Making records

Edel 13 July 2017 Update
Download PDF

Edel

Making records

Media

Scale research report - Update

13 July 2017

Price

€2.51

Market cap

€57m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt as at 31 March 2017

€39.3m

Business description

Edel AG 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

Small free float.

Lack of comparators for valuation.

Spotify dominance in streaming.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5757

Edel AG’s interim results show continued progress, particularly at Optimal Media where there was ‘significant’ progress in sales and earnings, buoyed by the continued resurgence of vinyl. Only the first few weeks of the new deal with Universal Music will have been included. Kontor New Media also made good progress and has been expanding its reach, while the books offering also performed well. The record label had less positive trading, with no major break-out hits released. The group is majority family-owned with limited market liquidity, which partly explains the modest rating. The shares trade at a discount to global entertainment content and publishing companies and carry an attractive yield.

Forecasts revised upwards

Revenues in the six months to end March were up 5%, with EBITDA up 9% and EBIT +15% on the comparative period. This was above market forecasts (only one set of numbers is in the market) and these have been revised up for FY17e, FY18e and FY19e. The current year EBITDA estimate is raised from €15.5m to €16.3m; for FY18e the revision is from €16.2m to €16.8m, up 5% and 4% respectively. Top-line growth of 4% is anticipated for this year and next, with 3.5% for the following year.

Investing in product and capacity

Management intends to take advantage of the favourable conditions to invest a further €22m in Optimal Media. The Universal Music contract in manufacture and distribution, launched in February 2017, has good scope for expansion. With some manufacturers of CDs and DVDs struggling, there are plenty of opportunities for Edel to continue to build share, even if the overall market for CDs and DVDs is in decline. By being an efficient, scale producer of quality product, Edel should be able to grow at good margins.

Valuation: Discount to content, publishing

We have maintained the same valuation approach as our initiation note, comparing the rating of the company with the global media subsectors of entertainment content and publishing. Edel’s shares trade on a significant discount on EV/sales, most likely reflecting the manufacturing contribution. On forward EV/EBITDA, the discount is 38%. On a P/E basis, the multiple is 14.8x vs 18.3x.

Consensus estimates

Year
end

Revenue
(€m)

PBT

(€m)

Adjusted EPS (€)

DPS
(€)

P/E

(x)

Yield
(%)

09/15

168.3

3.6

0.12

0.10

20.9

4.0

09/16

180.2

6.0

0.15

0.10

16.7

4.0

09/17e

187.4

6.0

0.17

0.11

14.8

4.4

09/18e

194.9

7.0

0.20

0.13

12.6

5.2

Source: Edel accounts, broker estimates (Montega).

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

Exhibit 1: Half year to 31 March 2017 vs prior half year

€000s

2017

2016

% change

Year end 30 September

HGB/German GAAP

HGB/German GAAP

Income statement

Revenue

98,570

93.488

+5

EBITDA

9,148

8,416

+9

EBITDA margin (%)

9.3

9.0

Profit before tax (as reported)

4,617

3,727

+24

Net income (as reported)

3,005

2,713

+11

Source: Edel accounts.

The growth at the pre-tax level shows the benefits of the new financing arrangements, as described in our previous note. New market forecasts are for EBITDA growth of 6.5% in FY17e and 3.0% for the year after, with a jump up to 6% growth in FY19e as the benefits of the investment programme start to come through. The group’s EBITDA margin is forecast in the 8.5-8.8% range.

The market forecasts are predicated on a capital investment programme of €22m on upgrading and expanding the facilties at Optimal Media to meet market demand. There is also investment, albeit less capital intensive, in expanding the operations of Kontor New Media. The scale of this operation is easy to overlook. It is a major player across Europe in the distribution of digital media, hosting and managing around 600 channels on YouTube for various major licensees, including Disney. In music it handles around 2.3m songs; in video over 2,000 films and 300 TV series. Management is targeting the scaling up of the children’s content offering in particular. The scale and breadth of its capabilities is increasing KNM’s attraction as a one-stop-shop partner for the major global rights’ owners.

The spending programme will lead to an uplift in net debt to a forecast €57.4m at the end of FY17e, €58.2m end FY18e, before starting to decline, with the additional interest taken into account in the revised earnings’ forecasts.

Valuation

A sensible valuation framework for Edel is complicated by the range of the company’s activities, from the pressing of 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. For this reason, any peer group comparison is inevitably flawed. Given these constraints, rather than pick out a set of inadequate peers, we have looked globally across the key subsectors in which Edel operates, particularly entertainment content and publishing at key valuation metrics. We have stripped out the unprofitable companies from the EV/EBITDA and P/E calculations, as well as any obvious distortive outliers.

Exhibit 2: Sectoral valuations for related activities

Historical EV/sales
(x)

Next EV/sales
(x)

Historical EV/EBITDA (x)

Next EV/EBITDA
(x)

Historical P/E
(x)

Next P/E
(x)

Entertainment content

3.40

2.70

10.60

9.80

21.40

18.00

Publishing

1.90

1.70

9.30

9.60

17.70

17.60

Edel

0.53

0.52

6.31

6.22

16.73

14.76

Source: Bloomberg, Edison Investment Research

It would be expected that the multiple to sales would be lower due to the large volumes of third-party revenues, which will also distort margin comparisons. In this context, Edel’s share price looks to be well below the global market, partly reflecting its comparatively modest size and limited liquidity.

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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
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.

Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

Share this with friends and colleagues

You may be interested in