One of the things I look for in UK growth shares is a story about why business expansion can continue. A history of growth can make a share more attractive for my portfolio. But what I really hunt for is a set of reasons which make me believe growth could continue into the future.
One UK growth share has more than doubled over the past 12 months. Despite that I believe that it could still move upwards in the future. Here’s why.
This UK growth share more than doubled
The share in question is digital advertising agency S4 Capital (LSE: SFOR). Its gain of 115% in the past 12 months has seen it touch new highs today, breaking the £7.50 price level for the first time. That’s a 50% share price gain since I picked it last December as my top British share for 2021.
What has been the story behind the rapid ascent of the S4 Capital share price? The company was set up by advertising veteran Sir Martin Sorrell. Unencumbered by the constraints of a legacy business, he focussed on where he thought the growth was – digital media. Not only did he put in his own money, but his reputation attracted backing from City investors. That has allowed the company to grow quickly through acquisition. This year the company borrowed to boost its acquisition war chest. That suggests that acquisitions could continue to fuel growth.
Strong organic growth
So, is S4 just the old story of growing a company fast by bolting on companies it buys?
In a word: no. There’s a lot more to the S4 growth strategy than that. It has a three-year target to double both revenue and profit organically. That is very ambitious, although as it actually upgraded its growth target for this year clearly the management is confident in the company’s outlook.
Behind that confidence lie a number of factors which I think are supporting this UK growth share. As the company scales up, it is better equipped to win work from large, multinational companies who want a global partner. Its growing reputation for work quality should help it to expand the size of at least some existing customer accounts. Plus the rising tide of demand for digital advertising helps to lift many boats, including S4.
Those elements could help to drive the company’s success in coming months and years. Interim results are scheduled to be announced next month. If they continue to show a surge in revenue, I think that could help boost the S4 Capital share price yet further.
UK growth share risks
But any share carries risks. Growth can be costly, especially in a potentially lucrative developing industry where competitive pressure is growing. That can also cut into profitability.
While it has a strong digital focus, S4 also relies on personal relationships with clients. That means the departure of any key personnel is another risk which could hurt the S4 Capital share price.
My take on S4 Capital
Diversification across other business sectors and shares helps me to manage my risks.
I would consider adding to the S4 Capital position in my portfolio at the current share price. I am excited about the strong growth story at S4 and hope that even after its meteoric ascent, there is road ahead for further growth.
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Christopher Ruane owns shares in S4 Capital. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.