M&C Saatchi shares crash 53%

From over 400p to less than 70p in under nine months is impressive. We explain the latest collapse.

Riding high in March on the back of record results, M&C Saatchi (LSE:SAA) shares were today more than 75% lower after the ad agency admitted its accounting crisis was bigger than first thought.

The latest disclosures from the AIM-listed company triggered a 53% slide in shares to below 70p, with sentiment also hit by weaker than expected trading towards the end of 2019.

It's a far cry from the start of the year, when CEO David Kershaw reported a 16% jump in annual profits to £32.2 million and a 15% hike in the dividend to 10.96p. His optimism for the year ahead was backed in the City after a largely untroubled decade for the share price, which motored from 31p during the financial crisis to a peak of 400p in early 2018.

Source: TradingView Past performance is not a guide to future performance

Kershaw said in March:

“Our unique business model of starting and growing companies with the best entrepreneurial talent continues to flourish.”

The investment case started to deteriorate in August when it emerged that Saatchi's independent auditor had raised concerns about accounting controls, mostly relating to the timing of revenue recognition and incorrect accounting of some assets and liabilities in UK subsidiaries.

After interim results in September had identified the need for accounting adjustments of £7.8 million, an independent accounting review by PwC has now concluded the figure is closer to £11.6 million, with the adjustment split between 2018 and 2019 results.

Kershaw admitted the restatement of numbers and the reduction in profit forecasts made for “very difficult reading” for both management and the company's stakeholders.

He added: “The only positives that we can offer are that a robust review has been undertaken and we have, under our new group finance director, started implementing processes and procedures to prevent such issues arising again.”

Kershaw described the second half trading performance as disappointing, with underlying profits for 2019 likely to be between 22%-27% below 2018 on a like for like basis. Saatchi makes a significant proportion of profits in the final quarter of the year.

The CEO still expects modest growth in adjusted profits in 2020, adding: “Our operating businesses remain strong, creative and competitive and we expect that, when combined with the impact of our restructuring coming through, we will have a stronger trading performance in 2020."

Saatchi, which is set to have £5 million of net cash at the end of this year, also announced it is restructuring its UK office. This will result in an exceptional charge of £2.5 million but generate annual savings of £6 million from 2020 onwards.

M&C Saatchi was formed in January 1995 by the brothers Maurice and Charles Saatchi, alongside Kershaw, current chairman Jeremy Sinclair, and executive director Bill Muirhead. It has around 2,500 staff employed in over 80 business units.

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