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System1 Group – following “very disappointing” interims, what now in a ‘Trading Update’?

By Steve Moore | Monday 8 January 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Previously writing on marketing services group System1 (SYS1) in October I concluded that the circa 400p share price looked to not reflect the trading risks and to continue to avoid. Today a Trading Update announcement…

“As announced on 27 October 2017, cuts and deferrals to some major FMCG client marketing budgets meant H1 trading was less than expected with Gross Profit (the company's top-line performance indicator) 9% down on prior year (12% in constant currency)… Q3 trading continued to be worse than anticipated and, subject to its normal lack of revenue visibility, the company now anticipates Gross Profit for the year to 31 March 2018 will be around 20% less than the prior year.” Uh oh. Another profit warning ahoy then!

This is with also overhead costs having increased – the company noting US and advertising agency investment meaning this by 8% in the first half, with it now having “taken steps to reduce overhead cost growth”. However, still “we anticipate overhead growth over the year as a whole in low to mid single digits. On this basis the company expects profit before tax for the full year to be a little over break-even (2016/17: £6.3m)”.

I note this also compares to a £0.8 million pre-tax profit (2016/17: £2.8m) at the half-year stage – suggesting a likely second half loss. The company seeks to reassure including that it has responded “by re-engineering most of its mainstream product offering… with a view to selling and delivering larger-scale, more automated, on-going programmes of work” and noting a £4.6 million net cash balance.

However, it still has to prove demand for the former and the latter compares with a market cap, despite the shares having slid currently to 320p, of still nearly £40 million. This combination sees, at the current juncture here, I continue to avoid.

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