No dividend until 2025: Is Mission Group still a recovery play?

UK advertising and marketing specialist Mission Group (TMG: 14p) has dropped an almighty bombshell on shareholders that prompted a 58 per cent share price collapse.

Less than four weeks ago, the directors were maintaining full-year guidance which underpinned house broker Canaccord Genuity’s pre-tax profit estimate of £7.9mn. Although revenue targets (8-9 per cent annual growth) should still be achieved, profitability will be materially worse than the board had been forecasting, so much so that headline pre-tax profit is now expected to be no more than £3.1mn. Around £1.2mn of the £4.8mn shortfall is attributed to costs relating to a business that will be classified as discontinued at the year-end.

The major issue is more challenging headwinds across the consumer and lifestyle, property, mobility and other technology market segments, although client activity in the US technology sector continues to recover. In particular, a few large accounts have cut spending at short notice, meaning that revenue from these activities will not be sufficient to cover the cost of the resources that were put in place to meet the anticipated demand. An operational review is being carried out to target savings to realign the group’s cost base.

The third reason for the profit shortfall is that the directors are forecasting a finance charge of £2.4mn on group borrowings, or 50 per cent higher than Canaccord had been expecting. Net debt has increased from £14.9mn on 30 June 2023 to £25.5mn, partly due to the working capital outflow resulting from the increase in turnover. This has led to a higher level of trade debtors which will not be converted into cash until early next year.

Furthermore, although the group is currently compliant with the net debt to cash profit covenant on its debt facilities, the reduced level of profitability means that there will be a breach on the next test at the year-end. The directors are in “constructive discussions” with bankers regarding a covenant waiver and are actively targeting a deleveraging of the balance sheet, hence why the recently announced interim dividend (0.87p) has been axed to save £0.79mn of cash. Canaccord does not expect a resumption of dividend payments until 2025.

Share price plunge

In the circumstances, it’s hardly surprising that Mission’s share price has collapsed. Not only has dividend support been withdrawn, 2023 earnings per share (EPS) estimates have been slashed by 60 per cent to 2.6p, and year-end net debt of £24.3mn is forecast to be £7.2mn higher than previously forecast. At the current share price, the group’s enterprise valuation of £38mn equates to seven times downgraded 2023 operating profit estimates of £5.5mn.

That said, the full benefit of the cost reduction programme will be seen in 2024 when Canaccord predict a recovery in operating profit to £9.2mn (downgraded from £10mn) and a reduction in net debt to £16.8mn. True, there is a high degree of risk over these estimates, but equally the debt reduction programme in the next 12 months could see a transfer of economic interest in the entity from debt holders to shareholders that equates to more than 50 per cent of Mission’s market capitalisation of £13mn. Also, deleveraging reduces financial risk and supports an unwinding of the elevated equity risk premium embedded in the current share price.

So, having advised taking a watching brief on the shares last month (‘Profits dip at Mission – but directors have plans to turn it around’, 27 September 2023), I can see medium-term recovery potential in the bombed-out shares. Hold.