Mondo TV — Guidance raised for full year

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Mondo TV

Guidance raised for full year

Interims; raised guidance

Media

6 October 2017

Price	€4.59
Market cap	€139m

Net debt (€m) at end June 2017		2.2

Shares in issue	30.2m
Free float	52%
Code	MTV

Primary exchange	Borsa Italiana Star
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	21.0	14.5	0.3
Rel (local)	16.5	6.1	(27.1)

52-week high/low

€4.6

€3.6

Business description

Mondo TV is a global media group with a focus on the production, acquisition and exploitation of animated children’s television series. Headquartered in Rome, it also holds controlling stakes in listed subsidiaries Mondo TV France (47%), Mondo TV Suisse (67%) and Mondo TV Iberoamerica (72%). It owns the rights to over 1,500 TV episodes and films, which it distributes across 75 markets. 80% of revenues are generated in Asia, 10% in Italy, 7% in Europe and 3% in America.

Next events

Q3 trading update

14 November 2018

Analysts

Bridie Barrett	+44 (0)20 3077 5700
Fiona Orford-Williams	+44 (0)20 3077 5739

media@edisongroup.com

Edison profile page

Mondo TV is a research client of Edison Investment Research Limited

Mondo’s licensing activities advanced significantly in the first half of the year, supporting a 67% increase in net profit. With Mondo’s developed pipeline, we are confident regarding delivery of the group’s FY17 budget and we increase our FY17e net profit by 5%, broadly in line with management’s raised guidance. We believe Mondo’s c 30% valuation discount to peers is unwarranted given the improving record of delivering to plan.

Year end	Revenue (€m)	EBIT (€m)	PBT* (€m)	EPS* (€)	DPS (c)	EV/EBIT (x)	P/E (x)
12/15	16.8	5.6	5.4	0.12	0.0	27.6	38.3
12/16	27.4	12.7	12.7	0.32	2.0	12.1	14.3
12/17e	37.6	19.8	18.5	0.44	0.0	7.7	10.4
12/18e	49.7	17.7	17.4	0.38	0.0	8.6	12.1

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

H117 highlights: Strong licensing sales

Mondo’s first half results demonstrate the significant progress the group has made in developing its licensing business over the last year. Revenues, which increased by 34% y-o-y to €15.3m, include €10.6m licensing sales (H116: €0.3m). While production and rights sales were lower than the same period last year, this is a function of the timing of deliveries rather than a lack of projects. We expect these revenues to increase in the second half of the year, with the completion of Season 2 (S2) of Sissi and additional episodes of Invention Story and The Rowly Powlys. We also understand that there are a number of rights deals pending. EBITDA of €11.1m increased by 40%, due to mix effects, as well as the ongoing benefit from the group’s reorganisation. Inclusive of foreign exchange loss on the translation of its receivables balance, net profit increased by 67% to €5.7m.

Outlook: Net profit guidance raised

Post period end, Mondo also announced the extension of its new teen fiction show Heidi for another two series, and the deepening of its involvement in Robot Trains, where it is currently involved in the licensing and distribution, to also become co-producer on the next season. This demonstrates management’s confidence in the development of these newer brands and further underpins Mondo’s five-year plan to deliver EBITDA of €64m by 2020. Management has slightly increased guidance for net profit this year by 3% from €11.6m to €12.0m. Given the good start to the year, we mirror this guidance in our forecasts.

Valuation: Discount to children’s entertainment peers

The shares have responded positively to the increased guidance. Nevertheless, they continue to trade a discount to peers in the children’s entertainment space and other Italian media stocks. Given the group’s improving track record, strong pipeline and significantly higher EBIT margins than peers, we believe this is unjustified. Announcements of additional licensing deals or significant new partners should help build confidence in the deliverability of its 2020 plan and close the c 30% FY18 EV/EBIT and P/E discounts to peers.

H117 results highlights: Delivering to plan

Mondo’s H117 results were broadly as reported in July’s trading update.

Total revenues of €15.3m increased 34% y-o-y, driven by very strong performance in licensing and internationally, in line with the group’s strategy:

■

Licensing revenues were €10.6m (H116: €0.3m), principally due to the contribution from Playtime Buddies, The Rowly Powlys and Sissi. In the second half of the year management anticipates first sales from its new flagship brand, Robot Trains.

■

Rights sales at €1.9m (H116: €5.4m) which, along with library sales, reflect first sales for Season 1 (S1) of Heidi and Final Fight. A number of rights deals are pending and management expects them to close in the second half of the year.

■

Production revenues of €2.7m (H116: €5.7m) reflects the delivery of Sissi for Broadvision, S1 of Invention Story (part of the $25m four-year York contract) and its Abu Dhabi Media contract. Production revenues can be fairly lumpy, subject to the delivery dates of key projects. In the second half of the year management expects to see a stronger contribution from production with the planned completion of Sissi S2, further deliveries of Invention Story, and The Rowly Powlys.

In an effort to increase efficiencies, as well as the change in revenue mix towards higher-margin licence sales, last year’s reorganisation enabled EBITDA to increase by 40% to €11.1m. After a €3.1m amortisation of the library, EBIT increased by 52% to €8.0m. Finance costs of €1.2m include €1m foreign currency translation effects in the value of the group’s dollar-denominated trade receivables. Including this charge and €1.4m tax (21% effective rate), net profit increased by 67% to €5.7m.

Exhibit 1: Summary interim results and updated forecasts

€m	H116	H117	Change y-o-y	H217e	2017e	2018e	2019e
P&L
Total revenue from sales and services	11.4	15.3	34%	22.3	37.6	49.5	54.3
Other revenues	0.1	0.0		0.6	0.6	0.6	0.6
Capitalisation of internally produced series	0.6	0.5		0.7	1.2	1.2	1.2
Total revenues	12.1	15.9	31%	23.6	39.5	51.3	56.1
EBITDA	8.0	11.1	40%	16.7	27.8	35.0	38.7
EBITDA margin	70%	72%		75%	74%	70%	71%
EBITA	5.3	8.0	52%	11.8	19.8	17.7	21.1
EBITA margin	46%	52%		53%	53%	36%	39%
PBT	5.0	6.8		11.7	18.5	17.4	20.8
Net profit	3.4	5.7	67%	6.3	12.0	10.9	13.1
EPS - adjusted basic (€)	0.1	0.2		0.2	0.44	0.38	0.45
Cash flow
EBITDA	8.0	11.1		16.7	27.8	35.0	38.7
tax	(2.6)	(2.6)		(3.5)	(6.1)	(5.8)	(6.9)
changes in working capital	0.4	(6.6)		(0.3)	(6.9)	0.9	(3.9)
Operating cash flow	5.8	1.9		12.2	14.8	30.1	28.0
Investment in content	(8.8)	(7.7)		(13.8)	(21.5)	(22.0)	(22.5)
Free Cash flow	(3.1)	(5.9)		(0.9)	(6.8)	8.0	5.4
Share issue	3.7	4.3		4.2	8.5	3.0	0.0
New borrowings		3.9		(3.9)	0.0
Interest costs and change in borrowings	(0.1)	0.1		7.4	(0.4)	(0.3)	(0.3)
Net cash flow	0.5	2.3		2.9	1.5	10.7	5.1
Closing cash		4.1		3.3	3.3	14.0	19.1
Gross debt		(6.3)		(2.7)	(2.7)	(2.7)	(2.7)
Net cash/(debt)		(2.2)		0.6	0.6	11.4	16.4

Source: Reported interims – Mondo TV, Edison Investment Research (forecasts)

Outlook: Budget underpinned by pipeline

As outlined in our July 2017 initiation, World-class animations group, Mondo has a well-developed pipeline, which underpins its five-year plan to deliver EBITDA of €64m by 2020. It has had a good start to the year, and management has increased its guidance for net profit for FY17 from €11.6m to €12.0m. (Given that this includes €1m of foreign exchange losses, the underlying increase is more significant.)

We are also encouraged by the group’s recent announcements with regard to the extension of its interest in Heidi for an additional two series, as well as a deepening of its role in Robot Trains (for CJ E&M), from distributor and licensing agent (S1) to co-producer on S2, which further supports the business plan in the coming years.

Although we expect margins, which should have a greater share of production sales than H1, to come down in the second half (Exhibit 3 summarises the key elements in the pipeline), we believe management is on track to deliver its increased FY17 budget and we are updating our forecasts to reflect this, as summarised in Exhibit 2.

Exhibit 2: Summary forecast changes

€m	2017e			2018e
	Old	New	Change	Old	New	Change
Revenues	37.6	37.6	0.0%	49.7	49.7	0.0%
EBITDA	25.9	27.8	7.4%	35.0	35.0	0.0%
EBITDA margin	68.8%	73.9%	7.4%	70.3%	70.3%	0.0%
Normalised operating profit	17.9	19.8	10.8%	17.7	17.7	0.0%
Normalised operating profit margin	47.5%	52.6%	5.1%	35.7%	35.7%	0.0%
Normalised net income	11.4	12.0	5.3%	10.9	10.9	0.0%
Reported net income	11.4	12.0	5.3%	10.9	10.9	0.0%
Normalised diluted EPS (€)	0.41	0.44	6.6%	0.4	0.38	1.2%
Net cash	2.0	0.6	-68.7%	9.7	11.4	16.7%

Source: Edison Investment Research

Cash flow

During the first half Mondo invested €7.7m in content and €6.6m of working capital was absorbed, principally in relation to the production of Invention Story, Beastkeepers, Partidei, Sissi and The Rowly Powlys as well as Heidi. We expect investment in content to increase in the second half, reflecting the strong production pipeline, but working capital requirements should moderate as H1 royalties are collected.

Inclusive of a further €13.8m investment in content acquisition and production (Heidi S2, Invention Story, Sissi S2 and S3), we forecast year-end net cash of €0.6m (from €2.0m previously forecast).

In July 2016 Mondo reached an agreement with Atlas Alpha Yield Fund (Atlas) and Atlas Capital Markets (ACM) for the issue of up to €15m of convertible bonds (€250k each). Net debt at June 2017 of €2.2m includes a further €3.75m of these bonds (which have subsequently all converted) meaning that to date €12m of the €15m facility has been called. We no longer expect the full facility to be issued by the year end and update our forecasts to assume that the remaining €3m is drawn in 2018.

Exhibit 3: Summary of key production schedules

Show	H217	H118	H218	2019	2020
Invention story	In production	In production	In production	In production	In production
	Start deliveries	Deliveries	Deliveries	Deliveries	Deliveries
		TV sales	TV sales	TV sales	TV sales
			Worldwide licensing	Worldwide licensing	Worldwide licensing
.
Heidi	Production S2	Production S3
	TV sales S1 Latam	TV sales S1-2-3 worldwide	TV sales S1-2-3 worldwide	TV sales S1-2-3 worldwide	TV sales S1-2-3 worldwide
	Licensing Latam	Licensing worldwide	Licensing worldwide	Licensing worldwide	Licensing worldwide
.
Sissi	End production S2	Production S3	End production S3	Production S4	Production S5
	Start production S 3	TV sales series 1-2	TV sales series 1-3	TV sales series 1-4	TV sales series 1-5
	TV sales series 1-2	Licensing series 1-2	Licensing series 1-3	Licensing series 1-4	Licensing series 1-5
	Licensing series 1-2

YooHoo	Delivery first episodes	Delivery 39 episodes	Delivery all series
	TV sales Pay/VOD	TV sales free TV	TV sales	TV sales	TV sales
	Worldwide licensing	Worldwide licensing	Worldwide licensing	Worldwide licensing	Worldwide licensing
		Master toy licence worldwide

Source: Edison Investment Research, Mondo TV. Note: S = season.

Valuation

As before, we have adjusted (upwards by €14m) Mondo’s headline enterprise value for the minority values of the listed subsidiaries. We also prefer to look to FY18 multiples given the expected increase in amortisation and the dilutive impact of the convertible.

On this more conservative basis, Mondo trades on an EV/EBIT multiple of 7.7x in FY17 and 8.6x in FY18, and a P/E multiple of 10.4x in FY17 and 12.1x in FY18. Compared to the average of peers in the children’s entertainment sector, as well as other Italian media groups (Exhibit 4), Mondo trades at a 31% EV/EBIT discount in FY18, despite its significantly higher EBIT margin, and a 33% P/E discount. Announcements of additional licensing deals or significant new partners should help build confidence in the deliverability of its ambitious targets and close discount to peers.

Exhibit 4: Summary peer comparison

Name	Market cap (m)		Sales growth (%)		EBIT margin (%)	EBITDA margin (%)	EV/Sales (x)		EV/EBIT (x)		PE (x)
			1FY	2FY	Last	Last	1FY	2FY	1FY	2FY	Last	1FY	2FY
Mondo TV	€134		37	32	43.5	61.8	4.0	3.1	7.7	8.6	13.7	10.3	12.0
Children’s entertainment:
DHX Media		C$741	55	6	16	22.4	3.8	3.6	17.1	17.2	35.0	26.2	17.9
Entertainment One		£1,145	8	8	6	45.3	0.9	0.9	7.5	7.0	21.5	12.4	10.9
Xilam Animation		€131	59	19	27	96.8	5.8	4.9	N/A	N/A	39.1	21.2	17.3
Toei Animation		¥164,920	11	5	25	25.9	3.1	2.9	N/A	N/A	22.5	19.7	18.2
Amuse inc		¥50,619	(9)	2	11	12.3	0.7	0.6	N/A	N/A	15.7	16.2	15.2
Italian media peers:
Mediaset		€3,437	3	(5)	(5)	32	1.4	1.5	13.0	9.6	89.9	23.5	14.2
Mondadori		€536	0	(0)	5	7	0.7	0.7	11.4	11.1	14.1	16.1	13.7
Rai Way spa		€1,267	1	2	30	48	6.0	5.9	16.7	15.6	27.3	23.5	22.0
Gedi Gruppo Editoriale		€363	14	1	4	7	0.5	0.5	10.3	8.3	19.7	14.9	12.3
Italiaonline		€382	(12)	2	0	14	0.9	0.9	13.1	8.7	11.9	23.1	14.2
Triboo		€77	N/A	5	10	16	N/A	N/A	N/A	N/A	13.3	14.8	11.1
Dada		€70.5	5	5	6	16	1.4	1.4	17.6	14.3	252.9	38.4	28.2
Axelero		€40.5	25	9	6	8	1.2	1.1	15.4	10.3	31.4	17.5	11.9
Digitouch		€17.7	16	11	2	11	0.7	0.6	6.9	5.0	93.9
Average children’s entertainment			24.9	8.0	11	34	2.9	2.6	12.3	12.1	26.8	19.1	15.9
Average Italian media sector			6.5	2.9	6.6	17.8	1.6	1.6	13.0	10.4	29.6	21.5	15.9

Source: Bloomberg (Mondo multiples based on Edison forecasts) Note: Mondo adjusted for minorities; 1FY = first forecast year. Priced at 4th October.

Exhibit 5: Financial summary

	€'m	2014	2015	2016	2017e	2018e	2019e
31-December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
INCOME STATEMENT
Revenue		11.3	16.8	27.4	37.6	49.7	54.6
Cost of Sales		(3.8)	(7.9)	(9.3)	(9.8)	(14.8)	(15.9)
Gross Profit		7.5	8.9	18.1	27.8	35.0	38.7
EBITDA		7.5	8.9	18.1	27.8	35.0	38.7
Normalised operating profit		2.2	5.6	12.7	19.8	17.7	21.1
Amortisation of acquired intangibles		0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		0.0	0.0	0.0	0.0	0.0	0.0
Share-based payments		0.0	0.0	0.0	0.0	0.0	0.0
Reported operating profit		2.2	5.6	12.7	19.8	17.7	21.1
Net Interest		(0.4)	(0.1)	0.0	(1.3)	(0.3)	(0.3)
Joint ventures & associates (post tax)		0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		0.0	0.0	0.0	0.0	0.0	0.0
Profit Before Tax (norm)		1.8	5.4	12.7	18.5	17.4	20.8
Profit Before Tax (reported)		1.8	5.4	12.7	18.5	17.4	20.8
Reported tax		(0.0)	(2.2)	(4.5)	(6.1)	(5.8)	(6.9)
Profit After Tax (norm)		1.8	3.3	8.3	12.4	11.7	13.9
Profit After Tax (reported)		1.8	3.3	8.3	12.4	11.7	13.9
Minority interests		(0.1)	(0.2)	0.3	(0.4)	(0.8)	(0.8)
Discontinued operations		0.0	0.0	0.0	0.0	0.0	0.0
Net income (normalised)		1.7	3.1	8.6	12.0	10.9	13.1
Net income (reported)		1.7	3.1	8.6	12.0	10.9	13.1

Basic average number of shares outstanding (m)		26	26	26	27	29	29
EPS - basic normalised (€)		0.07	0.12	0.32	0.44	0.38	0.45
EPS - diluted normalised (€)		0.07	0.12	0.32	0.44	0.38	0.45
EPS - basic reported (€)		0.07	0.12	0.32	0.44	0.38	0.45
Dividend (€)		0.00	0.00	0.02	0.00	0.00	0.00

Revenue growth (%)		#DIV/0!	48.5	63.2	37.3	32.1	9.8
Gross Margin (%)		66.4	52.7	66.0	73.9	70.3	70.9
EBITDA Margin (%)		66.4	52.7	66.0	73.9	70.3	70.9
Normalised Operating Margin		19.6	33.2	46.4	52.6	35.7	38.7

BALANCE SHEET
Fixed Assets		19.6	25.0	37.0	50.5	55.4	60.4
Intangible Assets		9.7	16.1	31.4	44.9	49.8	54.8
Tangible Assets		0.3	0.3	0.3	0.3	0.3	0.3
Investments & other		9.7	8.5	5.3	5.3	5.3	5.3
Current Assets		27.5	32.2	37.8	46.7	56.8	66.1
Stocks		0.0	0.0	0.0	0.0	0.0	0.0
Debtors		18.4	22.3	31.7	41.1	42.5	46.6
Cash & cash equivalents		0.4	2.9	1.8	3.3	14.0	19.1
Other		8.7	7.0	4.3	2.3	0.3	0.3
Current Liabilities		(15.4)	(14.5)	(14.1)	(14.7)	(14.9)	(15.2)
Creditors		(10.2)	(10.9)	(11.7)	(12.3)	(12.6)	(12.9)
Tax and social security		(0.1)	(0.1)	(0.2)	(0.2)	(0.2)	(0.2)
Short term borrowings		(3.9)	(2.9)	(2.1)	(2.1)	(2.1)	(2.1)
Other		(1.3)	(0.7)	(0.1)	(0.1)	(0.1)	(0.1)
Long Term Liabilities		(0.6)	(0.4)	(0.8)	(0.8)	(0.8)	(0.8)
Long term borrowings		(0.2)	(0.2)	(0.6)	(0.6)	(0.6)	(0.6)
Other long term liabilities		(0.4)	(0.2)	(0.2)	(0.2)	(0.2)	(0.2)
Net Assets		31.2	42.3	59.9	81.8	96.5	110.4
Minority interests		1.0	1.4	0.6	0.6	0.6	0.6
Shareholders' equity		32.2	43.7	60.4	82.4	97.1	111.0

CASH FLOW
Op Cash Flow before WC and tax		7.5	8.9	18.1	27.8	35.0	38.7
Working capital		(2.8)	(0.4)	(1.9)	(6.9)	0.9	(3.9)
Exceptional & other		(0.5)	1.0	0.7	0.0	0.0	0.0
Tax		(0.0)	(2.2)	(4.5)	(6.1)	(5.8)	(6.9)
Net operating cash flow		4.1	7.3	12.5	14.8	30.1	28.0
Capex		(7.3)	(9.8)	(20.6)	(21.6)	(22.1)	(22.6)
Acquisitions/disposals		0.0	0.0	0.0	0.0	0.0	0.0
Net interest		(0.3)	(0.2)	(0.2)	(0.3)	(0.3)	(0.3)
Equity financing		3.4	6.1	7.2	8.5	3.0	0.0
Dividends		0.0	0.0	0.0	0.0	0.0	0.0
Other		0.2	0.1	0.3	0.0	0.0	0.0
Net Cash Flow		0.1	3.4	(0.7)	1.5	10.7	5.1
Opening net debt/(cash)		3.7	3.6	0.2	0.8	(0.6)	(11.4)
FX		0.0	0.0	0.0	0.0	0.0	0.0
Other non-cash movements		0.0	0.0	0.0	0.0	0.0	0.0
Closing net debt/(cash)		3.6	0.2	0.8	(0.6)	(11.4)	(16.4)

Source: Mondo TV (historics), Edison Investment Research (forecasts)

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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

Sydney +61 (0)2 8249 8342

Level 12, 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

Sydney +61 (0)2 8249 8342

Level 12, 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

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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