Next 15 (NFG) faced a major setback on 6 September when news broke that one of its biggest clients, Mach49, would not be renewing its contract after the initial three-year term. This led to a drastic 50% drop in its market value in a single trading session, resulting in an £80 million hit to its top line in the 2026 financial year. This news came as a blow to the company, which had already been struggling in 2024 due to the rising cost of capital affecting the marketing and corporate services sectors.
The 18th edition of KPMG’s Capital Study highlighted a 110 basis point increase in the weighted average cost of capital, reaching 7.9% between September 2022 and April 2022. This rise in costs had a more pronounced impact on the tech and automotive sectors, as well as public sector contracts. Additionally, the demand for consultancy services was softening, with management noting a tough comparable year in terms of profit performance from Mach49.
Despite the challenges, Next 15 had shown resilience in the past, with strong cash generation and a new £30 million share buyback program. However, the company’s forward price/earnings ratio of 6.8 indicated that the market was pricing in a sluggish market outlook. The recent events with Mach49’s contract termination raised concerns about the company’s reliance on a limited number of contracts for revenue.
While the collapse in share price may present a contrarian opportunity for investors, analysts were revising their assumptions in light of the recent developments. Caspar Erskine at Panmure Liberum believed that the early termination of the Mach49 contract simplified the investment case for Next 15, but anticipated a sustained near-term discount to the sector. He suggested a 15% discount to peers on a price/earnings basis, with a projected multiple equating to 630p per share.
As Next 15 prepares to announce its interim results on 17 September 2024, investors will be closely watching to see how the company navigates the challenges ahead. The impact of the Mach49 contract termination and the overall organic growth trajectory will likely influence the company’s performance in the coming months.