Moving to the next stage

The Marketing Group 4 April 2018 Update
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The Marketing Group

Moving to the next stage

Full year results

Media

4 April 2018

Price

€0.25

Market cap

€9m

Net cash at end December 2017 (€m)

1.8

Shares in issue

34.1m

Free float

57.2%

Code

TMG

Primary exchange

Nasdaq First North

Secondary exchange

Frankfurt

Share price performance

%

1m

3m

12m

Abs

(15.5)

(30.2)

(67.3)

Rel (local)

(15.1)

(27.3)

(66.9)

52-week high/low

€1.20

€0.20

Business description

The Marketing Group is building a global full-service marketing network. Each company within the group provides specialist marketing services brought together, within complementary communities of practice, to form an international network that can address a global market.

Next events

Q118 results

May 2018

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

The Marketing Group is a research client of Edison Investment Research Limited

The Marketing Group is now in a position to grasp the opportunities it has to deliver innovative tech-based marketing solutions, having addressed its legacy issues. Six agencies were disposed of in FY17 and three wound-down, leaving the group with a network of agencies across Europe, the US and Asia-Pacific, with a strong global roster of clients. The Q417 launch of TRUTH, a media agency run on blockchain, has greatly lifted TMG’s profile in the industry, with its credibility cemented by the successful deployment of its first campaign, with The Guardian. This is a potentially transformative initiative, with the supporting investment programme likely to restrain current year profitability but stimulate growth thereafter.

Year end

Turnover (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

EV/EBITDA
(x)

12/16**

8.6

1.5

7.8

0.0

3.2

4.6

12/17

22.9

1.2

3.9

0.0

6.4

4.9

12/18e

24.8

1.3

2.7

0.0

9.3

5.0

12/19e

26.6

1.9

4.4

0.0

5.7

3.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **FY16 restated.

FY16 restated, FY17 restructuring

With the degree of churn and restructuring in the group, the headline numbers recently reported are fairly academic. The substantial goodwill write-off against earlier acquisitions (made under the previous management term) was taken at the half year. Additional exceptionals (€9.0m further goodwill impairment, €2.3m on performance shares and purchase obligations and €0.5m on abortive acquisitions) should allow the group to operate off a clean slate from now on, albeit that growth is now off a lower base. The extent of this corporate restructure is in danger of over-shadowing the underlying operational progress, with a culture of collaboration leading to a growing number of multi-service, multi-agency client work being won. We would anticipate this accelerating through FY18.

True potential

Management has a demanding schedule for FY18: cementing the collaboration through unified branding; moving forward with TRUTH (in building out the platform and in winning commercial client business); building the scale that will enable the business to leverage its overheads (likely to involve acquisitions and with the focus on North America and Europe); and building the recurring and repeatable revenue base, as well as looking into an AIM listing. Having worked hard to put the necessary control and reporting structures into the group agencies, any issues now arising should be much easier to spot and act on in a timely manner.

Valuation: Well below peers

The share price has drifted over the last six months and reflects the group’s rather turbulent history (and low liquidity) rather than its prospects. TRUTH’s potential value alone might be equivalent to the group’s current market capitalisation. Small/mid-cap marketing stocks are trading on 7.8x EV/EBITDA for FY19, which would back out to a share price of €0.41, 64% ahead of the current level.

TRUTH potential game changer

The FY17 result contained a number of adjustments reflecting the high level of corporate activity during the year: three acquisitions, six disposals and three entities closed down. Historically, companies were added to the group by all-paper transactions (for details see our initiation report of September 2017). Unravelling the repercussions of those deals, when the paper was valued at much higher levels, has now been completed, albeit at considerable cost to the balance sheet.

We have recalculated our forecasts based on the FY17 figures as shown below.

Exhibit 1: Revised forecasts

EPS

PBT

EBITDA

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2017

4.1

3.9

-5

1.7

1.2

-29

1.9

1.5

-21

2018e

4.6

2.7

-41

2.1

1.3

-38

2.3

1.5

-35

2019e

5.3

4.4

-17

2.5

1.9

-24

2.7

2.1

-22

Source: Company accounts, Edison Investment Research

In building our model (which we run off a geographical split), we have assumed that in FY18e, turnover grows broadly in line with the market, with the addition of wildcard (Germany), Reflexion Publique (France) and The Content Agency (Australia).

We have included TRUTH in the UK figures, although it is intended it will also operate in the US, Singapore, New Zealand and Australia. Investment in building out the blockchain will be substantial in relation to the group’s size. We have included capex of €1.0m in the current year, before returning to a ‘normalised’ €0.1m from FY19e. Until the levels of interest in the concept of a blockchain-driven media agency (highly relevant given the current levels of debate about transparency in programmatic advertising) translate into actual commercial business, we will remain cautious on our forecasting of additional revenues from it. The concept could also have practical applications for other parts of the group’s business, but again we will not factor this in at this point.

Acquisitions high on the agenda

The current scale of the business is not what the management team have in mind and it has been a frustration that the extent of the restructuring required has delayed the implementation of the growth strategy. It has also led to a lowering of estimates and the earnings’ base. This roadblock has now been passed and we would expect deal flow to continue through the year. There was net cash on the balance sheet of €1.75m at the end of December 2017. Our model indicates that FY18e will end at €1.4m despite the relatively high capital spend. We would expect future deals to be carried out with a mix of paper and debt, with suitable funding arrangements being put in place. The group is also evaluating a move to AIM with a view to improving liquidity in the shares.

The fundamental premise remains valid: building a global network of tech-enabled marketing businesses that offers a credible alternative to potential clients dis-enamoured with working with the large incumbent agencies.


Exhibit 2: Financial summary

€000s

2016

2017

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

8,592

22,860

24,825

26,581

Cost of Sales

(2,854)

(8,074)

(8,937)

(9,436)

Net Revenue

5,738

14,786

15,888

17,145

EBITDA

 

 

1,566

1,471

1,455

2,138

Operating profit (before amort. and except).

 

1,509

1,328

1,305

1,938

Amortisation of acquired intangibles

0

0

0

0

Exceptionals

(3,800)

(11,920)

0

0

Share-based payments

0

0

0

0

Reported operating profit

(2,291)

(10,592)

1,305

1,938

Net Interest

(41)

(101)

(30)

(21)

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

1,468

1,227

1,275

1,916

Profit Before Tax (reported)

 

 

(2,332)

(10,693)

1,275

1,916

Reported tax

(88)

(142)

(319)

(381)

Profit After Tax (norm)

1,380

1,085

956

1,535

Profit After Tax (reported)

(2,420)

(10,835)

956

1,535

Minority interests

0

0

0

0

Discontinued operations

610

(34,657)

0

0

Net income (normalised)

1,380

1,085

956

1,535

Net income (reported)

(1,810)

(45,492)

956

1,535

Average Number of Shares Outstanding (m)

18

32

35

35

EPS - normalised (c)

 

 

7.81

3.43

2.74

4.39

EPS - basic reported (€)

 

 

(13.71)

(143.65)

2.74

4.39

Dividend per share (c)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

166.1

8.6

7.1

Gross Margin (%)

66.8

64.7

64.0

64.5

EBITDA/Gross Profit Margin (%)

27.3

9.9

9.2

12.5

Normalised Operating/Gross Profit Margin

26.3

9.0

8.2

11.3

BALANCE SHEET

Fixed Assets

 

 

74,184

33,766

32,816

32,716

Intangible Assets

73,598

32,927

32,027

32,027

Tangible Assets

540

363

313

213

Investments & other

46

476

476

476

Current Assets

 

 

9,031

7,321

7,331

9,106

Stocks

379

0

0

0

Debtors

6,234

5,176

5,508

5,718

Cash & cash equivalents

2,418

2,145

1,822

3,389

Other

0

0

0

0

Current Liabilities

 

 

(11,447)

(6,421)

(6,324)

(6,565)

Creditors

(5,749)

(5,491)

(5,394)

(5,635)

Tax and social security

(773)

(253)

(253)

(253)

Short term borrowings

(843)

(277)

(277)

(277)

Other

(4,082)

(400)

(400)

(400)

Long Term Liabilities

 

 

(557)

(2,097)

(397)

(397)

Long term borrowings

(163)

(117)

(117)

(117)

Other long term liabilities

(394)

(1,980)

(280)

(280)

Net Assets

 

 

71,211

32,569

33,425

34,860

Minority interests

0

0

0

0

Shareholders' equity

 

 

71,211

32,569

33,425

34,860

CASH FLOW

Operating Cash Flow

1,566

1,471

1,455

2,138

Working capital

(864)

72

(429)

32

Exceptional & other

(540)

0

0

0

Tax

162

(687)

(319)

(381)

Net operating cash flow

 

 

324

856

707

1,788

Capex

(136)

(445)

(1,000)

(200)

Acquisitions/disposals

2,410

(372)

0

0

Net interest

(56)

(101)

(30)

(21)

Equity financing

0

0

0

0

Dividends

0

0

0

0

Other

(410)

(112)

0

0

Net Cash Flow

2,132

(174)

(323)

1,567

Opening net debt/(cash)

 

 

434

(1,412)

(1,751)

(1,428)

FX

(306)

0

0

0

Other non-cash movements

20

513

0

0

Closing net debt/(cash)

 

 

(1,412)

(1,751)

(1,428)

(2,995)

Source: Company accounts, Edison Investment Research. Note: FY16 restated.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by The Marketing Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by The Marketing Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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