Shares in UK advertising and marketing specialist The Mission Marketing Group (TMMG:70p) have kicked on a third since I highlighted the investment potential in my Alpha Report when you could buy them around the 53p level ('Alpha Company Research: Simon Thompson’s latest bargain buy', 11 Oct 2018). The re-rating is fully warranted.
Not only has the group delivered its eighth consecutive year of profit growth by reporting a 22 per cent increase in full-year underlying pre-tax profit and earnings per share (EPS) to £9.5m and 8.7p, respectively, on 13 per cent higher revenues of £78.7m, but importantly the trading outlook remains positive. Chairman David Morgan informed me that “the new financial year has started well and it’s business as usual for the vast majority of [the group’s 1,100] clients”. That’s reassuring to know given that their spending plans have a direct impact on marketing activity.
Mr Morgan also noted that Mission Marketing continues to build on its impressive roster of long-standing blue-chip clients, around 60 per cent of which have been with the group’s 16 agencies for at least five years and more than a third for over a decade, adding Amazon and Hewlett Packard to the client list last year as well as winning new assignments with existing ones including Aviva and Barclays.
The other key take was that headline post-tax profit of £7.5m converted into free cash flow of £5.6m, which funded £4.1m of payments on acquisitions and enabled the board to lift the dividend per share by almost a quarter to 2.1p, far higher than I had anticipated. Net borrowings were slashed from £7.4m to £4m in the 12-month period, and Mr Morgan anticipates Mission Marketing being debt free later this year, the benefit of which is that £10.8m of earn-outs on past acquisitions (due by 2022) can be easily covered by free cash flow, thus enabling the board to continue its progressive dividend policy that has seen the payout per share more than double since 2013.
Mission Marketing is improving its profitability, too. Having boosted operating margins from 11.7 per cent to 12.6 per cent in 2018, expect further progress on this front as Mr Morgan says that the consolidation of finance functions, IT, facilities management and recruitment should deliver cumulative cost savings of £1m by the year-end. It’s worth flagging up that last April’s acquisition of London-based Krow Communications, the UK's 17th largest advertising agency, is working out well. The agency delivered operating profit of £945,000 on revenues of £5.3m in the 38 weeks under Mission Marketing’s ownership, justifying the £2.75m initial consideration paid and a contingent earn-out of £6.4m dependent on Krow’s cumulative profits earned in 2018, 2019 and 2020.
The internal appointment of a group chief executive, James Clifton, to take the reins is an important step. He has held the same role at bigdog, a multi-channel marketing agency acquired by the group in 2012, and has the unanimous backing of the heads of all the other agencies, highlighting the collegiate approach adopted by the business.
Based on estimates of analyst Roddy Davidson at house broker Shore Capital, the shares are priced on a forward PE ratio of 7.5, offer a 3.2 per cent prospective dividend yield and trade a third below book value. That’s a low rating for a company that is creating value for shareholders through ongoing operational improvements and its fuse technology incubator, too.
Indeed, Mission Marketing booked a £3m profit (which I have excluded from the aforementioned 2018 profit figures) on last autumn’s disposal of its Broadcare business, a tracking and reporting software system designed for managing NHS-funded healthcare. Moreover, Mr Morgan expects sales from its Pathfindr asset management system (which has global contracts with Rolls-Royce and GKN Aerospace) to quadruple this year to £2m and earn a healthy margin, too.
Offering 42 per cent upside to my 100p target price I continue to rate the shares a buy.
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