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If you’re a keen investor in the media sector – especially marketing services companies focused on the internet – you should be excited at present as these are heady days indeed for this market.

The last set of figures from the Internet Advertising Bureau – for the 12 months to December 2006 – showed internet advertising in the UK had grown 41.6 per cent year-on-year and is now worth a cool £2 billion. By comparison, the rest of the media sector – television, press, classifieds, directories and outdoor advertising – struggled to post a collective gain of just 1.1 per cent.

All sections of the internet world saw improvement. Online display advertising jumped 22.5 per cent to £453.7 million and search engine optimisation (where companies pay to come higher in the listings when anyone conducts an online search) maintained its lead, accounting for 57.8 per cent of all online spend. Online classified advertising jumped 18.8 per cent to £379 million while email campaigns are now worth £17.5 million.

Many changes are driving – and will continue to drive – the online world forward, not least the growth of broadband (in which the UK is leading the world) and online shopping, and the explosion of consumer-generated content sites (think YouTube).

However, while all of the above is welcome, investors need to realise that the internet is still only 11.4 per cent of the total advertising market of £17.6 billion. Television and press display (advertising pages in newspapers and magazines) are still worth twice as much in monetary terms and offline classified advertising and direct marketing are still bigger than the internet, accounting for 16.2 per cent and 13.2 per cent of the market respectively.

Moreover, each of these traditional areas is not being replaced, but rather is being influnced in many new, and often surprising, ways by the online world. This is likely to accelerate, leading most observers to believe that only those firms that can deliver an integrated service – one combinng traditional services with the best of the digital/online age – will be the ones who survive and thrive.

Creston – the ultimate integrated marketing house
One person who is firmly convinced of this is Don Elgie of Creston. ‘To me it is self-evident that those firms combining the best of the off and online world will win out – and we have spent the best part of six years building a diversified marketing group with expertise to exploit this dynamic and fast-changing market,’ he says.

A careful acquisition strategy (‘we only buy well run businesses and don’t contemplate turnaround situations’) has vaulted Creston to be the fourth largest quoted marketing company in the UK. Its operation consists of four divisions: Brandcom, an advertising and communications specialist; Insight, a qualitative and quantitative research operation; Public Relations, focused on technology and healthcare; and Marcoms, specialising in direct marketing – both online and traditional.

In May last year Creston completed the acquisitions of ICM Group for a maximum of £37.2 million and Tullo Marshall Warren for a maximum of £38.3 million. The year 2006 saw the launch of a new online market research venture and ‘an online brand management and influencer’ initiative. In December it snapped up PAN, one of the UK’s largest independent healthcare advertising and communications companies, for a maximum of £18.8 million.

At the interim stage to September, fees earned leapt 49 per cent to £30.8 million and profits before tax came in 35 per cent ahead at £4.9 million. Earnings hit 6.93p and for the full year house broker Panmure Gordon is hoping for earnings of 14.53p, giving the group a forward p/e of 12.8.

‘The strength of our digital offering continues to win us new business, as does the recently announced alliance with Latitude, the UK’s leading search engine marketing
agency. Online digital revenues on an annualised basis are approximately £10 million. I believe we are fit for purpose both in the UK and elsewhere,’ says Elgie.

Media Square – bloodied but unbowed
Media Square, the once-revered marketing services venture led by Jeremy Middleton, suffered a bloody nose following its shock September profits warning. Long known as
one of the fastest-growing ventures in the sector, the group disappointed followers when it announced that integration teething problems relating to the major 2005 acquisition of Marketing Services Group (MSG) from Huntsworth would hit profits. Subsequent results for the six months to August revealed a dramatic fall in pre-tax profits from £1.3 million to £295,000, despite sales more than tripling to £99.6 million, with higher than expected costs impairing profitability.

Nevertheless, a recent pre-close statement for the year to February just ended put things in perspective. Middleton chronicled the recent restructuring, noting the successful ditching of non-core businesses for substantial multiples (admittedly SBGFinex was sold at a loss), with proceeds used to bring net debt below £16 million. When annual figures are announced in June, he expects to report 40 per cent-plus revenue growth north of £103 million, boosted by a 12-month turn from MSG, although exceptional costs will be higher than originally expected. With the bulk of these business issues resolved, Middleton is now ‘more confident about the base level of profitability’ from which Media Square can grow and he insists brands such as The Gate Worldwide, SEA, Coutts Retail Communications and Holmes & Marchant remain strong.

Interestingly, Media Square said it was looking to boost its presence in the digital space (where it currently derives 12 per cent of revenues). It is targeting 30 per cent of sales to come from the digital business by 2010. To signal his confidence in prospects, Middleton recently bought 500,000 shares, increasing his holding to 3.44 per cent.

The current £36.1 million market price tag looks way too low for a £100 million-plus revenue concern with a previous record of outperforming the sector. It has plenty of recovery appeal.

Deal Group Media – Moss puts his house on the line
Adrian Moss, founder of online marketing intermediary Deal Group Media (DGM), has just sold his house in order to invest £250,000 into the company, despite heavy losses last year.

Fiery Moss floated minnow DGM in 2000 and saw it grow to almost £100 million in 2005 before the shares tumbled after a major customer loss. He was then persuaded to hand over the controls and focus instead on overseas business, before leaving last June ‘for strategic reasons’.

Now Moss is back in the driving seat, re-appointed as chief executive in December in time to issue a £2.2 million operating loss for the year ending that month. The majority of this deficit was made up of a £1.8 million technology investment, of which £700,000 is non-recurring.

DGM provides search engine and affiliate marketing services for advertisers and sells advertising on behalf of a network of media owners. A cut-throat market in the UK for such services has been responsible for much of the company’s woes, prompting Moss to slash costs. Moss claims that DGM is one of the only companies offering ‘a multi-channel trading environment’ and enthuses about new technology offerings in the pipeline.

However, his real fervour is reserved for the Asia Pacific region, ‘where the big opportunity is’. The move is client led and Moss explains that DGM’s experience should see it thrive in a ‘less-complicated, early-stage’ market with a triple product offering to sell from day one. To accelerate growth

in a region that increased threefold last year, £1 million is being poured into a new base in Singapore and an imminent Indian launch.

Despite increased competition, this is still a fast-growing market and the group was marginally EBITDA-positive in the second half. House broker Evolution foresees a small loss this year and a £1 million pre-tax profit in 2008. Not for widows or orphans, but an intriguing punt nevertheless.

IPT – a leader in online direct marketing
One of our recommendations from last year, online marketing specialist Interactive Prospect Targeting (IPT), took a hefty tumble following news that net fee income for the first half of 2007 will be below 2006, with margins in certain areas of the business coming under pressure.

It could be argued that the share price fall looks exaggerated, given that IPT unveiled stellar numbers for an exciting 2006 and is still forecasting turnover ‘at least’ 40 per cent ahead of last year for 2007.

In 2006, pre-tax profits at the email marketing specialist surged 82 per cent north to £4.4 million on turnover up 77 per cent to £24.1 million. Operating margins increased from 15 per cent to 20 per cent. Basic earnings increased by 47 per cent to 8.4p and headline earnings doubled to 9.6p.

As well as developing and launching new websites and products, 2006 was a year of acquisitions for IPT, among them Direct Excellence – a key step in the development of the group’s presence in online market research – and Directinet, the number one direct marketing player in France.

This key deal gave IPT a leadership position in the provision of online direct marketing services in both the UK and France, which together account for 64 per cent of the European online advertising market.

Cagney – 70 per cent digital growth
Sector-leading margins and cross referrals between thriving group divisions underscore the investment case at communications buy and build play Cagney, which joined AIM in February 2006 with an acquisitive flurry.

Pro forma figures for the year to December 2006 revealed underlying operating profits for trading companies increasing from £400,000 to £1.5 million – growth of more than 250 per cent – from turnover of £8.2 million.

Paul Simons, chief executive, was keen to flag up the successful integration of the four founding businesses – brand consultancy business BrandAid, advertising and design outfit Chick Smith Trott, promotional marketing concern Cubo and PR firm The Media Foundry – and pointed out that 37 new clients were won during a successful 2006.

As well as good levels of organic growth, Simons highlighted excellent operating margins (before Plc costs) of 25 per cent, ahead of many sector peers and driven by the enhancement of the performance of acquisitions and resultant ‘natural collaboration between our businesses’.

Recent campaign highlights include Chick Smith Trott’s successful advertising drive for National Savings & Investments (a campaign featuring Alan Sugar) and the relaunch of BWIA as Caribbean Airlines, which took place in January 2007. ‘That was a great feather in the cap for us,’ explains Simons, ‘as we worked with top-level management to rebrand the airline, getting involved with everything from brand strategy to the design of the aircraft.’

Since the year-end, Cagney has completed the earnings-enhancing acquisition of consumer research agency Tree, which combines data analysis with psychological research, allowing clients such as O2 to predict consumer behaviour.

‘The customer information side of life is becoming more important,’ Simons tells GCI, ‘and data analysis knowledge is power.’ He continues to search for further sensibly priced acquisitions with digital advertising, media buying and direct marketing targets under consideration.

His vision is to build a portfolio of ten to 12 businesses representing ‘the waterfront of marketing services specialisations’, with this portfolio approach reducing exposure to any single revenue stream, de-risking Cagney as an investment. It also brings ‘multiple-entry points’ to a client, providing Cagney cross-referral opportunities to bag a greater share of customers’ marketing budget.

The Mission Marketing Group – fast, flexible and cost-effective
Pro forma figures to December 2006 from The Mission Marketing Group, showed 22 per cent growth in pre-tax profits to £3.74 million on turnover lifted 15 per cent to £54.1 million. Diluted earnings sped 23 per cent higher to 11.86p and a maiden dividend of 1p was proposed. Year-end cash was £3.86 million.

Chief executive Iain Ferguson, who argues that clients are looking for agencies that can do things faster, more flexibly and more cost-effectively than ever before, flagged up a strong performance across the board, with the important Bray Leino acquisition (completed at float in April 2006) meeting or exceeding targets.

Ferguson says clients are using more of the group’s services in more of its locations as the business expands and the group’s new media and online operations are performing well, having delivered near 70 per cent sales growth last year. Recent acquisitions BDW, whose clients include many of the UK’s best-known builders and estate agents, and April-Six (both completed since the year end) have taken the group into the fast-growing property and IT marketing sectors, further protecting the business against potential cyclical downturns. The shares look good value indeed.