UK advertising and marketing specialist The Mission Group (TMG:54p) is in far better shape to weather the Covid-19 induced economic downturn than the market gives it credit for.
Of course, the business will be impacted this year by clients reining in marketing budgets, and it’s impossible to know at this stage the extent, hence why the board has sensibly withdrawn earnings guidance. However, it’s worth bearing in mind the high level of client loyalty; no fewer than half of clients have been with one of The Mission Group’s agencies for at least five years, and a third of them for over a decade including household names AstraZeneca, Aviva and Bellway. These clients are financially strong enough to pay their bills and will be around to enjoy the recovery when the Covid-19 economic downturn is over.
The directors have also stress-tested the business and believe that it is financially strong enough to sustain an economic downturn of the magnitude of the 2008 financial crisis when gross profit declined by 30 per cent. I agree as the balance sheet is lowly geared (net debt of £4.9m), and the group has committed low-cost banking facilities of £20m, and a £3m overdraft facility, too.
True, there are cash earn-outs of £3.26m due for payment this year on past acquisitions, and a further £5.25m due within four years in addition to £379,000 of deferred consideration payable in shares. However, as analysts at Edison rightly point out: "These sums are dependent on post-acquisition profit performance mostly for 2020, which may be difficult to hit given the circumstances.” In other words, there is a silver lining because although last year’s adjusted pre-tax profit of £10.2m on operating income of £80m is going to take a hit this year, the group could save millions on earn-outs, too.
Importantly, the Covid-19 crisis is not impacting the ability of the group’s 1,150 employees to work as they are used to remote working, albeit the enforced country-wide lockdown will have an impact in certain areas such as live events and property marketing activities. That said, the directors have sensibly reined in capital expenditure, voluntarily reduced their salaries, and placed the payment of the 1.53p a share final dividend under review. It was due to be paid in July at a cash cost of £1.3m.
I first suggested buying the shares at the current price ('Alpha Company Research: Simon Thompson’s latest bargain buy', 11 Oct 2018), and they hit my 100p initial target (‘Aim traded shares that hit the mark, 17 Feb 2020), before giving back all the bull market gains during the subsequent market rout. Rated on a 50 per cent discount to net asset value, and trading on a modest five times 2019 earnings per share of 9.5p, the ninth successive year of earnings growth, the shares are worth holding onto for recovery.
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