Q3 update gives reassurance and upgrade

The Marketing Group 15 November 2017 Update
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The Marketing Group

Q3 update gives reassurance and upgrade

Q3 results

Media

15 November 2017

Price

€0.42

Market cap

€15m

Net cash (€m) as at 30 September 2017

1.7

Shares in issue

34.7m

Free float

58.4%

Code

TMG

Primary exchange

Nasdaq First North

Secondary exchange

Frankfurt

Share price performance

%

1m

3m

12m

Abs

(14.3)

(49.5)

(90.2)

Rel (local)

(13.0)

(51.1)

(91.5)

52-week high/low

€4.4

€0.4

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

FY17 report

28 February 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’s Q3 results show that it is now properly focused on growing the business, with group agencies worldwide taking on larger pieces of work in collaboration. EBITDA margin to net revenue has grown in each of the last three quarters and we have moved our full year, FY18 and FY19 earnings’ forecasts ahead by c 10%. Net cash at the end of the quarter had increased to €1.7m from €0.9m at end June. This is facilitating investment in new initiatives, including the group’s new blockchain-enabled global media agency, Truth. The rating should start to improve as confidence builds that management can deliver on its strategy.

Year end

Turnover (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

EV/EBITDA (x)

Yield
(%)

12/16**

15.8

2.2

11.3

0.0

3.7

5.7

0.0

12/17e

26.8

1.7

4.1

0.0

10.2

6.9

0.0

12/18e

29.6

2.1

4.6

0.0

9.1

5.8

0.0

12/19e

32.5

2.5

5.3

0.0

7.9

4.8

0.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Not restated for disposals.

Progress on the ground

Turnover of €7.0m (Q2: €6.3m) contained a one-off element (of undisclosed scale) from media business over the course of the general election in New Zealand, where the National Party is a client. The theory of global teamwork is now being put into practice with collaborative pitches, with account management close to the client and the subsequent implementation work done in the group agency best placed to deliver on the brief, regardless of geographic location. This approach is facilitated by TMG’s internally-developed inter-agency collaboration platform, Temba, launched in August 2017. It should help TMG achieve scalability without needing to replicate resource, driving margin alongside net revenue growth.

Cash for growth, innovation investment

Net cash at end Q317 was €1.7m and our model shows this increasing to €3.3m by the year-end (was €3.2m). This level of funding means that the working capital requirements of growth will be met from cash flow, with some flexibility for further complementary acquisitions. TMG has also launched a new agency, Truth, based out of London but also operating in the US, Singapore, New Zealand and Australia. It is a blockchain-based media planning and buying agency, providing validation all through the process, thereby addressing major concerns over media transparency. It will be led by Mary Keane-Dawson, who joined the group earlier in the year

Valuation: No credit yet for improved outlook

The current valuation has stabilised in a range of €0.40 to €0.50 over the last couple of months but this price does not yet reflect the enhanced growth prospects from the agencies working collaboratively and the associated margin expansion. Smaller marketing services groups currently trade on a current year P/E of 12.2x and on an EV/EBITDA of 8.5x. As TMG starts to build a record for delivering against market expectations, then we would expect the valuation discount to peers to close.

Quarter-on-quarter progress

As described in our Initiation note in September, TMG restated its Q117 numbers to reflect disposals (financial information from FY16 has not been restated and so is excluded from the table below and we have no given year-on-year comparisons). This shows the consecutive progress through the year to date. As with many agency groups, the gross profit (net revenue) line is the better indicator of growth, due to the impact of put through costs on the purchase of media.

We have moved our 2017 full year numbers ahead (see Exhibit 2) but have stayed relatively cautious on our Q4 assumptions, as Q3 had the one-off benefit in New Zealand and we are reluctant to extrapolate. Our estimates for FY18 and for FY19 are lifted by 10%, predicated on net revenue growing by 12% in FY18 and 11% the year after from the existing group network of agencies.

Exhibit 1: Quarterly performance and forecast

€m

Turnover

Net revenue

EBITDA

EBITDA/net revenue margin

Q117

7.190

4.832

0.125

2.6%

Q117 restated

6.217

4.094

0.298

7.3%

Q217

6.330

4.315

0.473

11.0%

H117

12.547

8.409

0.771

9.2%

Q317

7.043

4.260

0.679

15.9%

Q417e

7.210

4.231

0.450

10.6%

FY17e

26.800

16.900

1.900

11.2%

FY18e

29.600

18.944

2.280

12.0%

FY19e

32.500

20.963

2.721

13.0%

Source: Company accounts, Edison Investment Research

It is still very early days for the group and for the management team, who have only been fully in place from Q117. The growth plan which has been outlined, and which was described in more detail in our initiation note, should lead to gross profit moving ahead more strongly than the broader agency peer group. It should also allow for further margin expansion to (and possibly) beyond industry levels. We consider these industry margins to be running currently in the low-to-mid teens against gross revenue, high teens to low 20s against net revenue.

Exhibit 2: Revisions to forecasts

EPS (c)

PBT (€m)

EBITDA (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2017e

3.76

4.13

+10

1.55

1.70

+10

1.75

1.90

+9

2018e

4.19

4.61

+10

1.86

2.05

+10

2.09

2.28

+9

2019e

4.85

5.34

+10

2.27

2.50

+10

2.49

2.72

+9

Source: Edison Investment Research

Exhibit 3: Financial summary

€000s

2016

2017e

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Turnover

 

 

15,843

26,800

29,600

32,500

Cost of Sales

(5,986)

(9,900)

(10,656)

(11,538)

Net Revenue

9,857

16,900

18,944

20,963

EBITDA

 

 

2,316

1,900

2,280

2,721

Operating profit (before amort. and except.)

 

2,210

1,762

2,080

2,521

Amortisation of acquired intangibles

(1)

0

0

0

Exceptionals

0

(43,576)

0

0

Share-based payments

0

0

0

0

Reported operating profit

2,209

(41,814)

2,080

2,521

Net Interest

(56)

(62)

(30)

(21)

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

2,154

1,700

2,050

2,500

Profit Before Tax (reported)

 

 

2,153

(41,876)

2,050

2,500

Reported tax

(164)

(209)

(430)

(650)

Profit After Tax (norm)

1,990

1,360

1,640

1,900

Profit After Tax (reported)

1,989

(42,085)

1,619

1,850

Minority interests

0

0

0

0

Discontinued operations

0

0

0

0

Net income (normalised)

1,990

1,360

1,640

1,900

Net income (reported)

1,989

(42,085)

1,619

1,850

Average Number of Shares Outstanding (m)

18

32

35

35

EPS - normalised (c)

 

 

11.27

4.21

4.69

5.44

EPS - normalised fully diluted (c)

 

 

11.27

4.13

4.61

5.34

EPS - basic reported (€)

 

 

11.26

(130.33)

4.63

5.29

Dividend (c)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

69.2

10.4

9.8

Gross Margin (%)

62.2

63.1

64.0

64.5

EBITDA/Gross Profit Margin (%)

23.5

11.2

12.0

13.0

Normalised Operating/Gross Profit Margin

22.4

10.4

11.0

12.0

BALANCE SHEET

Fixed Assets

 

 

74,184

30,772

30,772

30,772

Intangible Assets

73,598

30,199

30,199

30,199

Tangible Assets

540

527

527

527

Investments & other

46

46

46

46

Current Assets

 

 

9,031

9,536

15,804

18,546

Stocks

379

379

379

379

Debtors

6,234

6,873

11,678

12,822

Cash & cash equivalents

2,418

2,284

3,747

5,345

Other

0

0

0

0

Current Liabilities

 

 

(11,447)

(7,993)

(10,939)

(11,831)

Creditors

(5,749)

(4,974)

(9,923)

(10,815)

Tax and social security

(773)

(773)

(773)

(773)

Short term borrowings

(843)

(543)

(243)

(243)

Other

(4,082)

(1,703)

0

0

Long Term Liabilities

 

 

(557)

(557)

(557)

(557)

Long term borrowings

(163)

(163)

(163)

(163)

Other long term liabilities

(394)

(394)

(394)

(394)

Net Assets

 

 

71,211

31,758

35,080

36,930

Minority interests

0

0

0

0

Shareholders' equity

 

 

71,211

31,758

35,080

36,930

CASH FLOW

Operating Cash Flow

554

1,900

2,280

2,721

Working capital

(864)

(1,414)

144

(252)

Exceptional & other

0

0

0

0

Tax

162

(209)

(430)

(650)

Net operating cash flow

 

 

(148)

277

1,993

1,819

Capex

(136)

(125)

(200)

(200)

Acquisitions/disposals

2,410

(177)

0

0

Net interest

(56)

(62)

(30)

(21)

Equity financing

0

4

0

0

Dividends

0

0

0

0

Other

(354)

0

0

0

Net Cash Flow

1,716

(83)

1,763

1,598

Opening net debt/(cash)

 

 

0

(1,412)

(1,578)

(3,341)

FX

(306)

249

0

0

Other non-cash movements

2

0

0

0

Closing net debt/(cash)

 

 

(1,412)

(1,578)

(3,341)

(4,939)

Source: Company accounts, Edison Investment Research

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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 12, 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 12, 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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 12, 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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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