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Research: TMT
The Mission has reported FY19 results in line with levels indicated in the year-end update, with an 11% uplift in adjusted PBT and a 5% increase in diluted EPS. The new financial year started well, with a more coherent service offering and the agencies working effectively together to deliver new business on an individual and on a collaborative basis. COVID-19 is having a marked impact across the marketing sector as clients reschedule and adjust their spending plans, but it is too early to judge the financial impact that this will have on Mission’s FY20 results at this stage.
The Mission Group |
On message |
Full-year results |
Media |
1 April 2020 |
Share price performance
Business description
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The Mission Group is a research client of Edison Investment Research Limited |
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The Mission has reported FY19 results in line with levels indicated in the year-end update, with an 11% uplift in adjusted PBT and a 5% increase in diluted EPS. The new financial year started well, with a more coherent service offering and the agencies working effectively together to deliver new business on an individual and on a collaborative basis. COVID-19 is having a marked impact across the marketing sector as clients reschedule and adjust their spending plans, but it is too early to judge the financial impact that this will have on Mission’s FY20 results at this stage.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
68.6 |
9.1 |
9.0 |
1.7 |
6.3 |
3.0 |
12/18 |
77.6 |
9.2 |
8.5 |
2.1 |
6.7 |
3.7 |
12/19 |
81.0 |
10.2 |
9.0 |
2.3 |
6.3 |
4.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Greater coherence
The Mission traded well across all its activities in FY19, with its largest segment, Advertising & Digital (80% of operating income), growing its revenues by 4.4%. All growth was organic. With the appointment of the group’s first CEO, James Clifton, in April 2019, and further new group roles added in business development, there has been noticeable impetus in developing both a more coherent group presence to external parties and greater internal collaboration. Some group agencies have been merged and the simplified group structure is encouraging cross-referrals and joint pitches, some under a Mission branding. COVID-19 is affecting some areas of the Mission’s activities more than others, but the speed of recovery in those areas may also be faster once the economy starts to recover. Much of the business is well suited to remote working. Property marketing and live events are most affected. We will initiate forecasts once the picture becomes clearer.
Facilities in place to handle hiatus
Year-end net debt of £4.9m (£11.1m including leases) was swelled by higher levels of working capital after a busy close to the year, which we expect to have corrected in the first couple of months of FY20. Outstanding acquisition obligations (£8.9m) are predominantly in cash, with £3.4m due in FY20 (£3.3m in cash). Mission has a committed £20m revolving credit facility (recently extended by £5m). This runs to September 2021, with a one-year extension option. It also has a £3m overdraft facility. Spending plans have been reined in and board salaries voluntarily reduced. A decision will be made on the final dividend closer to the June AGM.
Valuation: Price decline with sector
A combination of market volatility and withdrawn market forecasts compounds the difficulties in making prospective peer group comparisons for valuation. Historical multiples are in a wide range, with the more similar agency groups trading on a P/E of 6.7x, a premium of 22% to the Mission. UK agency sector share prices have fallen by an average of 45% year-to-date; the Mission’s price is down 28%.
A good set of results
The accounts were signed off by the auditors before the COVID-19 pandemic was declared.
The Mission reported turnover growth of 7.0%, compared to the most recent AA/WARC industry assessment of 5.2% growth in total UK ad spend. However, turnover includes a substantial element of media put-through costs and management uses its operating income line to represent its revenues, being a more accurate representation of its progress. Reporting is by line of business, rather than being drawn agency by agency, with Advertising and Digital the largest segment by far, at 80% of group revenue. Revenue is mostly generated in the UK (89%), with the balance coming from the US (6%), 5% from Asia and less than 1% from the rest of Europe.
Growth came from a combination of new client wins and repeat and additional work from existing clients. The group has an impressive record of client retention. In FY19, around half of revenue came from clients that were also clients in the previous five years, and a third from those working with the group for more than a decade. The client roster covers a wide range of sectors and includes household names such as DFS, Petro-Canada, AstraZeneca, Aviva, Symantec and Bellway. The spread is such that only two group clients (names undisclosed) represented more than 3% of FY19 operating income.
The pattern of business is not static and under its new leadership, the ethos has changed from a loose confederation of marketing services businesses to a connected network supporting clients as a creative partner. CEO James Clifton was previously head of the group’s bigdog agency, which has now been merged with krow. Other group agencies have also been merged during FY19, with a shared service platform now operational that provides finance, IT and HR. The culture has been adapting effectively to date, with the internal communications platform facilitating quick response times for new business enquiries that require the resources of multiple agencies within the group and enabling a unified pitch.
Improving margins
The Mission reports its profits on an adjusted basis, adding back exceptional items (none in either FY18 or FY19), acquisition adjustments (FY19: £1.32m vs FY18: £1.01m) and start-up costs (FY19: £0.43m vs FY18: £0.14m). The acquisition adjustments are a combination of movements in fair value of contingent consideration (net upwards in FY19 vs net downwards in FY18) and the amortisation of other intangibles recognised on acquisitions.
The group regularly has start-up costs, as new activities or new geographies are added and ‘road-tested’ before being adopted (or closed if they are not performing to target). For the year just reported, the start-up costs reflect the opening of new offices in China and Germany. The sports marketing offering, Mongoose, started three years ago, has been a notable success. Mission also runs a technology incubator, FUSE. Its most advanced project is an asset tracking business, Pathfindr, which increased its revenues to £0.9m from £0.5m in FY18.
The table below shows the split of turnover and revenue between segments and the operating margin progression. Management’s own target is that the adjusted operating margin should continue to increase with a target of 14% by FY21. The margin expansion is predicated on management’s targeted revenue growth of 5%+ per year. The current COVID-19 pandemic will doubtless make the progression towards this less smooth, but much depends on the length of the disruption in the short to medium term and the longer-term hit to the economy.
Exhibit 1: Segmental reporting and margins
£000s |
FY18 |
H119 |
H219 |
FY19 |
Turnover – Divisional split |
|
|
|
|
Advertising & Digital |
96,615 |
49,746 |
59,675 |
109,421 |
Exhibitions & Learning |
17,488 |
9,860 |
10,301 |
20,162 |
Media Buying |
36,473 |
18,195 |
12,659 |
30,855 |
PR |
9,340 |
4,499 |
6,154 |
10,653 |
Total |
159,916 |
82,300 |
88,790 |
171,091 |
Turnover growth year-on-year |
|
|
|
|
Advertising & Digital |
18.4% |
15.1% |
11.8% |
13.3% |
Exhibitions & Learning |
45.1% |
6.6% |
25.0% |
15.3% |
Media Buying |
-19.4% |
-13.2% |
-18.4% |
-15.4% |
PR |
16.8% |
-4.2% |
32.5% |
14.1% |
Total |
8.9% |
5.4% |
8.5% |
7.0% |
Operating income |
|
|
|
|
Advertising & Digital |
61,805 |
31,560 |
32,950 |
64,510 |
Exhibitions & Learning |
5,202 |
2,361 |
2,865 |
5,226 |
Media Buying |
3,469 |
1,880 |
1,814 |
3,694 |
PR |
7,109 |
3,359 |
4,183 |
7,542 |
Total operating income |
77,585 |
39,160 |
41,812 |
80,972 |
Gross margin |
|
|
|
|
Advertising & Digital |
64.0% |
63.4% |
55.2% |
59.0% |
Exhibitions & Learning |
29.7% |
23.9% |
27.8% |
25.9% |
Media Buying |
9.5% |
10.3% |
14.3% |
12.0% |
PR |
76.1% |
74.7% |
68.0% |
70.8% |
Total |
48.5% |
47.6% |
47.1% |
47.3% |
Central costs |
69,127 |
35,545 |
36,535 |
72,080 |
Operating profit |
8,458 |
2,616 |
5,278 |
8,893 |
Adjusting items |
1,461 |
999 |
861 |
1,860 |
Adjusted operating profit |
9,919 |
3,615 |
6,139 |
10,753 |
Adjusted operating margin to turnover |
6.2% |
4.4% |
6.9% |
6.3% |
Adjusted operating margin to revenue |
12.8% |
9.2% |
14.7% |
13.3% |
Source: The Mission Group accounts
Banking facilities in place
As indicated in February’s trading update, a busy close to FY19 sucked in more working capital around the balance sheet date. The group paid out additional contingent acquisition costs of £2.7m in FY19, from £1.7m in FY18. It has outstanding obligations totalling £8.9m, to be met by a combination of cash and shares, falling as shown below. However, we note that these sums are dependent on post-acquisition profit performance mostly for FY20, which may be difficult to meet given the circumstances.
|
Exhibit 2: Acquisition obligations |
|
|
Source: The Mission Group accounts |
Year-end net debt of £4.9m (non-IFRS 16) consisted of cash of £5.0m and a bank loan of £10.0m (the balance being unamortised arrangement fees), with the loan running to September 2021. The total facility (revolving credit) is for £20.0m, recently extended by £5.0m, with an option to roll-out for a further year. The interest rate is based on Libor plus 1.25–2.00%, depending on group leverage. Management targets leverage of less than 1.5x adjusted EBITDA (non-IFRS 16) and the figure for FY19 was comfortably below this at 0.4x. Including earnouts, this limit is 2.0x, well above the 1.1x figure for the group for FY19. These management targets are below those set by the banks, giving plenty of headroom.
Exhibit 3: Financial summary
£'000s |
2016 |
2017 |
2018 |
2019 |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Turnover |
|
|
144,096 |
146,912 |
159,916 |
171,091 |
Cost of Sales |
(78,198) |
(78,321) |
(82,331) |
(90,118) |
||
Gross Profit |
65,898 |
68,591 |
77,585 |
80,972 |
||
EBITDA |
|
|
9,677 |
10,873 |
11,334 |
12,225 |
Operating Profit (before amort. and except.) |
|
8,202 |
9,597 |
9,919 |
10,753 |
|
Intangible Amortisation |
(645) |
(944) |
(1,286) |
(1,980) |
||
Headline Adjustments |
0 |
(1,889) |
(546) |
(990) |
||
Other |
0 |
(11) |
(1) |
69 |
||
Operating Profit |
7,557 |
6,753 |
8,086 |
7,852 |
||
Net Interest |
(487) |
(473) |
(735) |
(668) |
||
Profit Before Tax (norm) |
|
|
7,715 |
9,113 |
9,183 |
10,154 |
Profit Before Tax (FRS 3) |
|
|
7,715 |
7,224 |
7,722 |
8,294 |
Tax |
(1,619) |
(1,704) |
(1,710) |
(1,868) |
||
Profit After Tax (norm) |
6,097 |
7,409 |
7,473 |
8,286 |
||
Profit After Tax (FRS 3) |
6,097 |
5,520 |
6,012 |
6,426 |
||
Average Number of Shares Outstanding (m) |
82.7 |
82.9 |
83.3 |
84.1 |
||
EPS - normalised (p) |
|
|
7.8 |
9.2 |
8.7 |
9.5 |
EPS - normalised and fully diluted (p) |
|
|
7.5 |
9.0 |
8.5 |
9.0 |
EPS - (IFRS) (p) |
|
|
7.3 |
6.5 |
7.1 |
7.5 |
Dividend per share (p) |
1.5 |
1.7 |
2.1 |
2.3 |
||
Gross Margin (%) |
45.7 |
46.7 |
48.5 |
47.3 |
||
EBITDA Margin (%) |
6.7 |
7.4 |
7.1 |
7.1 |
||
Operating Margin (before GW and except.) (%) |
5.7 |
6.5 |
6.2 |
6.3 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
86,975 |
91,777 |
107,002 |
107,416 |
Intangible Assets |
83,075 |
87,951 |
96,121 |
95,859 |
||
Tangible Assets |
3,576 |
3,513 |
10,858 |
11,360 |
||
Investments/ other |
324 |
313 |
23 |
197 |
||
Current Assets |
|
|
34,098 |
41,357 |
46,476 |
47,117 |
Stocks |
485 |
668 |
850 |
1,091 |
||
Debtors |
32,611 |
34,829 |
39,727 |
40,998 |
||
Cash |
1,002 |
5,860 |
5,899 |
5,028 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(30,616) |
(36,691) |
(40,986) |
(40,352) |
Creditors |
(28,366) |
(34,191) |
(40,986) |
(40,352) |
||
Short term borrowings |
(2,250) |
(2,500) |
0 |
0 |
||
Long Term Liabilities |
|
|
(13,529) |
(16,289) |
(24,896) |
(21,946) |
Long term borrowings |
(10,315) |
(10,708) |
(9,886) |
(9,927) |
||
Other long term liabilities |
(3,214) |
(5,581) |
(15,010) |
(12,019) |
||
Net Assets |
|
|
76,928 |
80,154 |
87,596 |
92,235 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
8,492 |
11,975 |
11,684 |
10,454 |
Net Interest |
(422) |
(425) |
(826) |
(626) |
||
Tax |
(1,869) |
(1,299) |
(1,906) |
(1,805) |
||
Capex |
(1,658) |
(1,521) |
(1,361) |
(2,169) |
||
Acquisitions/disposals |
(3,580) |
(2,921) |
(670) |
(2,839) |
||
Financing |
(169) |
(65) |
(1,938) |
(2,096) |
||
Dividends |
(1,276) |
(1,333) |
(1,695) |
(1,831) |
||
Net Cash Flow |
(482) |
4,411 |
3,288 |
(912) |
||
Opening net debt/(cash) |
|
|
11,224 |
11,563 |
7,348 |
3,987 |
HP finance leases initiated |
(90) |
(84) |
0 |
0 |
||
Other |
233 |
(112) |
73 |
0 |
||
Closing net debt/(cash) |
|
|
11,563 |
7,348 |
3,987 |
4,899 |
Source: Company accounts
|
|
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