*Our DCF valuation model is currently being refined.
The Mission Marketing Group (TMMG) are a UK centralised marketing firm who are responsible for a great range of marketing and advertising campaigns. More recently TMMG have been expanding out of the UK market, growing to include agencies in Asia and US. David Morgan the current chairman took over in 2010 when the firm restructured the board. Previously he was responsible for the founding and growth of TMMG’s largest agency ‘Bray Leino’, and is well regarded industry wide. When the present board took over, the firm had a high level of debt, which it has since reduced to a respectable level of leverage.
Bull View – Brandon
In this section I will be discussing TMMG from a ‘Bull’ viewpoint. I will be focusing particularly on the financial performance and acquisition policy of the company.
Over the past financial year TMMG has seen a strong improvement in the activities of the firm boasting a revenue increase of 7% in 2014. With a turnover increase of 1%, this would suggest a narrowing of 3rd party costs and thus improving margins; this focus on reducing costs has been carried forwards throughout the firm. This increases investor comfort and thus also firm profits, which is an attractive attribute to an investor. TMMG’s margins are now better than all but one UK based marketing firm. Over the long term the firm with the greatest competitive advantage should achieve comparatively excellent results both in periods of trouble and expansion, TMMG has a small advantage of this type resulting from the low cost approach enveloped from management. Seldom will the firm with the highest level of cost control suffer the greatest in a market-wide downturn.
The firm have been reducing their debt equity ratio over the past few years. Although excessively high debt was incurred historically, the management have a good attitude to debt reduction. This should reduce the net interest payment required by the firm, improving the bottom line and shareholder returns. furthermore this will aid the firm’s credit rating further compounding the benefits. This shows both sensible management whilst also helping the bottom line for shareholders.
TMMG has an active acquisition policy, seeking to acquire agencies which expand the firm’s global reach, they have also been active domestically consolidating their market position. Acquisition expenditure hit £2.1m in 2014 from £0.1m in 2013. Acquisitions can be a risky business operation, in order to moderate the level of risk associated with activities such as these, TMMG has structured the transactions through the medium of means tested pricing, meaning that if the acquisition is less successful than previously anticipated, a lower price is paid. To the investor this aids to set-aside worries about the capital allocation within the firm.
The expansion of director shareholdership is pleasing. Providing an encouraging indicator of self belief and optimism, whilst also helping to subdue the principal-agent problem.
Bear View – Daniel
TMMG appears undervalued across a range of standard measures. In this section I will look at the ‘bear’ views on TMMG and try to find out if the lower-than-average valuation ratios are justified. The three main areas I will look at are the acquisition policy of the group, the firm’s level of debt, and the long-term returns they can expect to achieve.
Acquisitions play a major role in the company’s strategy. This brings with it many risks for investors. If TMMG are overpaying for these bolt-on agencies then shareholders are losing value. Due to the large amounts of goodwill on TMMG’s balance sheet, the impact of impairment is heightened. The company already has a history of this; during 2008 and 2009, £18.5 million of goodwill was impaired. This suggests a lack of financial discipline in making acquisitions, and perhaps that management are searching for growth without regard for price.
According to recent filings, TMMG has £11 million worth of debt on its balance sheet. This compares with a tangible book value of (-£6.8 million). The latter figure, perhaps overcautiously, doesn’t take into account intangible assets of £77 million. I believe this debt/tbv ratio could be an explanation for the relatively low p/e ratio. This, coupled with the cyclical nature of marketing companies, means there does not exist a margin of safety. Therefore, for TMMG to be a successful investment, economic conditions would have to remain stable for the foreseeable future so that TMMG can continue to reduce the level of debt.
Marketing companies such as TMMG are very much people businesses. This can be a substantial risk for long-term shareholders as the value of the company is less likely to be stored in intangible assets such as brand names and strong reputation, but instead come from irreplaceable employees and management. If true, then these employees can demand higher remuneration at the expense of shareholder returns. Not only this, but at some point in the future these employees may leave the company. If they then take clients with them, this could lead to a loss of business for TMMG. This, along with strong competition in the industry, leads me to believe that TMMG has no economic moat and hence in the long term will not be able to sustain excess returns on capital. This however would not suggest TMMG is a poor investment. If the stock price is low enough and TMMG continues to generate strong profits, large returns can be made in the future.
On balance BearandBull would recommend an investment in TMMG. We believe that the continued growth of the company’s profit will eventually be reflected in the share price. This isn’t to say that there are no risks involved; The state of the balance sheet keeps our outlook cautious and is the main factor in our decision to give a low weighting of 5% to the stock in our portfolio. In a bull market we would expect this to be a highly successful investment, and we will more than likely see outperformance above that of the wider market. In a bear market however, the stock is exposed to greater risks than the average investment and thus we would expect a below average performance. Time will tell how accurate our analysis has been, but in the short term we will look to take advantage of share price volatility by buying more shares, lowering our average cost basis.
Disclaimer – This site is purely for an educational purpose and we do not advise using our analysis as any sort of financial guidance.