Further shift in mix to digital

Edel 11 February 2020 Update
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Edel

Further shift in mix to digital

Media

Scale research report - Update

11 February 2020

Price

€2.20

Market cap

€50m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt at 30 Sept 2019

€51.9m

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

Difficult CD, DVD and Blu-Ray markets.

Small free float.

Spotify’s dominance in streaming.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5757

Edel’s FY19 figures showed flat revenues against FY18, with a dip in profitability. This mostly reflects lower demand and pricing pressure at optimal media, the segment handling physical production and distribution. Increased depreciation following earlier capital investment exacerbated the effect on EBIT, down 25%. The shift in revenue to digital benefits working capital and the reversion of capex to maintenance levels should also help reduce group debt, refinanced post year-end on more favourable terms. The shares trade at a discount to global entertainment content and publishing stocks on historical EV/EBITDA and EV/sales, partly due to limited liquidity.

Focus on digital, rights ownership

The customer base for physical product continues to consolidate. Having invested over FY17–18, optimal media now has very efficient production and distribution facilities, allowing it to build market share, albeit that price competition and cost pressure have affected profitability. Higher depreciation limited the decrease in group EBITDA to 7% for FY19, while EBIT fell by 25%. There are opportunities to extend the group’s physical business, particularly in book publishing and through developing non-traditional routes to market. The greater FY20 growth potential is in the digital segment within Kontor New Media and in the acquisition of upstream rights. Kontor acts as an aggregator between rights owners and platform providers and is well positioned as downloads and streaming continue their strong progress.

Subdued outlook

Management guidance is for FY20 sales to be at a slightly lower level than FY19, with consolidated net income at around prior year level (€2.2m). Given that the expectation is for growth at Kontor New Media, the implication is that conditions in the physical market for music, books and entertainment will remain testing. Raw material and energy costs are expected to have a negative impact, though this may accelerate the withdrawal of further competitors from the market. The guidance also refers to potential tax liabilities that may arise from the application of trade taxes on additional licences and from the treatment of revenues derived from pursuing those that have illegally abused rights.

Valuation: Discount to content, publishing

We have maintained the same valuation approach as previously, comparing Edel’s rating with the global media subsectors of entertainment content and publishing. The shares trade at a significant discount on EV/sales, most likely reflecting the manufacturing element. Uncertainty regarding the potential tax liabilities may also be acting as a drag on the share price. While the lower EPS has lifted the P/E multiple to a premium, the discount on historical EV/EBITDA is now 46%.

Key financials

Year
end

Revenue
(€m)

PBT
(€m)

Adjusted EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/18

209.2

6.6

0.16

0.10

13.8

4.5

09/19

209.5

4.4

0.08

0.10

27.5

4.5

Source: Edel accounts

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 2019 in February.

Exhibit 1: Half year and full year progression to 30 September 2019

€000s

H119

% change

H219

FY19

% change

Year end 30 September

Revenue

108,074

+2

101,424

-2

209,498

0

EBITDA as reported

10,469

+1

5,568

-19

16,036

-7

EBITDA margin (%)

9.7

5.5

7.7

Profit before tax (as reported)

4,904

-13

(497)

N/A

4,407

-33

Net income (as reported), before minority

3,211

-12

(966)

N/A

2,245

-44

Source: Edel accounts Note: Figures reported under HGB/German GAAP

Earlier management guidance was for FY19 revenues of €207.5m, a 4% y-o-y reduction in sales. The outturn of flat revenues year-on-year is therefore a better result. Net income of €4.4m, however, came in slightly below the level previously guided of €4.7m. EBITDA margin (always weaker in H2) dipped to 5.5% in the second half of the year, from 6.7% in H218 and 9.7% achieved in H119.

Manufacturing and logistics (optimal media) accounted for 52% of FY19 revenues, down from 54% in FY18, which represents a fall of 3.1% in absolute revenues. Marketing and sales (book and audiovisual content) grew revenues by 3.9% over the prior year.

There were also some substantial swings in the geographical composition of the revenue, partly reflecting the change in business mix. In FY18, revenues from the DACH region were €111.1m, 53% of group. For FY19, DACH revenues were 13% lower giving group share of 46%. Great Britain, Edel’s second largest market, increased its share of group revenues from 15% to 22%, an absolute gain of 44%. Sales in the Netherlands, the group’s third largest market, were flat on prior year, US sales were also ahead by 44%, whereas sales in France were 49% lower than prior year.

Net debt was €51.9m at end FY19 compared to €54.8m at the half-year stage and €56.3m at the end of FY18. With the shift in business mix favouring digital product and services, working capital requirements should continue to reduce. Coupled with capex reverting to near-maintenance levels, we would expect group net debt to continue to fall.

FY20 guidance is for sales to be ‘slightly lower’ than in 2019, with net income at around the FY19 level of €2.2m. This could imply a small improvement in operating margin, assuming tax stays at similar levels and a modest reduction in interest payments (given the refinancing, lower balance sheet borrowings and reducing working capital requirement).

Valuation

Our valuation framework for Edel is unchanged from our previous note. Analysis is complicated by the range of the company’s activities, from pressing 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 limited. Given these constraints, rather than selecting a set of inadequate peers, we have looked 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

21.4

19.6

18.9

1.9

1.5

1.4

10.8

8.6

7.9

Broadcast & Entertainment

21.0

21.4

15.9

2.6

2.3

2.0

11.6

10.6

8.6

Edel

27.5

N/A

N/A

0.5

N/A

N/A

6.1

N/A

N/A

Source: Refinitiv, Edison Investment Research. Note: Prices as at 10 February 2020.

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. The change in the group’s legal identity to a partnership limited by shares in March 2019 (deemed more appropriate for the family-based group structure), reduces the potential influence of minority shareholders and so also has valuation implications. The founding family retains a 64% stake.

The reduction in group profitability, particularly in H219, where the group swung into a loss, reduced earnings per share and consequently lifted the historical P/E ratio. Nevertheless, Edel’s share price appears to be well below the global market on both EV/sales and EV/EBITDA multiples, in part due to its comparatively modest size and limited liquidity, given the family’s 64% shareholding. At present values, Edel’s historical EV/EBITDA multiple is at a 46% discount to peers.


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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.

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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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 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

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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

1,185 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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