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On a successful mission to a higher rating

The lowly rated UK advertising and marketing specialist is on course to deliver another year of solid earnings growth

Aim-traded shares in UK advertising and marketing specialist The Mission Marketing Group (TMMG:90p) rallied 37 per cent to an 11-year high of 96p after I last suggested buying, at 70p, when I covered the annual results three months ago ('Marketing a rerating', 9 Apr 2019). To date, the shares have produced a total return of 72 per cent after I highlighted the investment potential when they could be purchased around 53p ('Alpha Company Research: Simon Thompson’s latest bargain buy', 11 Oct 2018). The ongoing rerating is more than warranted as Monday's pre-close trading update highlights ahead of the release of half-year results on 25 September 2019.

The marketing group has reported revenue growth of 5 per cent and underlying pre-tax profit growth of 10 per cent in the latest six-month trading period, a performance that supports the maintained full-year forecasts of analyst Roddy Davidson at house broker Shore Capital, who is pencilling in 8 per cent higher annual pre-tax profit and earnings per share (EPS) to £10.2m and 9.4p, respectively, on revenues up 5 per cent to £83m in the 12 months to the end of December 2019.

Cash generation is strong, too. Even after settling £3.1m of earn-outs on acquisitions in the first half of this year, net borrowings dropped from £7.8m to £5.2m year on year, and Mr Davidson expecgts 2019 year-end net debt to be closer to £1.9m after taking into account the seasonal second-half weighting to the numbers. This year’s interest bill should be covered 21 times by likely annual operating profit of £10.5m, so with the business set to move into a strong net cash position in 2020, then shareholders can expect a continuation of the board’s progressive dividend policy that has seen the payout per share more than double since 2013. Shore Capital is forecasting a 2.2p a share payout this year, implying the shares offer a prospective dividend yield of 2.3 per cent.

Also, with operating free cash flow of £5.2m in 2018 forecast to improve to £6.5m this year, rising to £8.2m in 2020, then the outstanding £7.7m of potential earn-out obligations on previous acquisitions that are due to be paid by 2022 should be easily funded internally from free cash flow, thus leaving more cash to fund higher payouts for shareholders or to make further acquisitions.

The ongoing strong financial performance is underpinned by a longstanding blue-chip client base; 60 per cent of the group’s 1,100 clients have been with one of its 16 agencies for at least five years; a clear focus on digital expertise across its highly collegiate agency network that has a high level of staff loyalty; and the potential to realise further value from its Fuse technology incubator.

The directors have also been buying wisely. Indeed, at last month’s Capital Markets Day, the directors highlighted the strong performance of last year’s acquisition of London-based Krow Communications, the UK's 16th-largest advertising agency. The agency delivered operating profit of £945,000 on revenue of £5.3m in the first 38 weeks under Mission Marketing’s ownership, justifying the £2.75m initial consideration paid in April 2018 and a contingent earn-out of £6.4m dependent on Krow’s cumulative profits earned in 2018, 2019 and 2020.

Admittedly, Mission Marketing’s share price got to within pennies of my 100p target price last week, but the shares still only trade on a 2019 price/earnings (PE) ratio of nine, a massive seven percentage point discount to their peer group average. In the circumstances, I am raising my target price from 100p to 115p, based on the group delivering on Shore Capital’s 2020 EPS estimates of 9.9p, moving into a net cash position of £2.1m and raising the annual payout to 2.4p a share. Buy.


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