The Bank of England expects the UK economy to grow at a remarkable 3.4 per cent in 2014, up from 1.9 per cent in 2013, suggesting the UK recovery has finally found its feet. This is excellent news for the cyclical advertising market, which should soon move back to growth mode after several years of contraction. Surprisingly, this has yet to be properly factored into the share prices of marketing companies listed on Aim, which have been largely left behind in the recent stock market rally. None look cheaper than Mission Marketing (TMMG), a full-service advertising and PR agency with 18 offices mainly outside of London, whose shares trade on just six times forecast earnings for 2014 against a peer group average in the low double-digits.
- Cheap UK recovery play
- Cleaned up balance sheet
- On track to grow earnings
- Dividend payments resumed
- Legacy of debt problems
- Trading can be illiquid
Critics might suggest the shares are 'cheap for a reason', as the old investing adage goes, since Mission has a history of debt problems. The company went on a £50m buying spree in 2006 and 2007, only to find it had trouble paying back the huge sums it owed to banks and business vendors when the financial crisis hit. A rescue placing followed, along with new management in 2010. But debt worries look increasingly misplaced. Management have instituted a successful debt reduction programme over the past four years. As a result, net debt has fallen from £20.3m at the end of December 2009 to a more comfortable £8.8m as of June 2013, or just 14 per cent of net assets.
That’s not to say Mission is completely out of the woods yet. Relatively weak trading in the first half of the year, caused by the loss of a major client, led to restructuring and redundancy payments totalling £1m at one of Mission’s offices. However, strong trading in the six months to 31 December 2013 should see the debt ratio continue to fall; management confirmed in a January trading update that they “expect our year-on-year net bank debt, gearing ratio and debt leverage ratio to be further reduced” at the full-year stage. Although, they conceded that due to the phasing of working capital, the absolute level of net debt will be slightly higher than at the half-year stage.
THE MISSION MARKETING GROUP (TMMG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 34p | MARKET VALUE: | £ 26m | |
| TOUCH: | 33.5-34p | 12-MONTH HIGH: | 44p | LOW: 20p |
| FWD DIVIDEND YIELD: | 3.2% | FWD PE RATIO: | 6 | |
| NET ASSET VALUE: | 82p** | NET DEBT: | 14% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 90 | 1.6 | 3.5 | nil |
| 2011 | 116 | 4.2 | 4.3 | nil |
| 2012 | 117 | 4.9 | 4.5 | nil |
| 2013* | 127 | 5.0 | 4.7 | 1.0 |
| 2014* | 136 | 5.5 | 5.4 | 1.1 |
| % change | +7 | +10 | +15 | +10 |
Normal market size: 2,000 Market makers: 7 Beta: 0.31 *finnCap forecasts, underlying PTP and EPS figures **Includes intangible assets of £71m, or 92p a share | ||||
Importantly, management also confirmed that trading in the second half was "strong" and should see the company deliver financial results for the full year "in line with market expectations". Broker finnCap forecasts modest growth in 2013 but expects earnings to rise by 15 per cent in 2014.
With the balance sheet now firmly under control, and a return to double-digit earnings growth on the horizon, we expect Mission’s historical discount to peers will start to unwind. After adjusting for debt, Mission trades on an enterprise value to cash profits ratio of just 4.6 times - well below the small-cap peer average of eight. The re-rating should be driven by improving trading conditions but Mission’s management are taking other necessary steps to restore investor confidence in the business, too. The company’s stronger financial foothold has allowed Mission to reinstate bi-annual dividend payments to shareholders, giving a decent forward yield of just over 3 per cent.
