To start, let’s take a brief look at the highlights from Havas NV’s 2024 FY presentation, which delivered some positive news:
- Net revenue growth of 1.5%, with organic growth at -0.8%, aligning with guidance
- Adjusted EBIT margin improved to 12.4%
- Free cash flow (FCF) reached €223 million
- Dividend set at 8 cents per share
- A 10% share buyback program announced!
Additionally, the company provided guidance for 2025–2028, projecting further margin improvements.
Following this overview, we can expect modest organic growth paired with margin improvements.
When the company refers to organic growth, it’s focusing on its internal performance. However, Havas is a company with a strong track record of executing M&A strategies, which can drive inorganic growth as well.
Now, a more critical point: I recently discovered some errors in my valuation model (thanks to a helpful tip from this tweet) and I learned some things.
1 – Net Debt calculation
In my previous post I talked about 425M of net debt, I failed in not including Earn-Out.
What is an earn-out? An earn-out is a contingent payment in a merger or acquisition where the seller receives an additional compensation if the acquired business meet specific performance targets.
Under IFRS or GAAP, if a payment is measured it’s included as a liability in the balance sheet.
Does this imply a fixed payment? No, so why include it in the net debt calculation? After conducting some research, I learned that it’s typically included into the M&A process. However, this doesn’t apply here since I’m not planning to buy the entire company! Well, including it could serve as a conservative measure in our valuation process and as a reminder, we should always be conservative.
Using data from the latest 2024 FY presentation, here are the updated calculations:
- Financial debt (including long-term borrowings, – short-term borrowings, and bank overdrafts): +23
- Lease liabilities (current + non-current): +300
- Earn-out: +269
- Off-balance-sheet debt (on original prospectus): +300
- Cash: -234
Net Debt: 658M
This results looks higher than my original (and now updated) estimate of 468M. Naturally, this adjustment impacts the overall valuation of the company.
2 – FCF and Stock Based Compensation (SBC) adjustment
One detail I didn’t noticed is the stock-based compensation outlined in the original prospectus under section 11.10.6.1, “The Havas Equity Incentive Plan.”
This plan implies a maximum of €37.5 million in stock-based compensation annually, not as a one-time expense, but as a recurring cost each year. Therefore, as a conservative measure, it’s prudent to include this SBC in the FCF calculation.
Valuation Adjustment
When applying this to Free Cash Flow (FCF) valuation, we no longer see ultra-high potential upside. However, with the EV/EBITDA method, there is still some high potential (meaning undervaluation). The challenge arises when there is a significant divergence between different valuation methods there is something that is not good. In this case, the acceptable EV/EBITDA multiple would be closer to 5x rather than 6x, due to the low EBITDA-to-FCF conversion ratio of 43% (based on next twelve month)
Therefore, using a 5x multiple, we can still expect a slight upside, though it is less favorable than it would be at a higher multiple.
After reviewing this, I’ve decided not to close my current position. However, if a better opportunity arises, I will, of course, consider rotating my portfolio accordingly.
