Mission on course for strong profit recovery

UK advertising and marketing specialist The Mission Group (TMG:78p) flagged up the strong sequential quarter-on-quarter recovery in both revenue and profitability in the first half in a pre-close trading update (‘On a recovery mission’, 15 July 2021), so the directors view on the outlook and strategic developments are more relevant at this juncture. Given the seasonal second half weighting, the guidance given supports analysts’ predictions of a six-fold rise in full-year pre-tax profit to £7.1m on £10m higher revenue of £71.1m which underpin earnings per share (EPS) of 6p and a forecast dividend per share of 2.3p.

The directors report a particularly strong performance from agencies that operate in sectors that have been more resilient to the effects of the pandemic, including specialist technology and mobility agency, April Six, which delivered 10 per cent higher revenue in the first half and 25 per cent growth in North America.

Mission is also benefiting from the rebound in sectors that were significantly impacted by the pandemic. Specialist property marketing Agency ThinkBDW delivered 27 per cent higher revenue following a resurgence in activity in the UK new homes market, while brand Agency Bray Leino achieved 42 per cent growth as clients returned to a more business as usual footing. New client wins across the group include Redrow, Cazoo, Mecca, Bottlegreen and Porsche GB. In addition, a backlog of delayed overseas and UK events is boosting activity for several agencies such as Bray Leino, which is supporting the prestigious UK Pavilion at the upcoming Dubai Expo.

House broker Shore Capital highlights several factors that underpin a continuation of these trends, the key one being an improving UK advertising spend back drop (data and analytics company WARC forecast 18 per cent and 8 per cent year-on-year growth in 2021 and 2022). Mission’s strategic focus on delivering effective e-commerce solutions coupled with a focus on its data and analytics capability is another positive for the group as management look to leverage their deep digital skill base across a loyal blue-chip client base.

Importantly, Mission is well funded. Factoring in £6.6m of earn-outs payable in the second half, forecast year-end closing net debt of £9.9m is well within the group’s new £20m bank facility and equates to less than one times forecast adjusted cash profit of £11.7m. Furthermore, free cash flow is expected to treble to £9.8m in 2022 which should slash net debt to £5.1m and enable the dividend to be raised to 2.5p a share, next year’s pay-out being covered more than three times by  EPS estimates of 8.6p.

The holding has produced a 51 per cent total return since I initiated coverage (Alpha Research: 'Marketing highly profitable growth', 11 October 2018) and my 100p target could prove conservative given that Mission’s 2022 forward price/earnings (PE) ratio of 9 and enterprise valuation to cash profit multiple of 5.5 times are half that of peers. A prospective dividend yield of 3.2 per cent adds to the attraction. Buy.

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