Investors are being too risk-averse with this marketing company

• 10 per cent revenue growth in 2022 underpins modestly higher profit
• Acquisitions, restructuring and advertising outlook support earnings growth in 2023
• Trading on 2023 PE ratio of 6.2 and prospective dividend yield of 5.5 per cent

UK advertising and marketing specialist The Mission Group (TMG:50p) has delivered a resilient underlying performance from its agencies in 2022, lifting revenue by 10 per cent to £79.7mn and producing a modestly higher pre-tax profit of £7.6mn, although the profit was lower than analysts’ £ 8.4mn estimate, mainly due to £0.5mn higher finance costs. On this basis, house broker Shore Capital pencils in adjusted earnings per share (EPS) of 6.5p and a dividend per share of 2.5p, implying the shares are being rated on an historic price/earnings (PE) ratio of 7.7 and offer an attractive 5 per cent dividend yield.

A focus on the technology and healthcare segments – which cumulatively account for more than a fifth of group revenue – is helping to underpin the resilient performance, as is growth from North America (around a 10th of revenue) where Amazon Web Services is a top five clients.

A sound strategic acquisition

True, net debt of £11.4mn was above Shore Capital’s forecast of £7.4mn, but this is partly because the group made the earnings-accretive acquisition of London-based Influence Sports & Media (ISM) just before the financial year-end. The media agency works with sponsors, major brands and rights holders and has a strong presence in the US, boasting long-standing relationships with top brands Rolex, Mercedes F1 and oil giant Aramco. Importantly, ISM strengthens the group’s social media and marketing capabilities, and has been acquired at a sensitive price. The £1.5mn initial consideration equates to a reasonable five times pre-tax profit, and the maximum contingent consideration of £7mn is largely self-financing. That’s because ISM would need to achieve a cumulative cash profit of £4.8mn in the next three financial years for the full earn-out to become payable.

Restructuring and acquisitions to propel 2023 earnings

The other reason for the higher debt level was a £1.5mn restructuring charge for the group’s Asian operations (due to the extended impact of Covid-19 in the region) and its Pathfindr industrial internet-of-things (IoT) solutions business. The group will book a non-cash goodwill impairment of around £4.5mn in its 2022 accounts as a result, but management expects net borrowings to fall sharply this year, hence why house broker Shore Capital predicts an £8mn closing figure, well within the group’s £20mn credit facility.

Factoring in the upside from acquisitions made in 2022 and the restructuring, both Shore Capital and Edison Investment Research expect the group to be able to deliver current-year pre-tax profit of £9mn on revenue of £84mn and produce 12 per cent higher earnings per share (EPS) of 8.5p. On this basis, expect a raised dividend per share of 2.9p, the £2.6mn cash cost of the payout being covered more than three times by forecast free cash flow of £8.1mn, hence the anticipated debt reduction this year, too.

Industry forecasts support earnings growth forecasts

Analysts’ growth expectations also look underpinned by advertising spend expectations across the advertising industry. For instance, GroupM predicts 5 per cent growth in the UK, in line with its global revenue forecast growth rate, led by the digital segment, which has a dominant 80 per cent share in the domestic market.

Growth predictions from industry forecasters are completely at odds with Mission Group’s forward rating – 2023 forward PE ratio of 5.9 and prospective dividend yield of 5.8 per cent – ​​which imply a collapse in marketing spend this year. Either the forecasters are wrong (highly unlikely), or investors are being too risk-averse in their pricing. I am firmly in the latter camp.

So, having last rated the shares a recovery buy, at 49p, when I covered the interim results (‘on a recovery mission’, 27 September 2022), I feel that the investment risk remains to the upside.

Interestingly, the share price has formed a base formation around the 41p level since troughing out in October 2022. A break-out above November’s high (52.5p) would be a bullish signal worth following, with last summer’s highs (70p) the immediate target . Ahead of the next trading update at the annual results on 28 March 2023, I rate the shares a buy.

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