Underlying publishing revenues ahead

The Quarto Group 4 November 2015 Update

The Quarto Group

Underlying publishing revenues ahead

Trading update

Media

4 November 2015

Price

221.5p

Market cap

£44m

US$1.55/£

Net debt ($m) at end September 2015

80

Shares in issue

19.7m

Free float

64%

Code

QRT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.5

5.5

56.5

Rel (local)

(0.9)

10.0

55.4

52-week high/low

235p

141.5p

Business description

Quarto is the leading global illustrated book publishing and distribution group. It has five distinct but complementary businesses: Quarto International Co-editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK; Quarto Hong Kong, and Books & Gifts Direct, Australia & New Zealand.

Next events

Full year results

March 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Jane Anscombe

+44 (0)20 3077 5740

Bridie Barrett

+44 (0)20 3077 5700

The Quarto Group is a research client of Edison Investment Research Limited

Quarto’s Q315 trading update indicates that full year results are on track to meet management expectations for the full year, with profits strongly weighted to the final quarter. Group revenues were flat at $54.4m (Q314: $54.5m), with the benefits of acquisitions and positive performance from the underlying publishing businesses being offset by the twin impacts of currency and difficult trading in Australia and New Zealand. With earnings clearly on a rising trend and the debt level continuing to recede, the rating remains at an unjustifiably sizeable discount to the market and sector.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

176.3

9.6

37.7

7.9

9.1

3.6

12/14

172.6

12.1

44.8

8.3

7.7

3.7

12/15e

177.0

13.3

47.6

8.3

7.2

3.7

12/16e

184.3

14.6

51.7

8.3

6.6

3.7

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

Underlying publishing moving ahead

Q1’s successful acquisition and integration of Ivy Press (for £1.3m plus £0.2m debt) helped propel publishing revenues forward by 7.9% in Q315. Underlying publishing revenues also increased 1.3%. At the half-year, the children’s offer and foreign language sales were the strongest contributors to progress. Books & Gifts Direct, the Australia and New Zealand operation, benefited in H115 from the previous year’s reorganisation, but is finding the going tough in the throes of the local economic backdrop. The effect is amplified by the translation from A$ to US$ for reporting purposes, with a further 10% currency headwind in Q315 (17% year-to-date). The group has a clear strategy to create high-quality, content-rich books and sell them in as many languages and via as many channels as possible. The underlying progress on this front, and the continuing reduction in the debt (and interest), has led us to make a slight increase in our expectations for FY16 from a PBT of US$14.4m to US$14.6m.

Continuing progress on balance sheet

The indication of net debt at end September of $80m shows further progress ($81m at end June; $82m September 2014). Our model indicates a year-end figure of $60m, which is very comfortably within covenants (see our update note, August 2015). As was the case for Ivy Press, the balance sheet position is now allowing the flexibility for acquisitions on a modest scale, where payback and value is clear.

Valuation: Unjustifiably large discount

Despite the stronger 2015 share price performance, Quarto’s valuation remains at a considerable discount to other publishers and to the market. The overall global publishing sector currently trades on 14.4x FY15 P/E and 6.7x EV/EBITDA, with smaller international publishers on 10.1x current year P/E and 5.5x EV/EBITDA. Quarto is trading on a discount of 29% and 33% respectively to these latter peers.

Exhibit 1: Financial summary

Year end 31 December

 

US$'000s

2013

2014

2015e

2016e

Accounting basis

 

 

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Revenue

 

 

176,318

172,644

177,000

184,250

Cost of sales

(111,807)

(107,637)

(109,740)

(114,235)

Gross profit

 

 

64,511

65,007

67,260

70,015

EBITDA

 

 

33,317

34,832

36,100

37,544

Operating profit (before GW and except)

 

31,943

33,726

34,900

36,294

Amortisation of intangibles

 

 

(434)

(503)

(680)

(500)

Exceptionals

 

 

(3,405)

566

(500)

0

Amortisation of pre-production costs

 

 

(17,899)

(18,333)

(18,500)

(18,750)

Operating profit

 

 

10,205

15,456

15,220

17,044

Net interest

 

 

(4,443)

(3,257)

(3,100)

(2,944)

Profit before tax (norm)

 

 

9,601

12,136

13,300

14,600

Profit before tax IFRS

 

 

5,762

12,199

12,120

14,100

Tax

 

 

(1,416)

(2,980)

(3,658)

(4,150)

Adjustment to tax for normalised earnings

 

 

(1,013)

(16)

0

0

Minority charge

 

 

(412)

(310)

(270)

(270)

Profit after tax (norm.)

 

 

6,760

8,830

9,372

10,180

Profit after tax (FRS3)

 

 

3,934

8,909

8,192

9,680

 

 

 

 

 

 

 

Average number of shares outstanding (m)

 

 

19.7

19.7

19.7

19.7

EPS - normalised fully diluted (c)

 

 

37.7

44.8

47.6

51.7

EPS - IFRS (c)

 

 

20.0

45.2

41.6

49.1

Dividend per share (p)

7.9

8.3

8.3

8.3

 

 

 

 

 

 

 

EBITDA margin (%)

 

 

19%

20%

20%

20%

Operating margin (before GW and except) (%)

 

18%

20%

20%

20%

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

Fixed assets

 

 

104,557

102,416

105,595

105,845

Intangible assets

 

 

42,358

42,025

42,095

42,345

Tangible assets

 

 

5,978

2,857

4,500

4,500

Investment in associates

 

 

56,221

57,534

59,000

59,000

Current assets

 

 

99,103

101,073

96,977

99,328

Intangible assets: pre-publication costs

 

 

0

0

0

0

Stocks

 

 

19,181

23,347

21,542

22,201

Debtors

 

 

56,043

54,616

55,434

57,128

Cash

 

 

23,879

23,110

20,000

20,000

Current liabilities

 

 

(70,485)

(144,919)

(74,768)

(77,089)

Creditors

 

 

(53,882)

(55,769)

(57,723)

(60,088)

Short-term borrowings

 

 

(16,603)

(89,150)

(17,045)

(17,000)

Long-term liabilities

 

 

(83,229)

(6,875)

(68,100)

(61,100)

Long-term borrowings

 

 

(78,291)

0

(63,000)

(56,000)

Other long-term liabilities

 

 

(4,938)

(6,875)

(5,100)

(5,100)

Net assets

 

 

49,946

51,695

59,704

66,985

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

Operating cash flow

 

 

47,914

45,340

49,370

50,150

Net interest

 

 

(4,701)

(3,482)

(3,268)

(3,112)

Tax

 

 

(2,087)

(759)

(3,150)

(3,781)

Capex

 

 

(28,805)

(33,018)

(33,000)

(33,000)

Acquisitions/disposals

 

 

1,057

(2,008)

(1,341)

(671)

Financing

 

 

14

0

0

0

Dividends

 

 

(2,427)

(2,567)

(2,610)

(2,530)

Other

 

 

(382)

2,189

(6)

(12)

Net cash flow

 

 

10,583

5,695

5,995

7,044

Opening net debt/(cash)

 

 

80,978

71,015

66,040

60,045

HP finance leases initiated

 

 

0

0

0

0

Loans acquired with acquisitions

 

 

0

0

0

0

Translation differences

 

 

(620)

(720)

0

0

Closing net debt/(cash)

 

 

71,015

66,040

60,045

53,000

Source: Company accounts, Edison Investment Research

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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

245 Park Avenue, 39th Floor

10167, New York

US

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Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

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Level 15, 171 Featherston St

Wellington 6011

New Zealand

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