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Digital and physical up in harmony

Edel 12 July 2021 Update
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Edel

Digital and physical up in harmony

Media

Scale research report - Update

12 July 2021

Price

€3.10

Market cap

€70m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt at 31 March 2021

€39.4m

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 industries a unique full-service model, covering marketing and production as well as the distribution of audio content, video content and books.

Bull

Full-service, third-party offering.

Resurgence of vinyl.

Strengthened relationship with Universal Music.

Bear

Difficult CD, DVD and Blu-ray markets.

Small free float.

Spotify’s dominance in streaming.

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Edel’s H121 figures showed good progress, with revenues ahead by 11% to €123.3m and an EBITDA margin of 13.0%, up from 9.2% in H120. Digital revenues continued to benefit from the growth of the music streaming platforms, while the continuing popularity of vinyl is supporting results at optimal media. The expansion of co-operation with Universal Music Group bodes well particularly for FY22 and on, with guidance increased also for FY21. The share price is up 83% over the past 12 months yet it continues to trade at a discount to global entertainment and publishing stocks on historical EV/EBITDA and EV/sales multiples, partly due to limited liquidity.

Universal Music agreement

The interim statement highlights good results from across the business, although no breakdown is given. The momentum behind Spotify, Amazon and Apple Music is both helping the digital distribution business of Kontor New Media and providing buoyant markets for the content generation elements of the group, such as Edel Kids and eBooks. While digital music continues its positive trajectory, the resurgence of vinyl has outlived initial expectations, with management citing a 24.7% gain in Germany in 2020, to a market share of 5.5%. optimal media’s future is underpinned by the announcement of a long-term agreement with Universal Music Group, which covers logistics and distribution for the DACH region, Benelux and the Nordics, as well as production of vinyl, CDs, DVDs and Blu-Rays. This is a substantial commitment and strong endorsement of optimal media’s capabilities.

Guidance revised upwards with caution on H2

At the time of the full year report in February, FY21 consolidated net income was guided at €2.0–2.4m, from the €2.7m achieved in FY20. This has now been revised upwards, to a wider range of €4.0–6.0m (reflecting the uncertainty over the tax position). H121 net income was €4.6m, with possible raw material price increases and supply issues being factors that may restrict H221 margins. 2021 group revenue is now guided at €220–230m, up from €207–211m. At the mid-point, this implies 5% growth for FY21, suggesting a degree of caution over H221 prospects.

Valuation: Discount to content, publishing

Key financials

Year
end

Revenue
(€m)

EBITDA (€m)

PBT
(€m)

Adjusted EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/18

209.2

17.3

6.6

0.16

0.10

19.4

3.2

09/19

209.5

16.0

4.4

0.08

0.10

38.8

3.2

09/20

214.1

18.7

7.2

0.12

0.10

25.8

3.2

Source: Edel accounts

We have maintained the same valuation approach as previously, comparing Edel’s rating with the global media subsectors of entertainment content and publishing. The share price has performed well over the past year, picking up in November then again post the annual results and the Universal Music announcement in March. The shares continue to trade at a significant discount to peers on EV/sales, most likely reflecting the manufacturing and physical distribution element.

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.

Financials

The group published its full year report to end September 2020 in February and has now reported on the results for the half-year to end March.

Exhibit 1: Half year to 31 March 2021 vs H120

€000s

H120

H121

%

Year end 30 September

HGB/German GAAP

HGB/German GAAP

change

Revenue

111,408

123,299

11

EBITDA

10,222

16,004

57

EBITDA margin (%)

9.2

13.0

Profit before tax (as reported)

4,590

10,501

129

Net income (as reported), before minority interest

3,008

4,608

53

Source: Edel accounts

No revenue breakdown is given between the different operations of the group, but the commentary in the half year report indicates that both digital and physical aspects were in growth in the period. The digital distribution business of Kontor New Media is reported as having grown on the back of the streaming platforms, while the content businesses of Edel Kids, earMusic and Brilliant Classic all benefited from the overarching demand for quality content across channels. The publishing arm has recently expanded to include an imprint devoted to sport. There was little change in gross margin over the comparative period and operating costs were well controlled, meaning that there was a good level of drop through at the EBITDA level, reflected in a step up in margin from 9.2% in H120 to 13.0% in H121 (the H220 EBITDA margin was 8.3%).

There remains some uncertainty regarding tax liabilities relating to the accounting treatment around licences, as well as that on income from litigation over illegal rights. The provision in the balance sheet now stands at €7.0m, up from €2.8m at the year-end. The tax charge of €5.9m in H121 included €1.0m of deferred taxes (H120: €1.6m including €0.7m of deferred taxes).

There is a share buyback scheme in place for up to 984k shares (4.3% of the issued share capital) with a maximum spend of €3.0m. At the half year, the group had cash and equivalents of €15.9m and bank liabilities of €55.3m.

Outlook and guidance

Full year guidance is for revenue in the €220–230m bracket, implying a slower H2. Management’s comments point out the risks to the business from further shut-downs of physical retail and low levels of consumer confidence, which will depend on the future development of the COVID-19 pandemic.

On the margin aspect, there is a further note of caution regarding input costs and availability, highlighting polycarbonate, PVC and polystyrene as materials causing particular concern. Net income guidance for the year of €4.0–6.0m, with €4.6m booked in the first half, shows the level of caution being built in, albeit that some of the uncertainty continues to relate to the unresolved tax position.

There are no broker estimates for Edel in the market currently.

Valuation

Our valuation framework for Edel is unchanged from our previous note. Analysis is complicated by the range of Edel’s activities, from pressing CDs for third parties through to 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 limited. Given these constraints, rather than selecting a set of inadequate peers, we look globally across the main subsectors in which Edel operates, particularly entertainment content and publishing, to examine key valuation metrics based on consensus forecasts. We have stripped out unprofitable companies from our 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

FY1

FY2

Last

FY1

FY2

Last

FY1

FY2

Publishing

21.3

20.2

18.4

2.0

1.9

1.8

13.1

11.6

9.3

Broadcast & Entertainment

19.5

18.2

18.8

5.2

3.7

2.6

11.7

11.5

9.7

Edel

25.5

13.9*

N/A

0.5

0.5*

N/A

5.8

N/A

N/A

Source: Refinitiv. Notes: Prices as at 5 July 2021. *At mid-point of guided range.

We would expect that the multiple to sales for Edel would be lower than the comparator groups due to the large volumes of third-party revenues that it handles, which will also distort margin comparisons.

On EV/EBITDA, the discount remains high, despite the strong share price performance over the last year. For the last reported period, the discount currently stands at 53%. If the financial performance is considerably less strong in H221, for example if Edel just managed to breakeven at the EBITDA level, the EV/EBITDA multiple would only rise to 6.8x, over 40% lower than the global peers.

The group is a partnership limited by shares (deemed more appropriate for the family-based group structure), which reduces the potential influence of minority shareholders and so also has valuation implications. The founding family retains a 64% stake and the free float is 30.3%.


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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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