growth Rate Exhibit 30: Deploy Segment Growth Rate 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 8% 4% 4% 3% 3% 1% 1% High estimate 13% 5% 7% 6% 6% 1% 1%
Variable 4 – Design Segment Contribution Margin Exhibit 31: Design Segment Contribution Margin 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 21.0% 22.0% 22.1% 22.5% 22.6% 22.9% 23.0% High estimate 23.0% 23.1% 22.3% 23.1% 23.0% 23.0% 23.3%
Variable 5 – Produce Segment Contribution Margin Exhibit 32: Produce Segment Contribution Margin 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 15.8% 15.0% 15.0% 15.1% 15.2% 15.5% 16.4% High estimate 15.9% 16.0% 16.0% 15.9% 15.6% 15.5% 16.4%
Variable 6 – Deploy Segment Contribution Margin Exhibit 33: Deploy Segment Contribution Margin 2015E 2016E 2017E 2018E 2019E 2020E 2021E Low estimate 22.2% 22.0% 24.0% 23.8% 23.5% 23.0% 23.5% High estimate 24.2% 24.9% 24.9% 23.3% 23.0% 23.0% 23.5%
Communisis plc – Arrowhead BID 27 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
7.2 Relative Valuation Method On the basis of Relative Valuation Method, the Fair Market Value for Communisis’s shares stands at £0.71 with Market capitalization of £117.2MM as on May 1, 2015.
Market Cap Current EV EBITDA (FY1) EV/EBITDA Company Name £MM £MM £MM (FY1) Xchanging plc 314 321 88 3.7x Chime Communications plc 300 356 43 8.3x St. Ives plc 228 216 40 5.4x 4imprint group plc 285 273 34 8.1x M&C Saatchi plc 229 227 19 12.2x Restore plc 204 236 21 11.3x Cello group plc 75 82 12 6.7x Creston plc 73 67 12 5.7x Average 7.7x Source: Bloomberg
Arrowhead Fair Value Bracket - High Communisis EBITDA FY2014 (£000) 26,520 PEER EV/EBITDA (FY1) (x) 7.7 Discount for Relative Valuation (%) 10% PEER EV/EBITDA (FY1) after discount factor (x) 6.9 Enterprise Value (EV) FY1 (£000) 183,318 Adjustment Less: Debt (Net cash) (£000) 35,847 Implied Equity Value (£000) 147,471 Shares o/s ('000s) 208,000 Intrinsic Value per share (£) 0.71 Current market Price (£) 0.57 Upside / (Downside) (%) 25.5%
Communisis plc – Arrowhead BID 28 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Important Information on Arrowhead Methodology The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent depending on the subsectors in which the research is conducted, but all Arrowhead valuation research possesses an underlying set of common principles and a generally common quantitative process. With Arrowhead Commercial and Technical Due Diligence, Arrowhead extensively researches the fundamentals, assets, and liabilities of a Company, and builds solid estimates for revenue and expenditure over a coherently determined forecast period. Elements of past performance, such as price/earnings ratios, indicated as applicable, are present mainly for reference purposes. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence. Elements of comparison, such as multiple analyses, may be to some limited extent integrated in the valuation on a project-by-project or asset-by-asset basis. In the case of this Communisis plc report, there are no multiple analyses integrated in the valuation. Arrowhead BID Fair Market Value Bracket The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analysis, such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to those projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a tool for valuation. The high-bracket DCF valuation is derived from the high-bracket key variables while the low bracket DCF valuation is based on the low bracket key variables. In principle, an investor who is comfortable with the high-brackets of our key variable analysis will align with the high- bracket in the Arrowhead Fair Value Bracket, and likewise in terms of low estimates. The investor will also take into account the Company intangibles – as presented in the first pages of this document in the analysis on strengths and weaknesses and on other essential Company information. These intangibles serve as supplementary decision factors for adding or subtracting a premium in the investor’s own analysis. The bracket should be understood as a tool provided by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand that on one hand, global capital markets contain inefficiencies, especially in terms of information, and that on the other hand, corporations and their commercial and technical positions evolve rapidly: this present edition of the Arrowhead valuation is for a short to medium-term alignment analysis (one to twelve months). The reader should refer to important disclosures on page 33 of this report.
Communisis plc – Arrowhead BID 29 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
8. Appendix 8.1 Communisis’s Financial Summary
Exhibit 34 Financial High Bracket Estimates Summary Year Ending December 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E Net Revenue (£'000) 178,824 194,183 232,380 246,289 260,281 275,626 290,573 309,458 308,489 306,784 Operating Profit (£'000) 11,471 13,257 16,015 20,529 23,221 25,100 27,200 29,700 29,836 31,980 Net Income (£'000) 3,931 4,860 (15,109) 9,478 12,520 14,555 16,816 18,843 18,912 20,696 Reported Basic EPS (p) 2.84 2.65 (7.67) 4.56 6.02 7.00 8.08 9.06 9.09 9.95 Adjusted Diluted EPS (p) 4.51 4.19 4.62 5.95 7.05 8.14 9.07 9.95 9.98 10.82 Dividend per share (p) 1.65 1.80 2.00 1.97 2.16 2.36 2.60 2.88 3.03 3.18 Growth rates (%) Revenue 5.3% 8.6% 19.7% 6.0% 5.7% 5.9% 5.4% 6.5% (0.3%) (0.6%) Operating Profit 15.6% 15.6% 20.8% 28.2% 13.1% 8.1% 8.4% 9.2% 0.5% 7.2% Net Income (3.4%) 23.6% (410.9%) NM 32.1% 16.2% 15.5% 12.1% 0.4% 9.4% Reported Basic EPS (3.8%) (6.8%) (389.3%) NM 32.1% 16.2% 15.5% 12.1% 0.4% 9.4% Adjusted Diluted EPS (0.3%) (7.0%) 10.2% 28.8% 18.5% 15.5% 11.5% 9.7% 0.3% 8.4% Margins (%) Gross Margins (%) 45.5% 44.5% 45.1% 44.1% 44.2% 44.3% 44.4% 44.5% 44.6% 44.7% Operating Profit Margin 6.4% 6.8% 6.9% 8.3% 8.9% 9.1% 9.4% 9.6% 9.7% 10.4% Net Profit Margin 2.2% 2.5% (6.5%) 3.8% 4.8% 5.3% 5.8% 6.1% 6.1% 6.7% Ratios ROA 1.5% 1.7% (5.1%) 3.0% 3.9% 4.3% 4.8% 5.2% 5.5% 5.9% ROE 3.1% 3.4% (13.1%) 7.6% 9.4% 10.1% 10.8% 11.1% 10.4% 10.6% Debt/Equity 33.2% 31.4% 52.2% 56.1% 52.7% 48.5% 46.2% 44.5% 37.1% 30.4% Interest Coverage 5.0x 8.0x 4.5x 13.7x 14.4x 13.0x 14.1x 14.9x 14.4x 17.2x Price /Earnings Ratio (PE) 19.87x 21.32x NM 12.40x 9.39x 8.07x 6.99x 6.24x 6.21x 5.68x EV/Revenue 0.9x 0.8x 0.7x 0.6x 0.6x 0.6x 0.5x 0.5x 0.5x 0.5x
Communisis plc – Arrowhead BID 30 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
Exhibit 35 Financial Low Bracket Estimates Summary Year Ending December 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E Net Revenue (£'000) 178,824 194,183 232,380 240,040 252,038 261,344 269,758 274,133 272,478 270,894 Operating Profit (£'000) 11,471 13,257 16,015 17,192 17,829 20,646 22,683 23,722 24,173 26,033 Net Income (£'000) 3,931 4,860 (15,109) 6,141 8,455 11,012 13,383 14,305 14,607 16,176 Reported Basic EPS (p) 2.84 2.65 (7.67) 2.95 4.06 5.29 6.43 6.88 7.02 7.78 Adjusted Diluted EPS (p) 4.51 4.19 4.62 4.38 5.14 6.48 7.46 7.82 7.96 8.70 Dividend per share (p) 1.65 1.80 2.00 1.97 2.16 2.36 2.60 2.88 3.03 3.18 Growth rates (%) Revenue 5.3% 8.6% 19.7% 3.3% 5.0% 3.7% 3.2% 1.6% (0.6%) (0.6%) Operating Profit 15.6% 15.6% 20.8% 7.4% 3.7% 15.8% 9.9% 4.6% 1.9% 7.7% Net Income (3.4%) 23.6% (410.9%) NM 37.7% 30.2% 21.5% 6.9% 2.1% 10.7% Reported Basic EPS (3.8%) (6.8%) (389.3%) NM 37.7% 30.2% 21.5% 6.9% 2.1% 10.7% Adjusted Diluted EPS (0.3%) (7.0%) 10.2% (5.1%) 17.3% 26.0% 15.2% 4.8% 1.8% 9.2% Margins (%) Gross Margins (%) 45.5% 44.5% 45.1% 45.1% 45.2% 45.2% 45.3% 45.3% 45.4% 45.4% Operating Profit Margin 6.4% 6.8% 6.9% 7.2% 7.1% 7.9% 8.4% 8.7% 8.9% 9.6% Net Profit Margin 2.2% 2.5% (6.5%) 2.6% 3.4% 4.2% 5.0% 5.2% 5.4% 6.0% Ratios ROA 1.5% 1.7% (5.1%) 2.0% 2.7% 3.5% 4.1% 4.3% 4.7% 5.1% ROE 3.1% 3.4% (13.1%) 5.0% 6.7% 8.2% 9.4% 9.5% 9.2% 9.6% Debt/Equity 33.2% 31.4% 52.2% 57.6% 55.8% 52.4% 50.9% 50.1% 42.5% 35.4% Interest Coverage 5.0x 8.0x 4.5x 11.5x 11.1x 10.7x 11.7x 11.9x 11.7x 14.0x Price /Earnings Ratio (PE) 19.87x 21.32x NM 19.14x 13.90x 10.67x 8.78x 8.22x 8.05x 7.27x EV/Revenue 0.9x 0.8x 0.7x 0.6x 0.6x 0.6x 0.6x 0.6x 0.6x 0.6x
Communisis plc – Arrowhead BID 31 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
8.2 Communisis’s Balance Sheet
Exhibit 36: Consolidated all figures in 000' £ , unless stated differently High Bracket estimates Balance Sheet
Year Ending December 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E Total current assets 70,498 81,206 88,980 99,719 111,546 112,720 130,061 149,033 150,950 147,684 Total Non-current assets 188,983 205,688 205,782 215,340 211,724 222,535 216,898 212,512 195,902 204,413 TOTAL ASSETS 259,481 286,894 294,762 315,059 323,270 335,254 346,958 361,545 346,852 352,097 Total current Liabilities 70,536 74,205 77,435 82,654 86,945 91,375 93,763 96,607 95,713 94,691 Total Non-current 63,758 71,534 101,621 107,321 103,221 99,121 97,021 95,921 69,510 61,696 Liabilities TOTAL LIABILITIES 134,294 145,739 179,056 189,975 190,166 190,496 190,784 192,528 165,223 156,387 Total Shareholder's 125,187 141,155 115,706 125,084 133,104 144,759 156,174 169,017 181,629 195,710 Equity TOTAL LIABILITIES & 259,481 286,894 294,762 315,059 323,270 335,254 346,958 361,545 346,852 352,097 EQUITY
Exhibit 37: Consolidated all figures in 000' £ , unless stated differently Low Bracket estimates Balance Sheet
Year Ending December 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Total current assets 70,498 81,206 88,980 93,317 100,766 96,515 109,009 120,758 118,778 112,181
Total Non-current assets 188,983 205,688 205,782 215,244 211,551 222,237 216,468 211,903 194,901 202,402
TOTAL ASSETS 259,481 286,894 294,762 308,561 312,317 318,752 325,477 332,661 313,679 314,583
Total current Liabilities 70,536 74,205 77,435 79,493 83,394 85,817 86,659 86,638 85,760 84,917 Total Non-current 63,758 71,534 101,621 107,321 103,221 99,121 97,021 95,921 69,510 61,696 Liabilities
TOTAL LIABILITIES 134,294 145,739 179,056 186,814 186,615 184,938 183,680 182,559 155,270 146,613
Total Shareholder's 125,187 141,155 115,706 121,747 125,702 133,814 141,797 150,102 158,409 167,970 Equity TOTAL LIABILITIES & 259,481 286,894 294,762 308,561 312,317 318,752 325,477 332,661 313,679 314,583 EQUITY
Communisis plc – Arrowhead BID 32 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
9. Analyst Certifications Investors are advised to gather and consult multiple sources of information while preparing their investment I, Snehal Mahajan, certify that all of the views expressed decisions. Recipients of this report are strongly advised in this research report accurately reflect my personal to read the Information on Arrowhead Methodology views about the subject security and the subject section of this report to understand if and how the Company, based on the collection and analysis of public Arrowhead Due Diligence and Arrowhead Fair Value information and public Company disclosures. Bracket integrate alongside the rest of their stream of information and within their decision making process. Important disclosures Past performance of securities described directly or Arrowhead Business and Investment Decisions, LLC indirectly in this report should not be taken as an received fees in 2015 from Communisis plc for indication or guarantee of future results. The price, researching and drafting this report and for a series of value of, and income from any of the financial securities other services to Communisis plc including distribution described in this report may rise as well as fall and may of this report and financial research services. Neither be affected by simple and complex changes in Arrowhead BID nor any of its principals or employees economic, financial and political factors. owns any long or short positions in Communisis plc. Should a security described in this report be Aside from certain reports published on a periodic basis, denominated in a currency other than the investor’s the large majority of reports are published by home currency, a change in exchange rates may Arrowhead BID at irregular intervals as appropriate in adversely affect the price of, value of, or income derived the analyst’s judgment. from the security.
Any opinions expressed in this report are statements of This report is published solely for information purposes, Arrowhead BID’s judgment to this date and are subject and is not to be considered in any case as an offer to to change without notice. buy any security, in any state.
This report was prepared for general circulation and Other than disclosures relating to Arrowhead Business does not provide investment recommendations specific and Investment Decisions, LLC, the information herein to individual investors. As such, any of the financial or is based on sources Arrowhead BID believes to be other money-management instruments linked to the reliable but is not guaranteed by Arrowhead BID and Company and Company valuation described in this does not purport to be a complete statement or report, hereafter referred to as “the securities”, may not summary of the available data. be suitable for all investors. Arrowhead Business and Investment Decisions, LLC is Investors must make their own investment decisions not responsible for any loss, financial or other, directly based upon their specific investment objectives and or indirectly linked to any price movement or absence financial situation utilizing their own financial advisors of price movement of the securities described in this as they deem necessary. report.
Communisis plc – Arrowhead BID 33 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
10. Notes and References
i Source: Bloomberg, May 1, 2015 ii 52 weeks to April 24, 2015. Source: Bloomberg, May 1, 2015 iii 3 months to April 24, 2015. Source: Bloomberg, May 1, 2015 iv Source: http://www.mckinsey.com/client_service/marketing_and_sales/latest_thinking/leveraging_big_data_to_optimize_digital_marketing v Arrowhead Business and Investment Decisions Fair Value Bracket – AFVBTM. See information on valuation on pages 26-29 of this report and important disclosures on page 33 of this report. vi Source: http://www.pwc.com/gx/en/global-entertainment-media-outlook/segment-insights/internet-advertising.jhtml vii Source: http://www.generatorresearch.com/report/social-networking-and-social-media-2013/ viii Source: http://www.communisis.com/news-opinion/news-detail/2014/12/23/acquisition-of-life-marketing-consultancy-limited?category=investornews&year=2014 ix Source: Company Annual Report, 2013 x Source: Company Annual Report, 2013 xi Source: Company Presentation, 2014 Preliminary Results xii Source: Communisis - Annual Report, 2013 xiii Source: http://www.iso.org/iso/home/standards/management-standards/iso27001.htm xiv Source: Company Management xv Source: http://www.techmarketview.com/ukhotviews/ xvi Source: http://www.campaignlive.co.uk/news/1324935/ xvii Source: Company Management, Jan 2015 xviii Source: Arrowhead BID estimate xix Source: Communisis web site – News section xx Source: http://investing.businessweek.com/research/stocks/people/person.asp?personId=378178&ticker=CMS:LN xxi Source: http://investing.businessweek.com/research/stocks/people/person.asp?personId=20607865&ticker=CMS:LN xxii Source: http://www.uni-obuda.hu/journal/Szentgyorgyvolgyi_15.pdf xxiii Source:http://h10010.www1.hp.com/wwpc/us/en/sm/WF05a/18972-18972-3960978-2511410-3960979-5096373.html?dnr=2 xxiv Source: http://www.dieterich-post.com/pdf/HP_T_Series_FactSheet.pdf xxv Source:http://h10010.www1.hp.com/wwpc/us/en/sm/WF05a/18972-18972-3960978-2511410-3960979-5096373.html?dnr=2 xxvi Source: http://www8.hp.com/us/en/hp-news/press-release.html?id=1494725 xxvii Source: http://www8.hp.com/us/en/hp-news/press-release.html?id=903675 xxviii Source: http://www8.hp.com/us/en/hp-news/press-release.html?id=903675 xxix Source: http://searchcontentmanagement.techtarget.com/definition/What-is-digital-asset-management xxx Source: http://www.pro.rcip-chin.gc.ca/contenu_numerique-digital_content/fiches_techniques
Communisis plc – Arrowhead BID 34 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
xxxi Source: http://www.comscore.com/Insights/Presentations_and_Whitepapers/2013/From_Platforms_to_People_Multi_Platform_Planning_Insights xxxii Source: http://contentmarketinginstitute.com/wp-content/uploads/2013/12/UK_Research_2014_Final1.pdf xxxiii Source: http://www.pwc.com/gx/en/global-entertainment-media-outlook/segment-insights/internet-advertising.jhtml xxxiv Source: http://www.pwc.com/gx/en/global-entertainment-media-outlook/segment-insights/internet-advertising.jhtml xxxv Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/271008/Creative_Industries_Economic_Estimates_-_January_2014.pdf xxxvi Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/271008/Creative_Industries_Economic_Estimates_-_January_2014.pdf xxxvii Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/271008/Creative_Industries_Economic_Estimates_-_January_2014.pdf xxxviii Source: http://www.mckinsey.com/client_service/marketing_and_sales/latest_thinking/leveraging_big_data_to_optimize_digital_marketing xxxix Source: http://www.comscore.com/Insights/Presentations-and-Whitepapers/2013/From-Platforms-to-People-Multi-Platform-Planning-Insights xl Source: http://www.nielsen.com/us/en/newswire/2014/how-smartphones-are-changing-consumers-daily-routines-around-the-globe.html xli Source: http://www.generatorresearch.com/report/social-networking-and-social-media-2013 xlii Source: http://etonpreneurs.com/uploads/Global%20Social,%20Digital%20&%20Mobile%20Statistics,%20Jan%202014.pdf xliii Source: http://www.ibisworld.co.uk/market-research/advertising-agencies.html xliv Source: IPA Bellwether Report dated April 17,2014 xlv Source: http://www.digitalstrategyconsulting.com/intelligence/2014/05/uk_advertising_spend_growth_by_sector_2013.php xlvi Source: http://www.banner-managedcommunication.com/insights/uk-ad-spend-to-exceed-20-billion-in-2015 xlvii Source: https://econsultancy.com/blog/64655-mobile-is-now-the-main-driver-of-global-adspend-growth-stats#i.s3ejab87hd2lwz xlviii Source: http://www.britishprint.com/page.asp?node=72&sec=Facts_and_figures xlix Source: http://www.digitalstrategyconsulting.com/intelligence/2014/05/internet_reaching_3bn_users_un.php l Source: http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr13/2013_UK_CMR.pdf li Source: http://www.nielsen.com/us/en/newswire/2014/how-smartphones-are-changing-consumers-daily-routines-around-the-globe.html lii Source: http://www.kpcb.com/internet-trends liii Source: http://www.slideshare.net/zahidtg/uk-ofcom-communications-market-report-2013 liv Source: http://www.cmo.com/articles/2013/5/22/the_power_of_print_o.html lv Source: http://www.pb.com/docs/US/pdf/Microsite/Management-Services/news-and-resources/white-papers/print-outsourcing-white-paper-2012.pdf lvi Source: http://www.pb.com/docs/US/pdf/Microsite/Management-Services/news-and-resources/white-papers/print-outsourcing-white-paper-2012.pdf lvii Source: http://www.informationweek.com/big-data/big-data-analytics/ibms-predictions-6-big-data-trends-in-2014-/d/d-id/1113118 lviii Source: http://www.forbes.com/sites/gilpress/2013/12/12/16-1-billion-big-data-market-2014-predictions-from-idc-and-iia/ lix Source: http://www.mckinsey.com/client_service/marketing_and_sales/latest_thinking/leveraging_big_data_to_optimize_digital_marketing lx Source: http://www.kpcb.com/internet-trends lxi Source: http://www.kpcb.com/internet-trend lxii Source: http://www.ons.gov.uk/ons/rel/rdit2/internet-access---households-and-individuals/2013/stb-ia-2013.html lxiii Source: http://www.theguardian.com/media/2013/apr/10/mobile-advertising-triples-record-levels lxiv Source: http://stakeholders.ofcom.org.uk/market-data-research/market-data/communications-market-reports/cmr13/internet-web/uk-4.27
Communisis plc – Arrowhead BID 35 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report
lxv Source: http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr13/2013_UK_CMR.pdf lxvi Source: http://www.digitalstrategyconsulting.com/intelligence/2014/03/twothirds_of_marketers_now_using_automation_techniques.php lxvii Source : http://www.digitalstrategyconsulting.com/intelligence/2014/06/email_marketing_trends_forget_acquisition_is_email_now_purely_a_relationship_tool.php lxviii Source: http://techcrunch.com/2014/03/19/global-mobile-ad-spend-jumped-105-in-2013-on-track-for-31-5b-in-2014-led-by-google/ lxix Source: http://econsultancy.com/blog/63534-mobile-adspen-up-127-to429m-in-first-half-of-2013 lxx Source: http://techcrunch.com/2014/03/19/global-mobile-ad-spend-jumped-105-in-2013-on-track-for-31-5b-in-2014-led-by-google/ lxxi Source: http://www.pwc.com/gx/en/global-entertainment-media-outlook/data-insights.jhtml lxxii Source: http://www.digitalstrategyconsulting.com/intelligence/2014/06/global_ad_trends_digital_to_account_for_third_of_all_revenue_by_2018.php lxxiii Source: http://www.warc.com/LatestNews/News/Data_privacy_differentiates_brands_.news?ID=32765 lxxiv Source: http://www.emarketer.com/Article/Real-Time-Marketing-About-More-than-Social/1010722 lxxv Source: http://www.firstresearch.com/IndustryAnalysis/commercialprinting.html lxxvi Source : http://www.the-cma.com/news/stats-facts-and-future-trends-april lxxvii Source: https://www.mulesoft.com/resources/esb/single-customer-view lxxviii Source: Bloomberg lxxix Source: Bloomberg lxxx Source: Bloomberg lxxxi Source: Bloomberg, May 1, 2015
Communisis plc – Arrowhead BID 36 LSE: CMS Due Diligence and Valuation Report See important disclosures on page 33 of this report