7digital’s recent trading update confirmed good progress. H117 revenues increased 13%, with a strong performance from high-margin licence and creative sales. Momentum in monthly recurring revenues and new contract wins, as well as the full impact of the 24-7 acquisition put the group on track for an even stronger second half and add to our confidence in the deliverability of targeted EBITDA profitability in 2018. Given the progress being made, the 3.0x FY18 EBITDA rating looks extremely attractive.
Written by
7digital Group |
A good start to the year |
Trading update |
Media |
16 August 2017 |
Share price performance
Business description
Next events
Analysts
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7digital’s recent trading update confirmed good progress. H117 revenues increased 13%, with a strong performance from high-margin licence and creative sales. Momentum in monthly recurring revenues and new contract wins, as well as the full impact of the 24-7 acquisition put the group on track for an even stronger second half and add to our confidence in the deliverability of targeted EBITDA profitability in 2018. Given the progress being made, the 3.0x FY18 EBITDA rating looks extremely attractive.
Year end |
Revenue (£m) |
EBITDA (£m) |
PBT* |
EPS* |
DPS |
EV/ EBITDA (x) |
P/E |
12/15 |
10.4 |
(2.1) |
(7.6) |
(7.1) |
0.0 |
N/A |
N/A |
12/16 |
11.9 |
(3.5) |
(4.7) |
(4.1) |
0.0 |
N/A |
N/A |
12/17e |
19.1 |
(1.7) |
(2.9) |
(1.8) |
0.0 |
N/A |
N/A |
12/18e |
24.9 |
3.0 |
2.1 |
1.2 |
0.0 |
3.0 |
5.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H1 trading update: Pick up in recurring revenues
H1 revenues, which include a month of the 24-7 acquisition and some currency benefit, increased 13% to £5.93m. High-margin licence revenues increased by 25% (c £3.8m) and monthly recurring revenues (including Juke!) increased by 27%. Creative revenues, which are also fairly high margin, were also “particularly strong”.
Contract wins: Momentum across range of segments
Contracts with a lifetime value of c £5m were signed in H1, including with DTS (automotive), HDtracks (the world’s first full MQA streamed music service) and the relaunch of TriPlay’s eMusic service in the US. Since the period end, 7digital has also announced new contracts with Global Eagle Entertainment (inflight entertainment content to the airline industry), Deedo SAS for a new music streaming service across 27 markets in Africa and Asia and US group Fan Label. These contracts will start to contribute to revenues in H217 and along with the first full half contribution from the consolidation of 24-7 (which is expected to add £5m of revenues in H217 and £8m in FY18) should support a very strong second half performance in line with our forecasts and management’s expectations.
Valuation: Progress warrants re-rating
We look forward to more detail at the interims in September, but on the face of it, 7digital has had a good start to the year both financially and in terms of new client wins across a range of segments, which along with the successful integration of 24-7 underpin our forecast 61% growth in revenues this year. While work remains to be done to deliver forecasts, the growth in MRR is encouraging, reflecting in part the benefit of the acquisition, improving earnings visibility and adding to our confidence in the achievability of EBITDA profitability next year. Given the progress being made, the FY18 EV/EBITDA rating of 3.0x, a fraction of the peer set, is looking increasingly out of sync. As the group moves towards targeted EBITDA profitability in FY18 we expect to see a significant re-rating of the shares, which we believe are worth at least 14p. Please refer to our recent initiation report for more information.
Exhibit 1: Financial summary
£000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||||
Revenue |
|
|
10,212 |
10,392 |
11,899 |
19,110 |
24,856 |
27,587 |
Cost of Sales |
(4,882) |
(3,308) |
(3,451) |
(4,261) |
(4,853) |
(5,100) |
||
Gross Profit |
5,330 |
7,084 |
8,448 |
14,849 |
20,003 |
22,487 |
||
EBITDA |
|
|
(3,108) |
(2,102) |
(3,528) |
(1,747) |
2,965 |
4,646 |
Normalised operating profit |
|
|
(3,775) |
(2,862) |
(4,684) |
(2,875) |
2,145 |
3,762 |
Amortisation of acquired intangibles |
0 |
0 |
(321) |
(552) |
(552) |
0 |
||
Exceptionals |
(388) |
(128) |
(464) |
(840) |
(1,100) |
0 |
||
Share-based payments |
(340) |
(137) |
4 |
0 |
0 |
0 |
||
Reported operating profit |
(4,503) |
(3,127) |
(5,465) |
(4,267) |
493 |
3,762 |
||
Net Interest |
3 |
11 |
(13) |
0 |
(15) |
0 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
1,888 |
(4,767) |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(1,884) |
(7,618) |
(4,697) |
(2,875) |
2,130 |
3,762 |
Profit Before Tax (reported) |
|
|
(2,612) |
(7,883) |
(5,478) |
(4,267) |
478 |
3,762 |
Reported tax |
(17) |
(3) |
(12) |
0 |
0 |
(376) |
||
Profit After Tax (norm) |
(1,901) |
(7,621) |
(4,709) |
(2,875) |
2,130 |
3,386 |
||
Profit After Tax (reported) |
(2,629) |
(7,886) |
(5,490) |
(4,267) |
478 |
3,386 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
3,004 |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
(1,901) |
(7,621) |
(4,709) |
(2,875) |
2,130 |
3,386 |
||
Net income (reported) |
375 |
(7,886) |
(5,490) |
(4,267) |
478 |
3,386 |
||
Basic average number of shares outstanding (m) |
87 |
108 |
114 |
160 |
183 |
183 |
||
EPS - basic normalised (p) |
|
|
(2.2) |
(7.1) |
(4.1) |
(1.8) |
1.2 |
1.9 |
EPS - diluted normalised (p) |
|
|
(2.2) |
(7.1) |
(4.1) |
(1.8) |
1.2 |
1.9 |
EPS - basic reported (p) |
|
|
0.4 |
(7.3) |
(4.8) |
(2.7) |
0.3 |
1.9 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
N/A |
1.8 |
14.5 |
60.6 |
30.1 |
11.0 |
||
Gross Margin (%) |
52.2 |
68.2 |
71.0 |
77.7 |
80.5 |
81.5 |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
11.9 |
16.8 |
||
Normalised Operating Margin |
N/A |
N/A |
N/A |
N/A |
8.6 |
13.6 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
7,661 |
1,121 |
2,778 |
3,508 |
2,836 |
2,673 |
Intangible Assets |
345 |
417 |
2,303 |
3,013 |
2,541 |
2,548 |
||
Tangible Assets |
691 |
704 |
475 |
495 |
295 |
125 |
||
Investments & other |
6,625 |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
8,451 |
6,220 |
4,590 |
5,327 |
6,306 |
8,358 |
Stocks |
44 |
62 |
177 |
177 |
177 |
177 |
||
Debtors |
3,095 |
4,502 |
3,575 |
4,712 |
6,129 |
6,802 |
||
Cash & cash equivalents |
5,312 |
1,656 |
838 |
438 |
0 |
1,378 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(4,984) |
(3,975) |
(7,193) |
(8,652) |
(8,666) |
(7,354) |
Creditors |
(4,796) |
(3,804) |
(6,731) |
(8,190) |
(7,736) |
(6,892) |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
0 |
0 |
0 |
0 |
(468) |
0 |
||
Other |
(188) |
(171) |
(462) |
(462) |
(462) |
(462) |
||
Long Term Liabilities |
|
|
0 |
0 |
(1,746) |
(1,561) |
(1,376) |
(1,191) |
Long term borrowings |
0 |
0 |
(1,519) |
(1,334) |
(1,149) |
(964) |
||
Other long term liabilities |
0 |
0 |
(227) |
(227) |
(227) |
(227) |
||
Net Assets |
|
|
11,128 |
3,366 |
(1,571) |
(1,378) |
(900) |
2,486 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
11,128 |
3,366 |
(1,571) |
(1,378) |
(900) |
2,486 |
CASH FLOW |
||||||||
Op Cash Flow before WC and tax |
(3,108) |
(2,102) |
(3,528) |
(1,747) |
2,965 |
4,646 |
||
Working capital |
(2,788) |
(2,439) |
4,098 |
322 |
(1,871) |
(1,518) |
||
Exceptional & other |
(391) |
(150) |
(1,024) |
(840) |
(1,100) |
0 |
||
Tax |
(17) |
(3) |
(12) |
0 |
0 |
(376) |
||
Net operating cash flow |
|
|
(6,304) |
(4,694) |
(466) |
(2,265) |
(6) |
2,751 |
Capex |
(345) |
(848) |
(447) |
(800) |
(700) |
(720) |
||
Acquisitions/disposals |
3,718 |
1,828 |
108 |
0 |
0 |
0 |
||
Net interest |
2 |
11 |
(13) |
0 |
(15) |
0 |
||
Equity financing |
6,952 |
0 |
0 |
2,850 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(1) |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
4,022 |
(3,703) |
(818) |
(215) |
(721) |
2,031 |
||
Opening net debt/(cash) |
|
|
(1,290) |
(5,312) |
(1,656) |
681 |
896 |
1,617 |
FX |
0 |
48 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
0 |
(1,519) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(5,312) |
(1,656) |
681 |
896 |
1,617 |
(414) |
Source: 7digital Group accounts, Edison Investment Research
|
|
Research: Industrials
As indicated in the pre close trading statement, Marshall Motor Holdings (MMH) made good progress in H117, outperforming a weaker UK new car retail market. While uncertainty remains over the direction of end market demand, management’s growth strategy is facilitated by the strengthened balance sheet. Our forecasts are unchanged and assume ongoing market pressure in the second half of the year, with the rating discount to its peers likely to unwind further on any signs of market resilience during H2.