Profits dip at Mission – but directors have plans to turn it around

UK advertising and marketing specialist Mission Group (TMG:41p) delivered 6 per cent organic growth in first-half revenue – but at a much lower margin, which led to a decline in operating profit.

A focus on the technology and healthcare segments – which have in the past accounted for more than a fifth of group revenue – has previously helped support a resilient performance, as has growth from North America (around a 10th of revenue) where Amazon Web Services is a top-five client. However, more challenging trading conditions in the US technology sector meant that the segment’s revenue dipped by 5 per cent in the first half of 2023, with margins “significantly impacted”. This helps explain why group operating margin contracted from 2.7 to 2.1 per cent and why operating profit fell 11 per cent despite the group delivering double-digit revenue growth.

The impact on pre-tax profit was even more accentuated, falling by almost half to £1mn. That’s because net finance costs more than doubled from £0.4mn to £1mn, a reflection of the surge in interest rates in the past 12 months and a doubling of net debt to £14.9mn year on year. That said, Mission’s directors are maintaining full-year guidance at the lower end of the board’s original expectations. Factoring in the usual seasonal second-half bias to the trading results, it points towards annual operating profit rising 9 per cent to £9.5mn on 7 per cent higher revenue of £85.4mn. On this basis, new house broker Canaccord Genuity expects slightly higher annual pre-tax profit of £7.9mn after factoring in a £1.6mn interest charge to produce adjusted earnings per share (EPS) of 6.6p. 

At the time of the annual results (‘This marketing company has loyal clients and growing profits’, 28 March 2023), previous house broker Shore Capital had been forecasting a 15 per cent rise in adjusted pre-tax profit to £9mn on 5 per cent higher revenue of £84mn. The lowering of profit expectations mirrors the weakness in the share price in the past six months.

A resilient business model

The fact that the board still anticipates modest growth in pre-tax profits highlights the resilience of the business model in the face of challenging macroeconomic conditions. Around half of revenue is derived from clients who have been with the group for five years or more, so providing a reliable income stream that has been boosted in the first half by several new business wins including the UK Space Agency, Goldman Sachs and Worldpay. Since the period end, the group has also secured a major win with the Post Office. Reassuringly, the directors note that run rates from the US technology sector are bouncing back and starting to return to 2022 levels. They also anticipate growth across all the group’s market segments, too.

Of course, the seasonal second-half weighting to revenue and profit increases risk. But with the shares trading on a modest forward price/earnings (PE) ratio of 6.2, representing a 30 to 40 per cent discount to UK and global listed sector peers, and supported by a 6.3 per cent prospective dividend yield, it looks factored in. The kicker to narrow the ratings gap will be a meaningful return to earnings growth, and on that front it’s best to take a watching brief. Hold.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.