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Focus on profitable properties

Mondo TV 17 December 2018 Update
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Mondo TV

Focus on profitable properties

New business plan

Media

17 December 2018

Price

€1.13

Market cap

€41m

Net cash (€m) at 30 September 2018

9.3

Shares in issue

36.4m

Free float

64%

Code

MTVI

Primary exchange

Borsa Italia Star

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(55.2)

(71.9)

(83.1)

Rel (local)

(54.7)

(68.6)

(80.0)

52-week high/low

€6.8

€0.9

Business description

Mondo TV is a global media group, focused on the production, acquisition and exploitation of animated children’s TV series. Based in Rome, it also holds controlling stakes in listed subsidiaries Mondo TV France (25%), Mondo TV Suisse (57%) and Mondo TV Iberoamerica (72%). It owns the rights to over 1,500 TV episodes and films, which it distributes across 75 markets. 83% of FY17 revenues were generated in Asia, with the remainder from Europe and South America.

Next event

FY18 results

Q119

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5700

Mondo TV is a research client of Edison Investment Research Limited

Mondo TV is set to focus its efforts on a smaller number of more profitable properties, following a difficult H218. The group’s geographic spread will also be readjusted – partly as a result of existing Asian clients scaling back their purchasing – giving a better balance between destination markets. The global market appetite for quality content remains strong with channel proliferation. On reduced forecast revenues, Mondo TV remains comfortably profitable, with net cash on the balance sheet, and should return to being cash flow positive in FY20 in our modelled scenario. Our view is that the attrition of the share price has been overdone.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

27.4

12.7

31.1

2.0

3.6

1.8

12/17

32.0

15.4

43.0

0.0

2.6

N/A

12/18e

23.7

8.0

18.1

0.0

6.3

N/A

12/19e

23.9

6.1

6.0

0.0

18.8

N/A

12/20e

32.3

7.7

7.9

0.0

14.3

N/A

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

Revised FY19–23 guidance

Following the untimely death of the group’s founder, Orlando Corradi, in November, management brought forward the publication of the next business plan (originally scheduled for January) to reassure shareholders that the board was on top of the issues facing the group. The Q3 interim statement in November showed lower revenues, ascribed to reduced library sales, with FY18 estimates unlikely to be met. The more recent statement indicates a further deterioration in trading, particularly in Asia. This is both macro-related (weakening Chinese consumer economy) and specific, whereby customers cancelled previous projects or revised investments in response to weaker broadcaster demand. New FY19–23 financial objectives were issued, indicating a lower revenue base than previous guidance and growth resuming from FY20. With a reduced production slate, capex is significantly reduced (€20m down to €11m for FY19). Our new forecasts (previous forecasts had been withdrawn) are based on these objectives, with some contingency built in.

Library write-down

The reduced Asian demand has prompted a re-evaluation of the library. A €31m impairment is being taken (intangible assets at end September were €52m). With the cancellation of existing pre-sales, a further €27m is taken off trade receivables (€65m at end September). Less the tax offset (€12m), this equates to an extraordinary charge of €46m. Year-end shareholders’ funds will be around €59m.

Valuation: Retrenchment overdone

Mondo TV’s share price has drifted back from €6.55 on 1 January. The founder’s 36% shareholding has passed to his family, with Matteo Corradi the group’s chairman and managing director. The current valuation is well below peers (trading on c 16x EV/EBITDA in FY19e). It is also below the €2.48 valuation suggested by a DCF on our numbers, as updated for the downgrade (using a WACC of 12%) and below the NAV of €1.71, as indicated in the December statement.

Picking the winners

Mondo TV has developed a wide portfolio of property assets – arguably too many to manage from a rights, licensing and merchandising perspective for the scale of the group operation. The decision to focus on fewer, more profitable properties therefore looks very sensible and chimes in with the strategies of other successful operations within the children’s segment.

With a view to obtaining some balance in the portfolio, Mondo TV is also expanding its activities in live action and in widening its target audience.

Management has identified five strategic targets that should enable the group to reach its financial objectives. In summary, these are:

Improving portfolio quality by focusing on higher-yielding properties and with greater commercial scrutiny before green-lighting, working with partners and broadcasters for co-production opportunities and specifically targeting digital platform operators.

Improving geographic diversification to reduce risk. The lower exposure to Asian markets is in part self-fulfilling following the cancellation of projects indicated above, and our revised modelling suggests the proportion of FY19 revenues from Asia will be less than one-third of the group total.

Optimising the licensing and merchandising opportunities through greater emphasis on exploitable properties and a strengthened operational team. Mondo TV has just announced its first licensing agreement not connected to a production by taking on the sub-agency for Italy and the Iberian peninsula for Feisty Pets for US-based Surge Licensing Inc. If successful, this could lead to further similar arrangements and add a new, low-risk income source.

Broadening the product range with more third-party distribution with lower risk than own-production and no significant capital funding requirement.

Building on the expertise in Mondo TV Iberoamerica in live action to take proper advantage of the investment being made by the subscription video on demand (SVOD) channels in European programming to satisfy the needs of local markets and regulators. One such project, 2050, a sci-fi live action series targeted at an adult/young adult audience, is looking particularly promising.

New business plan targets

The changes outlined above describe an altogether different scale of business than that to which the company previously aspired. From the publication of the interim results in September, the FY18 revenue target was starting to look ambitious (Edison was expecting FY18 revenues of €47m, in line with management guidance, when we last published figures in May 2018). At the interim stage, revenues of €16.1m (plus €1.1m of capitalisation of internally produced cartoon series) were reported. By 30 September, this figure had increased to €20.3m, plus €1.9m of cost capitalisation, which at that stage would have required a significant Q4 turnaround to achieve the €47m target.

In light of the experience with the Asian customers, the impact of which carries through into FY19, the group has rebased its business plan in line with the strategic objectives described above. The new targets are shown in the table below with the previous business plan objectives for comparative purposes.

Exhibit 1: Mondo TV business plan targets, December 2018

2018 (forecast)

2019

2020

2021

2022

2023
(new)

Revenue differential

revenue - new

23.7*

24.5

34.0

38.5

40.8

44.4

revenue - old

47.0

61.8

76.0

88.6

100.2

-

change - revenues

-50%

-60%

-55%

-57%

-59%

N/A

EBITDA differential

new EBITDA

17.9

14.3

19.9

24.2

28.2

31.5

old EBITDA

36.2

47.3

58.8

65.9

75.2

-

change - EBITDA

-51%

-70%

-66%

-63%

-63%

N/A

new D&A

(9.4)

(7.5)

(11.0)

(12.5)

(14.2)

(14.6)

old D&A

(14.1)

(15.7)

(20.2)

(20.6)

(25.1)

EBIT differential

New EBIT

8.5

6.8

9.0

11.7

14.0

16.9

old EBIT

22.1

31.7

38.6

45.3

50.2

-

change - EBIT

-62%

-79%

-77%

-74%

-72%

N/A

Net profit differential

new net profit

5.91

4.12

5.425

7.044

8.384

10.489

old net profit

15.8

21.5

25.4

30.0

32.2

-

change - net profit

-63%

-81%

-79%

-77%

-74%

N/A

Source: Mondo TV. Note: *Edison estimate.

Our new forecasts, shown in Exhibit 2 below, are based around this plan, but with some contingency (increasing over time) built in to reflect the execution risk.

Financing secure

The final tranche of the Atlas Alpha Yield Fund and Atlas Capital Markets convertible bond subscription was exercised in September 2018, bringing the total amount raised from this source to around €21m, with around €12m coming in during Q3 in two tranches of €5m and €7m.

This funding means that the financial footing of the group is stable and that, under our modelled scenario, it will remain cash positive through FY19e, despite the reduced scale. On the basis of these projections, we expect Mondo TV to resume being cash generative in FY20e.

Valuation

The concerns over trading and strategy have undermined the share price for some time. The untimely death of the founder and chairman may also have led to some questions about the status of his 49.2% shareholding. The company has confirmed that this shareholding has passed to his family and that they are very much involved in the continued running of the business.

The significantly rebased expectations obviously have a direct impact on the implied valuation. With the change in strategy and different dynamic in the management (although no change in the executive team), there is bound to be a time lag before the market regains confidence in the team’s ability to deliver in line with the significantly reduced guidance. Some degree of discount against the peer set is very reasonable in that context. With net cash on the balance sheet, a valuation based on EV/EBITDA or EV/EBIT will look low in comparison to debt-funded peers. Global family entertainment peers are currently valued at around 16.1x FY19e EV/EBITDA and 14.9x FY20e, considerably in excess of the 1.8x and 1.3x respectively currently accorded to Mondo TV based on revised estimates.

A DCF run on our revised estimates, using a 12% WACC and a 2% terminal growth rate, suggests a share price of €2.48 on an earnings basis. The NAV of €1.71 as at end FY18e is based on assets that include the library value after the write-downs, which is 51% above the current share price.

Exhibit 2: Financial summary

€'m

2016

2017

2018e

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

27.4

32.0

23.7

23.9

32.3

Cost of Sales

(9.3)

(7.0)

(5.8)

(9.9)

(13.4)

Gross Profit

18.1

25.0

17.9

13.9

18.9

EBITDA

 

 

18.1

25.0

17.9

13.9

18.9

Operating Profit (before amort. and except.)

 

12.7

17.6

8.5

6.4

8.0

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

Reported operating profit

12.7

17.6

8.5

6.4

8.0

Net Interest

0.0

(2.2)

(0.5)

(0.3)

(0.3)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

(46.0)

0.0

0.0

Profit Before Tax (norm)

 

 

12.7

15.4

8.0

6.1

7.7

Profit Before Tax (reported)

 

 

12.7

15.4

(38.0)

6.1

7.7

Reported tax

(4.5)

(3.1)

(1.3)

(1.6)

(2.1)

Profit After Tax (norm)

8.3

12.3

6.7

4.5

5.6

Profit After Tax (reported)

8.3

12.3

(39.3)

4.5

5.6

Minority interests

0.3

0.5

(0.7)

(2.3)

(2.7)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

8.6

12.8

6.1

2.2

2.9

Net income (reported)

8.6

12.8

(40.0)

2.2

2.9

Average Number of Shares Outstanding (m)

27

30

34

36

36

EPS - normalised (c)

 

 

31.1

43.0

18.1

6.0

7.9

EPS - normalised fully diluted (c)

 

 

31.1

43.0

18.1

6.0

7.9

EPS - (c)

 

 

0.3

0.4

(1.2)

0.1

0.1

Dividend per share (c)

2.0

0.0

0.0

0.0

0.0

Revenue growth (%)

63.2

16.8

(26.0)

0.8

0.0

Gross Margin (%)

66.0

78.1

75.5

58.4

58.6

EBITDA Margin (%)

66.0

78.1

75.5

58.4

58.6

Normalised Operating Margin

46.4

54.9

35.9

26.8

24.7

BALANCE SHEET

Fixed Assets

 

 

37.0

47.9

22.1

25.7

27.3

Intangible Assets

31.4

44.1

18.3

21.9

23.6

Tangible Assets

0.3

0.4

0.4

0.4

0.4

Investments & other

5.3

3.4

3.4

3.4

3.4

Current Assets

 

 

37.8

53.6

58.6

58.1

65.4

Stocks

0.0

0.0

0.0

0.0

0.0

Debtors

31.7

47.9

38.0

41.0

48.2

Cash & cash equivalents

1.8

2.4

17.3

13.8

13.9

Other

4.3

3.3

3.3

3.3

3.3

Current Liabilities

 

 

(14.1)

(19.0)

(21.2)

(19.8)

(23.1)

Creditors

(11.7)

(15.0)

(15.0)

(13.6)

(17.0)

Tax and social security

(0.2)

(0.4)

(0.4)

(0.4)

(0.4)

Short term borrowings

(2.1)

(3.6)

(5.8)

(5.8)

(5.8)

Other

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

Long Term Liabilities

 

 

(0.8)

(0.7)

(1.3)

(1.3)

(1.3)

Long term borrowings

(0.6)

(0.7)

(1.3)

(1.3)

(1.3)

Other long term liabilities

(0.2)

0.0

0.0

0.0

0.0

Net Assets

 

 

59.9

81.8

58.3

62.7

68.3

Minority interests

0.6

0.6

0.6

0.6

0.6

Shareholders' equity

 

 

60.4

82.4

58.8

63.3

68.9

CASH FLOW

Op Cash Flow before WC and tax

18.1

25.0

17.9

13.9

18.9

Working capital

(1.9)

(11.2)

(10.1)

(4.4)

(3.8)

Exceptional & other

0.7

(2.1)

0.0

0.0

0.0

Tax

(4.5)

(3.1)

(1.3)

(1.6)

(2.1)

Net operating cash flow

 

 

12.5

8.7

6.5

7.9

13.0

Capex

(20.6)

(19.2)

(14.6)

(11.1)

(12.6)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Net interest

(0.2)

(0.2)

(0.5)

(0.3)

(0.3)

Equity financing

7.2

9.4

23.5

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

0.3

0.1

0.0

0.0

0.0

Net Cash Flow

(0.7)

(1.2)

15.0

(3.5)

0.1

Opening net debt/(cash)

 

 

0.2

0.9

2.0

(10.3)

(6.8)

FX

(0.1)

0.1

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

(2.7)

0.0

0.0

Closing net debt/(cash)

 

 

0.9

2.0

(10.3)

(6.8)

(6.9)

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Mondo TV and prepared and issued by Edison, in consideration of a fee payable by Mondo TV. 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 Edison analyst 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.

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This report has been commissioned by Mondo TV and prepared and issued by Edison, in consideration of a fee payable by Mondo TV. 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 Edison analyst 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 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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