Friday, 4 July 2014

Value Small-Cap of the Month: The Mission Group (TMMG) - Media Sector

Every month, I will be focusing on a compelling mid- or small-cap value story. This month, I a going to focus on a UK media company called The Mission Group (code LON:TMMG), whose current market value is £39m, and is listed in the AIM segment of the London market.

What Do They Do?

The Mission Group is comprised of a number of marketing, advertising and public relations agencies (11 in total), based in the UK, San Francisco and Singapore. Key clients include Tesco, Volvo, Scania and Virgin Atlantic. 

You can find a lot more information about The Mission on their web site.

Where is the Value?

In simple terms, The Mission is cheap on a number of traditional value metrics including forecasts P/E, price/book value and price/sales (Figure 1):

1. TMMG is Cheap!
Source: Stockopedia

For lovers of combining Value and Quality criteria, The Mission comes out extremely well on Piotroski's combination of low price/book value ratio (0.6x) and his F-score of quality, where the Company scores a high 8 out of a possible 9. So The Mission looks great value at least. 

The Total Shareholder Yield also looks strong, combining a 2.3% dividend yield with a £1.7m reduction in net debt worth another 5% or the Company's market cap, so a total yield of well over 7%, in line with the Free CashFlow Yield of just under 10%. 

What about Momentum?

Secondly, price momentum over the last 3 and 12 months has been very positive, with the shares gaining some 16% and 82% over these two periods respectively. 

2. TMMG Has Already Made Some Impressive Price Gains

3. But There is a Long Way to Go To Regain Prior Highs

But back in late 2007, the stock reached a high of 150p, if only briefly. So even after such impressive gains over the last 12 months, it would need to nearly triple to get back to historic highs. 

And Is There a Reason to Buy the Company Now?

Key highlights from The Mission's 2013 Annual Report were encouraging:
  • Revenue +9% to £51.6m;
  • Profit Before Tax +3% to £5.0m;
  • Net Debt sharply lower to £10.7m, -£1.6m versus FY2012;
  • Annual dividend of 1.0p put in place, versus nil before.
So operating trends certainly look promising, while back in February this year, the Investor's Chronicle publication highlighted The Mission as a very cheap recovery stock. 

A key driver for the Company, as for all advertising-related companies, is the strong underlying economic growth being experienced in the UK, with London the epicentre. Normally, domestic economic growth has a leveraged effect both on top-line revenues (clients want to spend more on advertising) and also on profitability (as the major cost of ad agencies are their staff salaries, plus office rent, which are largely fixed). 

What are the Risks?

  1. Even after nearly halving the debt in 4 years since 2009, there is still nearly £11m of net debt outstanding (Figure 5).That said, this is less than 1.5x the 2014e forecast EBITDA of £7.7m, so normally this should not be a big issue.
  2. The promised boom for advertising from the growing economy may not materialise as expected.
  3. Most of the stated book value is net Goodwill (£71m), so who knows what the true economic worth of TMMG's intangibles like branding, network etc. really is?  

5. TMMG's Balance Sheet

Investment Summary

Overall then, TMMG is very cheap, with a share price that is moving up nicely (has broken through recent price highs) but which has plenty of scope to move up further before hitting all-time historic highs, together with plenty of leverage to the improving UK economy. 

On Stockopedia's StockRanks system, this all adds up to a near-maximum 99 combined StockRank (Figure 6)!

6. TMMG's Combined StockRank is 99!
Source: Stockopedia

So The Mission (TMMG) is the first company to go into my UK Model Portfolio, at an entry price of 54.75p.


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