Half-year results from UK advertising and marketing specialist The Mission Group (TMG:79p) highlight just why I suggested buying the Aim-traded shares around the 53p mark just under a year ago when it was called The Mission Marketing Group ('Alpha Company Research: Simon Thompson’s latest bargain buy', 11 Oct 2018).
Excluding the profitable disposal of a non-core business last November, revenue from ongoing operations increased by 9 per cent to £39.2m in a relatively flat market in the six months to 30 June 2019, maintaining the track record of delivering on the board’s 5 per cent target.
Moreover, despite domestic political and economic uncertainty, Mission is well on track to deliver against full-year budgets, which points to another year of profitable growth. Chairman David Morgan pointed out during our results call that “there are no signs that the world [economy] nor Brexit are affecting our business”, adding that he is “pretty optimistic” about prospects for 2020, too. It’s easy to see why.
Major client wins in the first half include Fuji Xerox, a joint-venture partnership between Japanese photographic company Fujifilm and US document management company Xerox, which is selling xerographic and document-related products and services in the Asia Pacific region; and Cummins, an American Fortune 500 corporation that designs, manufactures and distributes engines, filtration and power generation products. In the year to date, there have been 15 net client wins, including five major ones and, importantly, no losses of significant accounts.
These client wins “will have a real bang in 2020”, says Mr Morgan. He has a point and one that I feel other investors have yet to cotton on to. The story gets even better because Mission is in the late stages of negotiating the single-largest client win in the group’s history. Currently, the largest client, Bellway, accounts for 5 per cent of group revenue, so this is a huge contract. Also, the group’s next 10 clients account for 10 per cent of annual revenue, and the next 30 clients around 30 per cent of the total, which highlights the financial significance to 2020 revenue from all of this year's major client wins.
Notable developments
Other notable developments include the opening of offices in Seattle, where Mission “does quite a lot of business with Amazon”, and in Munich in response to client demand. The decision to refine the group’s structure to create a simplified service offering is important, too. This will entail merging last year’s acquisition of London-based Krow Communications, the UK's 16th-largest advertising agency, and Bigdog, a London and Midlands-based marketing communications agency (advertising, design, branding, direct marketing, social media and strategy planning) into an integrated agency. Bigdog was previously run by Mission's chief executive, James Clifton, and the two businesses have effectively been working as one company this year anyway, so merging them is a natural progression.
The merger of April Six, a specialist PR agency that provides communication services to prestigious clients in science and technology (national laboratories, universities, and global technology and engineering companies), with RLA, a full-service agency with expertise in international channel marketing programmes in the automotive, retail and allied sectors, makes strategic sense, too. It creates a single agency to leverage complementary skillsets and April Six’s international footprint.
Exploiting a competitive edge
Importantly, Mission looks very well placed to maintain its competitive advantage to grow revenues and profits even in a less favourable market environment by exploiting: the breadth of experience and resources it’s able to deploy across the group’s 11 brands and 150 clients; a stable and loyal base of key talent whose flair is cultivated through a collegiate-style approach; and longevity of client relationships that create a barrier to entry for competitors.
Other reasons why the business continues to outperform peers include a collaborative structure that enables the independent entrepreneurial spirit of each agency’s management to flourish; a clear focus on digital expertise (the segment of the market that’s producing the highest growth); and the fact that Mission is no longer purely a marketing communications group, but a partner with the skills to help clients solve business challenges, the reason why the company changed its name. These factors help explain why 55 per cent of clients have been with the group for at least five years, and 36 per cent for more than a decade. It’s a highly profitable business, too.
On track for profitable organic growth
Analyst Roddy Davidson at house broker Shore Capital is pencilling in a solid 7 per cent increase in full-year pre-tax profit to £10.2m on revenue of £83m to produce earnings per share (EPS) of 9.4p, up from 8.7p in 2018. He also expects net debt, which was reduced from £7.8m to £5.1m in the first half, to fall to £2.1m by the 2019 year-end, driven by annual operating free cash flow of £6.5m.
Furthermore, even after factoring in £2.3m of expected earn-out payments in the next 12 months on past acquisitions, the group looks well on course to move into a net cash position of around £2m by the end of 2020 based on a further improvement in operating free cash flow to £8.2m. This is predicated on a modest, and more importantly achievable, forecast increase in revenue to £87m, which Mr Davidson expects to produce pre-tax profit of £11.3m and EPS of 9.9p.
Rightly, shareholders are being rewarded. The half-year dividend per share has been hiked again, up by 10 per cent to 0.77p, and a similar increase in the well-covered full-year payout from 2.1p to 2.3p looks a sensible prediction, higher than analysts are conservatively forecasting. Indeed, the board’s progressive dividend policy has seen the payout rise by 40 per cent in the past three financial years.
True, Mission's shares have rerated in the past 12 months, but they still only trade on a modest price/earnings (PE) ratio of eight, based on 2020 forecasts and offer a prospective dividend yield of 3 per cent. That’s a modest rating for a company that is winning major new accounts, has a high retention rate of existing ones, and is producing substantial free cash flow to be able to pay down all of the £9.1m outstanding obligations on past acquisitions, invest in organic growth initiatives, and still reward shareholders with a progressive dividend policy.
Having raised my target price to 115p at the time of the pre-close trading update (‘On a mission to a higher rating’, 15 Jul 2019), and underpinned by a growing list of major clients, I share Mr Morgan’s optimism. Buy.
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