-10 percent 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 percent
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 percent to £79.7mn and producing a modestly higher pre-tax profit of £7.6mn, albeit 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 a historic price/earnings (PE) ratio of 7.7 and offer an attractive 5 percent 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 client.
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 sensible 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 Pathfinder 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 a current-year pre-tax profit of £9mn on revenue of £84mn and produce 12 percent 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.
