Mitchell Communication Group Limited MCU 29 September 2008
Strong result by Australia’s leading Media Agency despite weak market sentiment
Recommendation: Buy Investment Rationale MCU is Australia’s largest diversified media group by billings. It has a strong presence in digital advertising through the emitch brand, which acquired Mitchell Partners in early 2007. MCU has three key sources of competitive advantage - its established Mitchell brand and the scale benefits coming from being the leader; the now well established leadership of emitch in the digital and online space; and the breadth of competencies and ‘one-stop-shop’ attraction to customers flowing from the Mitchell-emitch combination and a continuing flow of complementary acquisitions. Its product suite removes for its customers the burden of dealing with multiple agencies, providing complete marketing solutions across the full range of media. The severe price fall has discounted MCU’s yield and growth prospects and its emitch operations will continue to enjoy the very rapid growth of broadband and online media. Event FY08 NPAT of $18.2m was in line with market, underpinned by the first full year’s contribution from Mitchell, organic growth and acquisitions. FY08 gross billings rose 24% on a proforma basis to $1,175m, with Q4 billings up 65% on 4Q07. Total revenues were $191m, up 46% on a proforma basis. EBIT of $32.3m was similarly up 38%. NPAT was $19.5m pre acquisition intangibles amortization with reported profit $18.2m. EPS rose 44% to 6.5¢. All recent acquisitions were accretive and 1.4m shares were bought back at an average cost of $0.66. A final 2.1¢ dividend took the full-year franked dividend to 3.9¢. Net operating cash flow fell 18% to $25.9m mainly due to the timing of tax payments and a higher base last year. Working capital was strong with cash flow before interest and tax above reported EBITDA of $33.9m. Debt increased from $38.5m to $60m with acquisitions. A cash figure of $73m reflects client money received not yet placed with media companies. Interest revenue from this offsets borrowing costs. FY08 EBIT interest expense cover was 7.5x but may slide towards 6x in FY09. Impact The Media division grew revenue by 13% to $41.3m, with operating leverage driving EBITDA up 41% to $12.1m. Media billings firmed 21% to exceed $1bn. The Diversified group achieved 38% revenue growth with EBITDA up 52%, mainly driven by Stadia Media and recent acquisitions. The Digital business was, as usual, a standout performer, with revenue up 69% to $109.8m and EBITDA up 49% to $17m. EBITDA margin fell 2% to 15.5% reflecting high growth in the lower margin, search-based Columbus brand. Digital bookings surpassed $100m for the first time and in Q4 were up 65% on the pcp, versus 27% online ad spend in Australia, clearly growing at twice the market rate in Australia. MCU also announced the acquisition of Vivid, which extends the group’s footprint in digital media services and adds significant technology competencies. The $13m Perth-based acquisition was funded by cash and debt. In FY08 it achieved $7m of revenue and $2m in EBITDA. MCU says there has been a powerful start to FY09 across all divisions and ahead of last year. Cross-selling benefits from recent acquisitions are being pursued and expected to start delivering over the next few months. While the +10% FY09 NPAT growth target issued in June was not repeated, CEO Stuart Mitchell expects “to surpass last year’s performance in all spheres” and “the traditional media-buying business continues to go from strength to strength”. The macro environment is challenging and might hold back earnings but we have allowed for this in our estimates which include from Vivid and other recent acquisitions. Recommendation Impact The price discounts the prospects. MCU is a definite Buy at current levels.
MCU Price at posting:
57.0¢ Sentiment: None Disclosure: Not Held
