The Quarto Group |
Underlying publishing revenues ahead |
Trading update |
Media |
4 November 2015 |
Share price performance
Business description
Next events
Analysts
The Quarto Group is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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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