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Avesco Group — Update 11 January 2016

Avesco Group — Update 11 January 2016

Avesco Group

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

Avesco Group

‘Odd’ year outruns the best ‘even’

Full-year results

Media

12 January 2016

Price

212.5p

Market cap

£41m

£1:$1.54

Net debt at end September 2015 (£m)

17.5

Shares in issue

19.1m

Free float

56%

Code

AVS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.4)

6.5

77.1

Rel (local)

(3.0)

10.1

81.2

52-week high/low

246.5p

116p

Business description

Avesco is an international media services group that provides broadcast and audiovisual (AV) equipment and services to the corporate, entertainment and broadcast markets worldwide. Avesco brings together a portfolio of specialist event-staging services under one umbrella.

Next events

AGM

March 2016

Half-year results

Mid-June 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Jane Anscombe

+44 (0)20 3077 5740

Avesco Group is a research client of Edison Investment Research Limited

FY15 results were ahead of forecasts, with particularly strong performance from Creative Technology (CT) in the US and with CT Europe getting a boost from the European Games in Baku. FY16 should benefit from the UEFA European Championships and Rio Olympics. Growth of corporate revenues and the migration of Presteigne to dry hire only are helping to even out swings between odd and even years, with the ‘odd’ FY15 outperforming previous ‘even’ highs. The Fountain Studio sale will further bolster the balance sheet, supporting investment to grow CT and a progressive dividend.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

126.4

5.0

12.4

6.0

17.1

2.8

09/15

133.7

5.7

25.3

7.0

8.4

3.3

09/16e

137.5

6.6

20.8

8.0

10.2

3.8

09/17e

136.5

7.1

22.3

9.0

9.5

4.2

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

Creative Technology continues to power up

As was clear from early on, CT traded strongly in FY15, particularly in the key US market, with the benefit of a positive underlying market across a range of verticals. The European Games in Baku were also more valuable for CT than originally anticipated. Losses in Germany have been largely eliminated and the H2 outperformance was broadly attributable to the US, which more than compensated for tough markets for Broadcast Services. Earnings benefited further from an advantageous tax settlement with HMRC on treatment of earlier losses.

Turning off the Fountain

The sale of the Fountain Studio site in Wembley, London makes sense from both a financial and a structural perspective. The price is well in excess of the book value, realising a net gain of around £7m in FY16, with an impairment of £1.3m being taken on bespoke broadcast equipment in the FY15 numbers. The group is leasing back the studios until at least the end of the year to meet contractual commitments. The ongoing group will consist of CT in the US, Europe and Asia Pacific, the Full Service business, mclcreate, and Presteigne dry hire, reporting as Broadcast Services. CT is far and away the largest element of the group, accounting for 83% of sales and 90% of trading profits in our model for the current financial year.

Valuation: Discount to events and hire businesses

The share price has risen 48% from 143.5p at the time of the interims in June and the shares no longer sit at a discount to the historic underlying asset value (180p). The sale proceeds and improving profitability imply an increase in the balance sheet for FY16, underpinning the current price. The shares also trade well below EV/EBIT of other event and hire businesses, closer on P/E and yield, leaving the price well underpinned, with upside potential provided the modelled earnings scenario pans out.

CT in the vanguard

Stripping out the effect of the large events (Baku, the Rugby World Cup, Paris Motor Show, offset by the absence of prior-year large events), underlying revenues grew by 2% (£2.3m) with the underlying gross margin increasing from 37% to 39%. The impact from earlier restructuring has now worked its way through, with the overall business significantly de-risked through the withdrawal from project work in Broadcast Services and the downsizing of the mainland European Presteigne and CT operations.

CT in the US (the largest part of CT overall, at around 58% of divisional revenues) was clearly the star performer in the group, with revenues and trading profits ahead by 21%. This growth was broadly based, rather than representing any particular big wins, with the larger events gaining ground, consistent with the experience of the wider events and exhibitions market providers. The European operations turned in a better-than-expected performance thanks to the European Games in Baku, which delivered over £5m of revenues, albeit that CT Europe’s revenues were down overall. Margins, however, recovered well as the German restructuring approached eliminating previous losses. CT Asia Pacific is making gentle progress but has not yet achieved sufficient scale to break even. While the addressable market is vast, most of CT’s business is inbound rather than local, working with existing corporate clients from other territories and therefore supporting the overall effort. The market in Singapore is emerging as the most accessible.

Full Service stable, Broadcast Services under pressure

The group’s Full Service offer to corporate clients, mclcreate, had a stable year, with revenues slightly down but margins ahead. This was achieved despite the loss of a sizeable exhibition client. Post the Fountain disposal, and likely closure of the studios, the Broadcast Service division will solely comprise Presteigne. Presteigne had a difficult year in FY15, with highly competitive markets and a £0.9m bad debt from a longstanding client in Thailand whose own client is experiencing cash flow difficulties. With the altered orientation of the business away from project work on to pure dry hire, the sales department has been restructured and the decline should now start to reverse. Presteigne should also be in a strong position to benefit from broadcast coverage of the UEFA European Championships.

Sale of Fountain Studios

The Fountain Studios, best known for broadcasting The X Factor and Britain’s Got Talent, are surrounded by land and buildings owned by property company Quintain, which itself was bought by US private equity house, Lone Star, in the autumn last year. Quintain has been developing the Wembley Park site. Margins at the studios had been under heavy pressure and they made a small trading loss of £0.1m in these reported figures. The sale price of £16m is considerably ahead of the historic book value and the expected profit of £7m, net of tax related costs, will fall into the FY16 year. An impairment of £1.3m has been taken on fixtures, fittings and other plant and equipment. A consultation process will now start with the employees with regard to ceasing studio operations there over time. For the time being, the group will lease the facilities back.

Significant balance sheet strengthening

In addition to the impairment referred to above, two provisions (£0.7m and £0.4m) have been taken against onerous leases in mclcreate and at CT Germany, respectively. Post capital expenditure of £16m, the strong operating cash flow in FY15 reduced the balance sheet net debt position from £21.4m to £17.5m. In the current year, the proceeds from the Fountain sale will give a step change in the strength of the balance sheet. We are anticipating slightly lower levels of capital spend, of around £14-15m in each of FY16 and FY17, resulting in anticipated year end net debt levels of £3.5m and £2.5m respectively.

Earnings revision

FY16 has started positively, with CT Europe having the benefit of the UEFA European Championships in June and CT US well positioned for the Rio Olympics and Paralympics, although the gains here will not approach the scale of the benefit from London 2012. In FY17, the IAAF World Athletics Championships will be held in London in the summer, which should help negate some of the ‘odd’ year large event effect.

We have reviewed our numbers on the back of the full year results, which were ahead of our forecasts, particularly on the assumptions regarding taxation.

Exhibit 1: Revisions to forecasts

Revenues

EPS

PBT

EBITDA

Old

New

% chg

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2015

130.0

133.7

+3

13.0

25.3

+95

5.2

5.7

+10

26.0

27.0

+4

2016e

140.0

137.5

-2

16.8

20.8

+24

6.5

6.6

+2

27.9

27.0

-3

2017e

-

136.5

N/A

-

22.3

N/A

-

7.1

N/A

-

27.1

N/A

Source: Edison Investment Research; Note: 2015 figures ‘New’ represents actual figures, ‘Old’ – forecasts.

Valuation underpinned

Exhibit 2: Peer valuation comparison

Price

Mkt cap

EV/EBIT (x)

P/E (x)

Yield

 

(p)

(£m)

FY15e

FY16e

FY17e

FY15e

FY16e

FY17e

FY15e

FY16e

FY17e

Avesco

212.5

40.5

7.9

5.5

5.2

8.4

10.2

9.5

3.3%

3.8%

4.2%

Vitec

575.5

255.2

10.2

8.8

8.4

10.8

10.1

9.9

4.3%

4.4%

4.6%

Tarsus

222.0

225.6

13.8

12.4

9.7

12.7

15.2

11.6

3.7%

3.9%

4.1%

Lavendon

141.5

243.7

8.9

7.7

7.3

8.5

8.0

7.6

3.4%

3.8%

4.1%

Centaur

63.8

91.6

7.5

9.3

8.7

9.2

11.4

10.3

3.5%

4.9%

5.2%

RELX

1,170.0

13,287.7

16.6

14.8

14.1

19.9

18.1

17.0

2.4%

2.5%

2.7%

Peer average*

11.4

10.6

9.6

12.2

12.6

11.3

3.4%

3.9%

4.1%

Peer average excl RELX*

10.1

9.6

8.5

10.3

11.2

9.8

3.7%

4.2%

4.5%

Source: Edison Investment Research, Bloomberg. Note: Prices as at 8 January 2016. *Adjusted to match Avesco’s Sept y/e; averages do not include Avesco.

The good share price performance reflects the combination of good underlying trading and the reduced potential volatility in trading patterns. The unwinding of the corporate ‘distractions’, such as the Disney situation and the slight anomaly of the studios operation, leaves the group as a much clearer and more coherent investment proposition. The shares no longer trade at a discount to published assets of 180p, but the value to be realised by the Fountain sale adds another 31p, fully underwriting current levels.

On an earnings basis, the direct market comparisons are limited, but looking at a framework of equipment hire businesses and events companies as in Exhibit 2, above, there remains a valuation discrepancy that should close provided that results continue to deliver at least to market expectations.

Exhibit 3: Financial summary

£'000s

2013

2014

2015

2016e

2017e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

124,033

126,391

133,674

137,500

136,500

Cost of sales

(80,408)

(80,186)

(83,035)

(85,250)

(84,630)

Gross profit

43,625

46,205

50,639

52,250

51,870

EBITDA

18,943

24,968

26,955

27,000

27,100

Depreciation and software amortisation

(18,432)

(18,715)

(19,598)

(19,000)

(18,900)

Trading profit (before exceptional items)

511

6,253

7,357

8,000

8,200

Amortisation of acquired intangible assets

0

0

0

0

0

Exceptional items

(8,861)

(5,385)

(2,499)

7,000

0

Operating profit

(8,350)

868

4,858

15,000

8,200

Net Interest

(1,529)

(1,298)

(1,650)

(1,400)

(1,100)

Profit before tax (norm)

(1,018)

4,955

5,707

6,600

7,100

Profit before tax (FRS 3)

(9,879)

(430)

3,208

13,600

7,100

Tax

(744)

(2,310)

(854)

(2,608)

(2,805)

Minority interest

0

0

0

0

0

Profit on discontinued operations

45,729

1,192

1,072

0

0

Profit after tax (norm)

(1,762)

2,645

4,853

3,992

4,295

Profit after tax (FRS 3)

35,106

(1,548)

3,426

10,992

4,295

Average number of shares outstanding (m)

25.8

21.4

19.0

19.1

19.1

EPS - normalised fully diluted (p)*

(6.8)

12.4

25.3

20.8

22.3

Dividend per share (p)

5.0

6.0

7.0

8.0

9.0

Gross margin (%)

35.2

36.6

37.9

38.0

38.0

EBITDA margin (%)

15.3

19.8

20.2

19.6

19.9

Operating margin (before GW and except) (%)

0.4

4.9

5.5

5.8

6.0

BALANCE SHEET

Fixed assets

62,160

62,311

59,201

53,275

52,125

Intangible assets

311

130

209

209

209

Tangible assets

56,346

57,787

54,266

48,716

47,566

Other (mainly deferred income tax assets)

5,503

4,394

4,726

4,350

4,350

Current assets

67,655

33,462

40,741

37,768

37,569

Stocks

829

596

649

668

663

Debtors

23,114

23,801

25,860

26,600

26,407

Cash

43,699

9,065

12,749

10,500

10,500

Other

13

0

1,483

0

0

Current liabilities

(38,607)

(33,259)

(35,592)

(31,027)

(30,323)

Creditors

(30,712)

(25,357)

(27,247)

(28,027)

(27,823)

Short-term borrowings

(7,895)

(7,902)

(8,345)

(3,000)

(2,500)

Long-term liabilities

(18,009)

(30,371)

(29,931)

(17,000)

(13,500)

Long-term borrowings

(13,467)

(22,602)

(21,866)

(11,000)

(10,500)

Other long-term liabilities

(4,542)

(7,769)

(8,065)

(6,000)

(3,000)

Net assets

73,199

32,143

34,419

43,016

45,871

CASH FLOW

Operating cash flow

17,098

16,415

26,292

22,000

21,400

Net interest

(1,604)

(1,224)

(1,634)

(1,400)

(1,100)

Tax

(1,157)

(1,268)

(2,942)

(3,300)

(3,800)

Capex (net)

(15,766)

(19,042)

(15,975)

(15,000)

(14,000)

Net acquisitions/ Disney payout (FY13)/ Fountain disposal (FY16)

49,818

0

634

13,000

0

Share buy-back/redemption

0

(21,861)

0

0

0

Dividends

(1,032)

(17,468)

(1,474)

(1,300)

(1,500)

Net cash flow

47,357

(44,448)

4,901

14,000

1,000

Opening net debt/(cash)

24,765

(22,337)

21,439

17,462

3,500

Other (inc currency)

(255)

672

(924)

(38)

0

Closing net debt/(cash)

(22,337)

21,439

17,462

3,500

2,500

Source: Company accounts, Edison Investment Research

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NetDimensions (Holdings) — Update 11 January 2016

NetDimensions (Holdings)

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