Booking record growth

Edel 12 February 2018 Update
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Edel

Booking record growth

Media

Scale research report - Update

12 February 2018

Price

€3.35

Market cap

€76m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt as at September 2017

€50.3m

Business description

Edel is one of Europe’s leading independent media groups. It is both a publisher and a producer. Edel offers the music, film and book industry a unique full-service model, covering marketing and production as well as the distribution of audio content, video content and books.

Bull

Diversity of revenue streams.

Full-service third-party offering.

Resurgence of vinyl.

Bear

Small free float.

Lack of comparators for valuation.

Spotify dominance in streaming.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5757

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Edel’s results to September 2017 were comfortably ahead of earlier guidance, revised post year-end. Revenues were boosted by good demand at Optimal Media, particularly for vinyl records, increased music streaming and by a good performance in cookery and health-related books. The capital investment programme is boosting market positioning while the earlier refinancing has reduced the interest burden. The group is majority family-owned with limited market liquidity, which partly explains the modest rating. The shares trade at a discount to global entertainment content and publishing companies, and carry an attractive yield.

Market forecasts revised up post year-end

FY17 revenues of €198.1m were well ahead of previous guidance (€187m). FY18e consensus revenue forecast has been raised from €194.9m to €203m, while FY19e numbers show 3% further growth. This primarily reflects a strong performance from Optimal Media, where revenues were up 12% in FY17. Sales were buoyed by strong demand for vinyl records (+40%), benefiting from the company’s market reputation for high quality and for being a ‘one-stop-shop’, as well as additional business from Universal, for which Optimal now carries out central storage and worldwide distribution of all vinyl products. Difficult underlying markets for other delivery media (CDs, DVDs) may play in Edel’s favour as less efficient players withdraw from the market, although rising input costs will be less helpful. Kontor New Media also performed well, boosted by market growth in music streaming and its ability to handle distribution end-to-end from rights acquisition right through to the streaming.

Investing in product and capacity

The bulk of the spending programme at Optimal is now complete, with the benefits starting to show through in the numbers. The group has also been investing in high-quality book-binding, which will allow it to reduce external costs for its own publishing imprints and to offer full service to third parties.

Valuation: Discount to content, publishing

We have maintained the same valuation approach as our previous notes, comparing the rating of the company with the global media subsectors of entertainment content and publishing. Edel’s shares trade on a significant discount on EV/sales, most likely reflecting the manufacturing contribution. On forward EV/EBITDA, the discount is 36%. On a P/E basis, the multiple is 12.4x vs 21.1x.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

Adjusted
EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/16

180.2

6.0

0.15

0.10

22.3

3.0

09/17

198.1

6.8

0.19

0.11

17.6

3.3

09/18e

203.0

8.6

0.27

0.11

12.4

3.3

09/19e

210.0

9.2

0.28

0.13

12.0

3.9

Source: Edel accounts, broker estimates (Montega)

Financials

Exhibit 1: Full year to 30 September 2017 vs prior year

€000s

2017

2016

% change

Year end 30 September

HGB/German GAAP

HGB/German GAAP

Income statement

Revenue

198,146

180,162

+10

EBITDA

16,131

15,261

+6

EBITDA margin (%)

8.1

8.5

Profit before tax (as reported)

6,815

6,031

+13

Net income (as reported)

4,459

4,165

+7

Source: Edel accounts

New consensus forecasts are for EBITDA growth of 12.2% in FY18 and 5.0% for the year after, predicated on top-line growth of 2.4%, followed by 3.4% in FY19, showing the efficiency gains from the capital investment programme starting to come through. The growth at the pre-tax level shows the benefits of the new financing arrangement put in place in Q1/Q217, with interest costs falling to €2.2m from €2.7m in the prior year. These figures indicate the EBITDA margin rising from 8.1% for FY17 to 8.9% in FY18 and to 9.0% for FY19.

The capital investment programme of €22m during FY17 (€9.7m in FY16) was focused on upgrading and expanding the facilties at Optimal Media to meet market demand. Further sums of €11m and €6m are built into forecasts for FY18 and FY19 respectively. The investment programme also includes the expansion of Kontor New Media, which has helped to increase its attraction as a one-stop-shop partner for the major global rights owners. Net debt at the year-end was €50.3m, slightly lower than had been projected, with the expectations for end FY18 to be at a broadly similar level, before starting to fall away from the following year.

Valuation

The valuation framework for Edel is complicated by the range of the company’s activities, from pressing of CDs for third parties through children’s animated TV, to being the market-leading publisher of cookery books and handling logistics and services for the world’s largest music publishers. Any peer group comparison is therefore inevitably flawed. Given these constraints, rather than pick out a set of inadequate peers, we have looked globally across the key subsectors in which Edel operates, particularly entertainment content and publishing at key valuation metrics. We have stripped out the unprofitable companies from the EV/EBITDA and P/E calculations, as well as any obvious distortive outliers.

Exhibit 2: Sectoral valuations for related activities

P/E (x)

EV/Sales (x)

EV/EBITDA (x)

Last

FY 1

FY 2

Last

FY 1

FY 2

Last

FY 1

FY 2

Publishing

24.3

21.0

15.8

3.9

3.3

2.9

12.5

11.3

10.0

Broadcast & Entertainment

18.9

21.2

16.6

1.9

1.8

1.7

10.9

10.5

9.0

Edel

17.3

12.1

11.7

0.6

0.6

0.6

7.7

6.9

6.6

Source: Bloomberg, Edison Investment Research. Note: Prices as at 8 February 2018.

It would be expected that the multiple to sales would be lower due to the large volumes of third-party revenues, which will also distort margin comparisons. In this context, Edel’s share price looks to be well below the global market on both P/E and EV/EBITDA multiples, partly reflecting its comparatively modest size and limited liquidity. The current rating does not reflect the higher rate of growth.

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