The Marketing Group — Moving to the next stage

TMT

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

media@edisongroup.com

Edison profile page

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.

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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. 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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

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

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

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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