Streaming positivity

Edel 2 July 2019 Update
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Edel

Streaming positivity

Media

Scale research report - Update

2 July 2019

Price

€2.12

Market cap

€48m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt at 31 March 2019

€54.8m

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

Small free float.

Lack of comparators for valuation.

Spotify’s dominance in streaming.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5757

Edel’s H119 results to March showed a modest improvement in revenues, which were up 2% on the prior period, and a broadly stable EBITDA and margin. Increased depreciation impacts further down the income statement. Management has been passed down a generation to Jonas Haentjes, post Edel’s transition to a partnership limited by shares (the founding family retains its 64% stake). The shares trade at a substantial discount to global entertainment content and publishing stocks, partly due to the limited market liquidity.

Peak investment phase passed

Over the past three years Edel has invested heavily to take advantage of the opportunities in both physical and digital production and distribution in the music, publishing and film markets. Capital spend was €20.4m in FY17 and €19.3m in FY18 but now the peak investment has passed in H119 it was less than half the prior year at €5.1m. Vinyl pressing continued to increase, but CD/DVD production declined, leading to a somewhat disappointing performance at optimal media. Streaming remains a strong market, with Kontor New Media (licensing and content management) well placed, distributing content on platforms such as Apple Music (where it is a Preferred Plus partner), Amazon and Spotify. The group’s book publishing and film and children’s operations also performed well. The change in mix lowered the gross margin by 200bp to 49%, while the higher depreciation charge post the capex programme weighed on pre-tax profit and EPS. There was no update to earlier FY19 company guidance (there are no broker forecasts).

Ongoing shift to digital but vinyl resists trend

Industry figures (IFPI) show revenues from streaming approaching half of the total music market globally at $8.9bn, having climbed to 47% in 2018 from 39% in 2017. The global physical market was down 10% on the prior year as the production of CDs and DVDs continues to decline, but vinyl continues its (13-year) positive run, up 6.0% at 3.6% of the total market. The German market is now the fourth largest global music market, having been overtaken by the UK.

Valuation: Discount to content, publishing

We have maintained the same valuation approach as in our previous notes, comparing the company’s rating with the global media subsectors of entertainment content and publishing. Edel’s shares trade at a significant discount on EV/sales multiples, most likely reflecting the manufacturing contribution. On current year EV/EBITDA (based on company guidance), the discount is 41%. On a P/E basis, the multiple is 10.1x vs 17.2x.

Consensus estimates*

Year
end

Revenue
(€m)

PBT
(€m)

Adjusted EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/17

198.1

6.8

0.19

0.10

11.2

4.7

09/18

209.2

6.6

0.16

0.10

13.3

4.7

09/19e

207.5

7.8

0.21

0.10

10.1

4.7

Source: Edel accounts. Note: *Company guidance.

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 half year report to end March 2019 in June.

Exhibit 1: Half year to 31 March 2019 vs H118

€000s

H119

H118

%

Year end 30 September

HGB/German GAAP

HGB/German GAAP

change

Income statement

Revenue

108,074

106,104

+2

EBITDA

10,469

10,400

+1

EBITDA margin (%)

9.7

9.8

Profit before tax (as reported)

4,904

5,607

-13

Net income (as reported)

3,211

3,649

-12

Source: Edel accounts

As management did not update its FY19 sales guidance of €207.5m, this maintained figure now allows for a more difficult H2 (a 4% reduction in sales). Working backwards from the company’s guided net income of €4.7m suggests to us FY19 EBITDA in the €18.5–19.5m range (we do not model the company financially in full and there are no broker forecasts). This now implies EBITDA of €8–9m in H2, from the low of €6.9m in H218. The EBITDA margin has recovered to over 9%, having dipped to 6.7% in H218.

Management did not provide detail on the revenue split at this stage, but did outline the trading performance by segment. Streaming is the main growth driver at Kontor New Media, where the group’s strong relationships with the major platforms position it as a market leader. At optimal media, where the capex programme has been focused, the activities in vinyl and in book publishing both remain positive as the state-of-the-art facilities make the group an attractive partner. The book publishing imprint, ZS Verlag, had a particularly successful trading period with a number of top 10 sellers in various categories. The Film and Children’s operations also showed positive earnings growth. However, physical digital (CD, DVD, Blu-Ray) remains a more difficult market, leading to overall reduced revenues from optimal media.

Net debt at the half-year stage was €54.8m vs €56.3m at the end of FY18. With capex reverting to near-maintenance levels, we would expect net debt to continue to reduce.

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

22.0

15.4

15.0

1.5

1.5

1.5

7.9

6.8

6.5

Broadcast & Entertainment

17.2

19.0

12.0

1.7

1.5

1.4

9.7

7.4

6.4

Edel

13.3

10.1

N/A

0.5

0.5

N/A

6.0

5.9

N/A

Source: Refinitiv, Edison Investment Research. Note: Prices as at 1 July 2019. Edel FY1 based on company guidance.

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 corporate structure ensures stability but diminishes the potential sway of the minority shareholders and the possible valuation. Nevertheless, Edel’s share price appears to be well below the global market on both P/E and EV/EBITDA multiples, in part due to its comparatively modest size and limited liquidity, given the family’s 64% shareholding. At present, Edel’s current-year P/E multiple is at a 41% discount to peers, while on EV/EBITDA it trades at a 17% discount.

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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.

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.

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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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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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.

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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.

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Frankfurt +49 (0)69 78 8076 960

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