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Division on schedule

Technicolor 12 May 2022 Update
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Technicolor

Division on schedule

Q1 figures

Media

12 May 2022

Price

€2.97

Market cap

€700m

US$1.15/ €

Net debt (IFRS, including leases) at end March 2022 (€m)

1,230

Shares in issue

235.8m

Free float

90.6%

Code

TCH

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.7)

5.5

3.6

Rel (local)

(7.8)

17.5

4.9

52-week high/low

€3.60

€2.55

Business description

Technicolor is a worldwide technology leader operating in the media and entertainment industry. Its activities fall into three business segments: Technicolor Creative Studios, DVD Services and Connected Home.

Next events

Capital markets day for TCS and for Technicolor ex-TCS

14 June 2022

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Technicolor is a research client of Edison Investment Research Limited

Technicolor’s Q122 results show broadly flat group revenues (at constant exchange rates) with a good step up in EBITDA as the mix shifts towards higher-margin activities and the benefits of earlier cost control exercises come through more noticeably. Management FY22 guidance is confirmed, with our forecast adjusted for a small change in accounting treatment as previously flagged. The process of spinning off the majority of Technicolor Creative Studios to a separately quoted vehicle is on schedule for implementation in Q322, with a London capital markets day set for 14 June to showcase the two intended corporate entities. Debt refinancing is also progressing to plan.

Year end

Revenue
(€m)

EBITDA
(€m)

EBITA
(€m)

PBT*
(€m)

EPS*
(€)

EV/EBITDA
(x)

12/20

3,006

163

(59)

(46)

(0.36)

11.8

12/21

2,898

268

95

(6)

(0.11)

7.2

12/22e

2,975

375

175

89

0.32

5.2

12/23e

3,135

415

224

138

0.48

4.6

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Demand outstrips ability to supply

Q122 group EBITDA margins of 7.2% were up 161bps at constant currency, stepping up from 9.7% in Q121 to 13.0% for Technicolor Creative Studios (TCS) and from 6.3% to 7.7% at Connected Home. The underlying demand in both these operations remains very strong. For TCS, demand for high-quality content is robust across film, episodic and animation, with 80% of the current year pipeline booked. As described in our February update, the industry is beset by shortages of talent from which TCS is not immune, which is a constraint on faster growth. At Connected Home, demand for domestic broadband continues to be very good, with higher revenue growth again constrained by industry-wide component shortages.

Clearer picture emerging of new entities

At the intended capital markets day on 14 June, management will present the two future businesses, and the vote to approve the spin-off is set for 30 June. A full management line up for each is now in place, along with an outline of the segmented debt post refinancing (an EGM has now approved the issuance of the €300m of mandatory convertible loan notes). Technicolor ex-TCS would carry €300–375m of private debt with an asset-based loan facility, with the balance of the debt being carried by TCS in the form of a term loan.

Valuation: Complexity discount

The valuation reflects the current complexity of the group and the cost and constraints imposed by the debt. The proposed restructure tackles both issues. Our sum-of-the-parts, based on compiling segmental FY23e earnings-based valuations, variously discounted, derives a value equivalent to €4.07/share, down from €4.95 in our last report, reflecting peer price movements and higher seasonal net debt. A group-based DCF, using a WACC of 9.0% and 1% terminal growth, gives a value of €3.85/share. Both valuations are well above the current price.

Q122 shows benefit of strong demand

We show the Q1 figures below at current currency rates but note that these have benefited from favourable exchange rate movements. At constant rates, group revenues were down 0.3%, but at current rates, this moves to an improvement of 6.6% over the prior year.

During this quarter, TCS continued to benefit from the rebound in industry activity post the impact of the pandemic, climbing to 26% of group revenue for the period, compared with 20% in Q121. The improvement in profitability lifted its proportion of group adjusted EBITDA (before Central and Other) from 36% to 42%. Connected Home contributed 54% of group revenues and half of adjusted EBITDA. On a group basis, adjusted EBITA moved from just below break-even to a positive €14m.

Group free cash flow (before financials and tax) improved from an outflow of €200m in Q121 to an outflow of €126m (€314m in Q120), which reflects the better operating performance, a lower working capital position (mostly at Connected Home) and reduced costs of restructuring. Q1 – and H1 – is generally a period of free cash outflow, with inflows in the seasonally stronger H2. For the current year, management expects that this figure will be around €230m (€217m excluding Trademark Licensing, for which it expects to conclude the sale by end July, bringing in another €100m).

IFRS net debt at the quarter end was €1,230m, up from €1,039m at the year-end, ahead of the current market capitalisation of €700m.

Our forecasts replicate management guidance, which was confirmed with the Q122 statement. This is for

revenue to grow from continuing operations;

adjusted EBITDA from continuing operations of €375m (€365m excluding Trademark Licensing);

adjusted EBITA from continuing operations of €175m (€161m excluding Trademark Licensing); and

free cash flow from continuing operations, before financial results and tax, of €230m (€217m excluding Trademark Licensing) post inflows in the seasonally stronger H2.

Management guidance for adjusted EBITDA and adjusted EBITA is unchanged, with our forecast for the former now reduced by €10m, and for adjusted EBITA by €5m, as was flagged in the February year-end statement, to reflect changes in the accounting treatment (IFRIC adjustments) of software-as-a-service (SaaS) revenues.

Segmental performances and outlooks

Exhibit 1: Summary Q122 results

€m

TCS

Change
y-o-y

DVD Services

Change
y-o-y

Connected Home

Change
y-o-y

Corporate & Other

Change
y-o-y

Group

Change
y-o-y

Revenue

198

+41.6%

150

+8.2%

408

-4.6%

1

-82.5%

756

+6.6%

Adjusted EBITDA

26

+13.0%

5

+15.0%

31

+15.9%

(7)

-31.9%

55

+28.6%

Margin

13.0%

3.1%

7.7%

7.2%

Adjusted EBITA

11

N/A

(3)

N/A

14

+36.6%

(8)

30.2%

14

N/A

Margin

5.6%

(1.1%)

3.4%

(65.6%)

1.9%

Source: Technicolor accounts. Note: Changes at current currency rates.

Connected Home (54% of Q122 revenue)

Demand for broadband boxes has remained strong into FY22 and looks set to continue as consumers look for faster and more reliable connectivity. This underlying high level of demand is greater than can be fulfilled, given the ongoing global shortages of key components and supply chain bottlenecks. Broadband accounted for 79% of the quarterly revenue, up from 67% in Q121. Overall segmental revenues were down 5% (-11% at constant currency). Video revenues were down 39% (-43% at constant currency), while broadband revenues were ahead by 12% (4% at constant currency). Connected Home is a global leader in broadband gateways and won some notable new business in the period, including with Telstra in Australia. For Bouygues in France, it is developing a premium 4K UHD set-top box integrated with ‘best-in-class’ Wi-Fi.

There is no direct impact on the business from the war in Ukraine on the customer or supplier front, but there is further disruption to transport as some supplies are diverted to longer sea routes.

EBITDA margins climbed to 7.7% in Q122 from 6.3% (Q120: 4.1%), boosted by the cost reductions from the transformation plan as discussed in previous reports and operating efficiencies from the platform-based approach. Had the ability to meet demand not been constrained, the implication is that margins would have climbed further.

The key issue for Connected Home remains the availability and pricing of componentry, a well-documented problem across many industries, stemming from supply and distribution issues exacerbated by the pandemic. The group is a key supplier to the cable companies, who themselves are anxious not to disappoint their own customers, putting the group in a stronger position than some smaller players, particularly in terms of passing through a proportion of cost increases.

TCS (26% of Q122 revenues)

Strong demand across all aspects of TCS, from film and episodic through advertising and animation, propelled segmental revenues ahead by 42% (33% at constant currency) to €198m.

MPC (now the core brand for work in the film and episodic space) was involved in 20 theatrical films in the period, delivering four in Q122, including Sonic the Hedgehog 2 and Elvis. In episodic, MPC worked on more than 30 projects for clients including Disney+, Peacock, Netflix, Paramount+, Apple TV, Amazon and HBO. The Mill worked on more than 1,000 advertising projects during the quarter, including 34 Super Bowl projects. Mikros Animation was in production on six feature film projects, including PAW Patrol: The Mighty Movie (Spin Master Entertainment/ Paramount) and Thelma the Unicorn (Netflix) and numerous series for names such as DreamWorks, Disney and Nickelodeon.

Mikros Animation will also be working on the new animated version of Charlie and the Chocolate Factory with Netflix under the directorship of Taika Waititi.

Technicolor Games also has a very strong client roster. Its Q122 releases included 2K Sports’ WWE 2K22.

The adjusted EBITDA margin firmed from 9.7% up to 13.0%, with efficiency gains from the business restructuring and from the operational gearing from higher volumes. However, the ability to recoup all the benefit is constrained by the particularly tight labour market in specialists in this field, leading to shortages, employee churn and higher costs of employment.

The number of staff employed had risen from 10,700 at the previous year-end to 11,800 at end March. Management is confident that the 80% of FY22 pipeline that is already committed can be delivered on the basis of the capacity now in place.

DVD Services (20% of Q122 revenue)

Disc volumes continued their decline, down 16.5% in volumes on Q121. However, segmental revenues increased by 8.2% (+2.2% at constant currency) as newer sources of revenue were built up outside the traditional disc production and logistics. There are two main elements of this growth:

Vinyl: the group had signed a contract with a top three global music company in Q122 and expects to add the other two in Q222. Two large US independents are also in negotiations.

Supply chain/fulfilment: a ‘major anchor’ client contract has been signed to add to significant volumes of products already being handled.

EBITDA margin for the segment was flat at 3.1%, reflecting the positive contribution from earlier cost cutting and the newer activities, offset by the impact of lower disc volumes. These factors are expected to continue through the year, with a shift in the disc business towards new releases and away from catalogue material, as theatrical releases pick up as movies delayed by the pandemic hit the screens.

Exhibit 2: Financial summary

€m

2019

2020

2021

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

3,800

3,006

2,898

2,975

3,135

Cost of Sales

(3,375)

(2,729)

(2,493)

(2,527)

(2,680)

Gross Profit

425

277

404

448

455

EBITDA

 

 

325

163

268

375

415

EBITA

 

 

42

(59)

95

175

224

Amortisation of acquired intangibles

(54)

(41)

(38)

(38)

(38)

Exceptionals

(79)

(151)

(53)

(11)

(10)

Reported operating profit

(121)

(267)

30

150

200

Net Interest

(84)

77

(127)

(110)

(110)

Joint ventures & associates (post tax)

(1)

0

0

0

0

Exceptionals

0

155

0

0

0

Profit Before Tax (norm)

 

 

(73)

(46)

(6)

89

138

Profit Before Tax (reported)

 

 

(206)

(191)

(97)

40

90

Reported tax

(3)

(5)

(24)

(5)

(10)

Profit After Tax (norm)

(75)

(51)

(30)

84

128

Profit After Tax (reported)

(208)

(196)

(121)

35

80

Discontinued operations

(22)

(15)

(19)

0

0

Net income (normalised)

(75)

(51)

(30)

84

128

Net income (reported)

(230)

(210)

(140)

35

80

Average Number of Shares Outstanding (m)

15

126

241

247

247

EPS - normalised (c)

 

 

(492.18)

(40.77)

(12.26)

33.83

51.88

EPS - normalised fully diluted (c)

 

 

(492.18)

(35.73)

(11.42)

31.57

48.42

Dividend per share (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(5)

(21)

(4)

3

5

Gross Margin (%)

11.2

9.2

14.0

15.0

14.5

EBITDA Margin (%)

8.6

5.4

9.3

12.6

13.2

EBITA Margin (%)

1.1

(2.0)

3.3

5.9

7.2

BALANCE SHEET

Fixed Assets

 

 

2,082

1,665

1,730

1,657

1,592

Intangible Assets

1,483

1,242

1,283

1,248

1,198

Tangible Assets

476

288

305

265

250

Investments & other

40

62

59

59

59

Deferred tax and other

84

72

83

85

85

Current Assets

 

 

1,127

1,344

1,268

1,291

1,372

Stocks

243

195

335

309

316

Debtors

507

425

359

332

322

Cash & cash equivalents

64

330

196

271

355

Other

312

394

378

379

379

Current Liabilities

 

 

(1,542)

(1,379)

(1,359)

(1,376)

(1,392)

Creditors

(825)

(710)

(671)

(689)

(744)

Tax and social security

(41)

(21)

(29)

(29)

(29)

Short term borrowings

(95)

(72)

(65)

(65)

(65)

Other

(581)

(576)

(594)

(593)

(554)

Long Term Liabilities

 

 

(1,631)

(1,466)

(1,505)

(1,521)

(1,537)

Long term borrowings

(1,203)

(1,070)

(1,170)

(1,186)

(1,202)

Deferred tax

(27)

(15)

(20)

(20)

(20)

Other long term liabilities

(401)

(381)

(315)

(315)

(315)

Net Assets

 

 

37

163

134

51

35

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

37

163

134

51

35

CASH FLOW

Net profit

(208)

(196)

(121)

35

80

Depreciation and amortisation

322

261

222

215

205

Working capital

(69)

(101)

(81)

71

58

Tax and interest

(76)

(41)

(50)

(95)

(100)

Exceptional & other

101

(9)

43

(10)

(20)

Operating cash flow

 

 

70

(86)

14

215

224

Capex

(169)

(104)

(95)

(140)

(140)

Acquisitions/disposals

(2)

(3)

27

0

0

Equity financing

1

60

0

0

0

Dividends

0

0

0

0

0

Other

3

(21)

(3)

0

0

Net Cash Flow

(97)

(154)

(57)

75

84

Opening net debt/(cash)

 

 

733

1,234

812

1,039

980

FX

(16)

16

0

0

Discontinued

(35)

(23)

(29)

0

0

Other non-cash movements

(369)

615

(156)

(16)

(16)

Closing net debt/(cash)

 

 

1,234

812

1,039

980

912

Source: company accounts, Edison Investment Research

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This report has been commissioned by Technicolor and prepared and issued by Edison, in consideration of a fee payable by Technicolor. Edison Investment Research standard fees are £60,000 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.

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This report has been commissioned by Technicolor and prepared and issued by Edison, in consideration of a fee payable by Technicolor. Edison Investment Research standard fees are £60,000 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.

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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.

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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.

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.

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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

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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