Cordiant rewards shareholders: The Investment Column

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The Independent Online
Investors who subscribed to Cordiant's deeply discounted pounds 127m rescue rights issue in 1995 are sitting pretty. It took a leap of faith to shell out 60p a share to back the marketing services group when it was staring into the abyss after founders Charles and Maurice Saatchi left in a huff and took large clients such as British Airways with them.

But Cordiant, under the chief executive, Bob Seelert, is right to say it is delivering on the undertakings given at the time of the rights issue. Most of the accounts lost to the Saatchi brothers have been replaced, costs controlled and margins raised.

The result was a pounds 41.8m pre-tax profit in 1996, versus a pounds 22.6m loss a year earlier, and a return to the dividend list for the first time in seven years.

Better still, the balance sheet, which had a deficit of pounds 356m on shareholders' funds in 1995, has been sorted out. Average net debt fell from pounds 125m to pounds 15m while interest cover is a comfortable 6.6 times.

True, Cordiant still has a long way to go to achieve its target of 10 per cent operating margins by the end of 1998. These currently stand at 6.4 per cent, compared with the double-digit margins chalked up by rivals such as Martin Sorrell's WPP.

Given a fair wind, though, Mr Seelert should deliver on this promise as well. There is every reason to suppose revenue growth will at least match the industry average of 6 per cent. Assuming a stable exchange rate, profits and earnings in 1998 should double if the margin targets are met.

That would imply a prospective price/earnings ratio of just 10 with the shares at 113.5p, up 9.5p.

That looks good value, especially as Cordiant could always enhance shareholder value by spinning off Siegel & Gale, its US design and corporate identity arm, or even demerge the Saatchi & Saatchi advertising agency it still owns.

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