An underrated recovery play

UK advertising and marketing specialist Mission Group (TMG: 21p) has started the 2024 financial year on a firmer financial footing than many investors feared after last autumn’s profit warning (‘No dividend until 2025: Is Mission Group still a recovery play?’, 23 October 2023).

To date, management have taken £5mn of annualised costs out of the business at a cost of £0.7mn, sold the group’s 80 per cent stake in non-core technology business, Pathfindr, for an initial cash consideration of £1mn along with a three-year earn-out, and refinanced its debt facility with NatWest. True, headline pre-tax profit declined from £7.9mn to £4.2mn, and closing net debt of £15.4mn was £4mn higher than a year before, but both metrics were better than forecast in late October.

Please note that the adjusted pre-tax profit figure excludes £15mn of exceptional charges: £10.4mn non-cash goodwill impairment charge; £0.7mn of restructuring costs; £0.5mn bank refinancing costs; £1.8mn start-up costs and £1.6mn of acquisition-related expenses. In addition, the group booked a £1.1mn loss on discontinued operations.

Mission recovers from downturn in US technology sector

As has been previously documented, Mission was wrongfooted by the sudden downturn in its US technology business in the first half of 2023 (£2.2mn reduction in revenue), a period which chairman David Morgan describes as “horrendous”. The profit impact on that business was accentuated given its relatively fixed cost base and the fact that it had been fully resourced at the start of 2023 after a record 2022.

It was not the only business to suffer as a review of the carrying value of four agencies resulted in the £10.4mn goodwill write-down. The good news is that the revenue run-rate in the technology segment was restored in the final quarter of 2023, and other segments (most notably property and sports and entertainment) have been delivering organic growth.

Catalysts for recovery

Importantly, Mission has a loyal customer base with 53 per cent of operating income generated from clients that have been with the group for five years or more. The group has been winning new accounts, too. The Post Office, EasyJet, Pandora, Meta, and Brabantia were all added to the client roster over the course of 2023. The new business momentum has continued into the new financial year with Mission announcing some notable new client accounts (global pharmaceutical company Dr Reddy’s and food group Herta).

In addition, the group should continue to reap the benefits from the more recent acquisitions of social media marketing agencies, Populate and Influence, both of which are profitable and contributed £5.6mn of the £6.8mn increase in the group’s operating income growth in 2023. The raft of high profile European (Olympics and UEFA European Championships) and Global sporting events this year is another positive for earnings. Reassuringly, Mission has already secured several early new business wins.

House broker Canaccord Genuity is pencilling in a recovery in current year pre-tax profit to £7.6mn on annual revenue of £91mn, and a doubling of earnings per share (EPS) to 6.2p. Although shareholders will have to wait until 2025 for a return of dividends, free cash flow will be used to pay down debt.

Priced on a multiple of around four times operating profit estimates to enterprise valuation, the shares have further recovery upside. Buy.

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