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Cello. Is it dividends you’re looking for?

Marketing firm Cello is one of just 25 AIM shares with a track record of delivering dividend increases to shareholders for more than seven years running. The historic success and today’s modest rating mean that the shares are worthy of a closer look. Cello is a marketing group comprising two divisions: Cello Health and Cello Signal. Cello Health provides expertise to the global pharmaceutical and health sectors. Cello’s collection of marketing agencies aims to serve the communication needs of pharmaceutical developers through the full product life cycle, from preclinical testing to approval, launch and patent expiry. Cello Health has performed well in recent years and is key to the Group’s success, delivering around 2.5 times the profit managed by Cello Signal.

Cello Signal is a more typical general marketing agency Cello Signal is a more typical general marketing agency, offering its services to consumer brands and business-to-business clients. The recent annual report highlights some notable accounts, such as the marketing for Barr’s Irn Bru at the Commonwealth Games and 6

the Royal British Legion’s D-Day commemorations. Due to a barnstorming first half of 2014 and costs associated with senior hires to support expansion, Cello Signal’s first half performance dipped in 2015. One Signal division that looks particularly interesting is its Pulsar suite of social media products. From launch in April 2013, Pulsar now has 150 clients and is delivering annualised license revenue of £2.0m. Signal looks to be onto a winner with Pulsar and the division is expected to move into profit by the end of 2015. Unfortunately, a VAT issue is a major problem. This has arisen from some of Signal’s charity activities, where it turns out that the Group may not have been charging correctly. A £1.1m provision was added to the accounts in H1 2015, taking the full provision to £3.2m. This amounts to around half of 2014 pretax profit. Cello is not the first company to have fallen foul of a change of judgement/opinion at HMRC. Disappointments at quality

companies can present buying opportunities. That may be the case with Cello. Following publication of H1 results, shares in the company fell to 80p, their lowest price since January 2014. The current share price suggests that Cello may be entering a period where it will be struggling for earnings growth. That seems a little harsh, given that revenues have increased at an average rate of +6.5% a year over the last five years, with dividends racing ahead at an average of almost 15% per annum.

VAT issue should not be expected to worsen further The last reported balance sheet showed long-term borrowings of £10.2m, comparable to one year’s EBITDA. Trade receivables were £8m ahead of payables. Cello has been advised that its VAT issue should not be expected to worsen further. Indeed, there is the possibility that the Group will be able to secure contributions from some clients.

Cello Group (LON:CLL) FOR Successful firm Discount rating AGAINST Modest growth forecast VAT issue not finalised Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£71m 82p:85p 10.0 3.3% 79p:107p

November 2015 AIM Prospector  
November 2015 AIM Prospector  

Featuring NINE AIM companies: ASOS, Cello, Craneware, Fulham Shore, Keywords Studios, MartinCo, Miton Group, NWF, The Mission Marketing Grou...