UK advertising and marketing specialist The Mission Marketing Group (TMMG:57p) finished the 2018 financial year strongly and has guided investors to expect a 10 per cent rise in revenues and a 20 per cent plus increase in underlying operating profit to £9.4m for the 12-month trading period.
Half the top-line growth is organic and the balance has come from a maiden contribution from last April’s acquisition of London-based Krow Communications, the UK's 17th largest advertising agency. This is the eighth consecutive year of profit growth delivered by Mission Marketing and is underpinned by an impressive roster of long-standing blue-chip clients (35 per cent of its 1,100 clients have been customers for at least a decade), and a reputation in the industry for delivering innovative and effective creative work based on a collaborative approach across its 16 agencies.
The other major take for me is that net debt of £4m at the year-end was better than analysts had predicted, and has been slashed from £7.4m at the end of 2017. This reflects a strong cash-flow performance and proceeds from a small disposal last autumn. It also means that net borrowings have fallen below 0.5 times’ annual cash profit which triggers another reduction in the interest charge to only 1.25 per cent over Libor. The other consequence of the deleveraging of the balance sheet is that £5.2m of earn-outs on past acquisitions (due by the end of 2021) are easily covered by the company’s free cash flow.
This means that more of the company’s cash flow can be recycled back to shareholders through a progressive dividend policy that has seen the payout per share double since 2013. Indeed, based on estimates of analyst Roddy Davidson at house broker Shore Capital, earnings per share (EPS) of 8.6p support a well-covered dividend per share of 2p for the 2018 financial year, and EPS estimates of 9.1p for the 2019 financial year underpin a 10 per cent anticipated hike in the dividend per share to 2.2p. On this basis, Mission Marketing’s shares are rated on a miserly forward PE ratio of six and offer a 4 per cent prospective dividend yield. They also trade on a 40 per cent plus discount to net asset value.
So, having highlighted the investment potential of the company during the autumn when it was possible to buy the shares at the 53p mark (‘Alpha Company Research: Simon Thompson’s latest bargain buy’, 11 Oct 2018), I maintain the view that the low-ball valuation fails to adequately reflect Mission Marketing’s improving cash-flow generation, the deleveraging of its balance sheet and expectations of strong dividend growth. Ahead of the annual results on Tuesday 9 April 2019, I rate the shares a buy and have a 100p target price. Buy.
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