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Research: TMT
With the financial reconstruction complete and the group’s credit ratings upgraded as of end-September, Technicolor is now focused on improving its underlying profit and cash generation. The Q3 narrative was in line with earlier updates: Connected Home benefiting from the strong demand for reliable home broadband and Wi-Fi; Production Services seeing a partial resumption of live action filming; and DVD Services held back by the lack of new releases. Run-rate targeted cost savings have been edged ahead to €325m by FY22, up €25m. FY20 and FY22 guidance, and our revenue and EBITA forecasts based on that guidance, are unchanged.
Technicolor |
Back to basics on driving business performance |
Q3 results |
Media |
19 November 2020 |
Share price performance
Business description
Next events
Analysts
Technicolor is a research client of Edison Investment Research Limited |
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With the financial reconstruction complete and the group’s credit ratings upgraded as of end-September, Technicolor is now focused on improving its underlying profit and cash generation. The Q3 narrative was in line with earlier updates: Connected Home benefiting from the strong demand for reliable home broadband and Wi-Fi; Production Services seeing a partial resumption of live action filming; and DVD Services held back by the lack of new releases. Run-rate targeted cost savings have been edged ahead to €325m by FY22, up €25m. FY20 and FY22 guidance, and our revenue and EBITA forecasts based on that guidance, are unchanged.
Year end |
Revenue (€m) |
EBITDA |
EBITA |
PBT* |
EPS* |
EV/EBITDA |
12/18 |
3,988 |
266 |
98 |
7 |
(3.07) |
5.1 |
12/19 |
3,800 |
325 |
42 |
(73) |
(4.92) |
4.2 |
12/20e |
3,100 |
169 |
(64) |
10 |
(0.08) |
8.0 |
12/21e |
3,460 |
338 |
104 |
(21) |
(0.18) |
4.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Divergent segmental performances
Q3 revenues from Connected Home were ahead 10.6% year-on-year at constant currency rates. Growth was particularly strong in North America (+41% q-o-q), with cable customers upgrading their kit to cope with the demands of working from home and more entertainment consumption. The impact of COVID-19 on Production Services has continued to be severe, with little live action filming in Film and Episodic during the quarter. Revenues were down 51.6% year-on-year and adjusted EBITDA dipped to a small loss of €2m. There are signs that the situation is improving, with the pipeline filling and insurance and union agreements facilitating a return to filming. DVD Services’ Q3 revenue was down 22.7% on Q319, reflecting the paucity of new film releases, although adjusted EBITDA margins increased to 14%, from 12% last year, as the benefit of renegotiated contracts kicked in.
Improving free cash flow
Free cash flow guidance for the current year remains at an outflow of €115–150m, which implies a strong Q4 in this respect. Year-to-date free cash flow to end September was an outflow of €335m, implying a strong inflow in Q4. Management’s target is to be free cash flow positive to the tune of €259m in FY22. Cost savings remain on track for achieving €160m for the current year, with €109m realised by end September. The permanent workforce has been reduced by nearly 30% from the previous year-end. The target for savings by FY22 is edged up slightly by €25m to €325m. IFRS net debt at end Q3 was €955m (€1.04bn nominal), on average interest rates of 8.3%.
Valuation: Off the lows
The share price bottomed out at €1.16 in late of September, with completion of the financial reconstruction. We would expect it now to start better reflecting underlying trading prospects, albeit that the equity remains dominated by the value of the debt. News flow on improving conditions in Production Services, which carries strong longer-term performance potential, should help the share price recovery further.
Focus back on underlying performance
The combination of a complex financial reconstruction and a global pandemic has been demanding, but one is now completed and there is hope that the other will have a less dramatic impact on the business in FY21 and on.
Exhibit 1: Summary results for continuing operations
Q320 |
% change |
YTD |
% change |
||
Revenue (€m) |
Production Services |
111 |
-52% |
390 |
-41% |
DVD Services |
193 |
-23% |
495 |
-21% |
|
Connected Home |
488 |
11% |
1,327 |
-5% |
|
Other |
6 |
N/A |
18 |
N/A |
|
Total |
798 |
-16% |
2,230 |
-18% |
|
Adjusted EBITDA (€m) |
Production Services |
(2) |
N/A |
0 |
N/A |
DVD Services |
27 |
-10% |
29 |
-31% |
|
Connected Home |
31 |
N/A |
85 |
N/A |
|
Other |
(3) |
N/A |
(8) |
N/A |
|
Total |
53 |
-45% |
106 |
-47% |
|
Adjusted EBITA (€m) |
Production Services |
(24) |
N/A |
(75) |
N/A |
DVD Services |
15 |
37% |
(14) |
28% |
|
Connected Home |
15 |
N/A |
35 |
N/A |
|
Other |
(4) |
N/A |
(11) |
N/A |
|
Total |
2 |
-97% |
(65) |
N/A |
Source: Technicolor
Strong US demand for Connected Home
Connected Home has now surpassed its original pre-COVID-19 budgets for the year, buoyed by particularly strong demand from the North American market as customers upgrade to meet their greater domestic needs. North America has generated 56% of segmental revenues over the first nine months of the year. Elsewhere, the trading situation has been more difficult, with lockdowns affecting the ability to access premises in Europe, Asia-Pacific with strong comparatives, and some supply constraints and currency weakness undermining price competitiveness in Latin America. Broadband and Android-based solutions are driving the growth, with video broadly flat.
The benefits of cost cutting are now showing through more strongly, with an adjusted EBITDA margin for the year-to-date of 6.4%, from 1.9% over Q1–Q319.
DVD Services margin improvement in weak markets
The lack of major releases across all formats continued to have an impact on the DVD Services segment, as it had in Q220, with revenues down 23% at constant currency. Catalogue sales have held up better than had initially been expected, given the constraints on the retail sector globally in the pandemic. There will be some lag before any boost from the front list, particularly since several anticipated blockbusters scheduled from the studios have gone straight to streaming rather than theatrical release.
A more aggressive stance on site closures and costs helped improve adjusted EBITDA and EBITA margins, as did earlier contract renegotiations with major studios. That with Paramount has not been renewed, but the distribution part of the agreement has been extended.
Production Services seeing first glimmers of green lights
Film and Episodic productions have moved back into tentative production in Q3, but at small scale. The US studios have now reached agreements with insurers and the unions on how to proceed. Planning is therefore now starting to step up and the pipeline is building encouragingly for FY21, with some productions that are particularly heavily skewed to computer graphics on the slate. The management team has been realigned internally. They have been tasked to deliver greater leverage of the group’s brands and technical capabilities, while delivering a better return in terms of profits and cash.
Updated earnings estimates
We have revised our estimates to incorporate Technicolor’s adjustments to its financial figures following the completion of the financial restructuring, with new debt and equity accounted at fair value as opposed to the nominal values announced during the transaction. While these adjustments only have a small impact on the cash flow, the income statement has been more visibly affected, due to a $164m one-off charge as well as some interest adjustments, all predominantly non-cash. We have also adjusted the number of shares to bring it in line with the latest disclosure. These changes have brought our PBT and EPS estimates lower. However, we maintain our underlying segmental assumptions.
Exhibit 2: Financial summary
€m |
2018 |
2019 |
2020e |
2021e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
3,988 |
3,800 |
3,100 |
3,460 |
Cost of Sales |
(3,521) |
(3,375) |
(2,841) |
(3,042) |
||
Gross Profit |
467 |
425 |
259 |
418 |
||
EBITDA |
|
|
266 |
325 |
169 |
338 |
EBITA |
|
|
98 |
42 |
(64) |
104 |
Amortisation of acquired intangibles |
(81) |
(54) |
(59) |
(59) |
||
Exceptionals |
(127) |
(79) |
(145) |
(20) |
||
Reported operating profit |
(119) |
(121) |
(268) |
25 |
||
Net Interest |
(51) |
(84) |
(90) |
(125) |
||
Joint ventures & associates (post tax) |
0 |
(1) |
0 |
0 |
||
Exceptionals |
0 |
0 |
164 |
0 |
||
Profit Before Tax (norm) |
|
|
7 |
(73) |
10 |
(21) |
Profit Before Tax (reported) |
|
|
(170) |
(206) |
(194) |
(100) |
Reported tax |
(54) |
(3) |
(20) |
(20) |
||
Profit After Tax (norm) |
(47) |
(75) |
(10) |
(41) |
||
Profit After Tax (reported) |
(224) |
(208) |
(214) |
(120) |
||
Minority interests |
(1) |
0 |
0 |
0 |
||
Discontinued operations |
157 |
(22) |
(20) |
0 |
||
Net income (normalised) |
(48) |
(75) |
(10) |
(41) |
||
Net income (reported) |
(68) |
(230) |
(234) |
(120) |
||
Average Number of Shares Outstanding (m) |
15 |
15 |
120 |
224 |
||
EPS - normalised (c) |
|
|
(306.94) |
(492.18) |
(8.41) |
(18.10) |
EPS - normalised fully diluted (c) |
|
|
(306.94) |
(492.18) |
(7.33) |
(16.77) |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
(6) |
(5) |
(18) |
12 |
||
Gross Margin (%) |
11.7 |
11.2 |
8.4 |
12.1 |
||
EBITDA Margin (%) |
6.7 |
8.6 |
5.4 |
9.8 |
||
EBITA Margin (%) |
2.5 |
1.1 |
(2.1) |
3.0 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
2,101 |
2,082 |
1,761 |
1,625 |
Intangible Assets |
1,591 |
1,483 |
1,274 |
1,140 |
||
Tangible Assets |
233 |
476 |
364 |
362 |
||
Investments & other |
26 |
40 |
40 |
40 |
||
Deferred tax and other |
251 |
84 |
84 |
84 |
||
Current Assets |
|
|
1,659 |
1,126 |
1,365 |
1,470 |
Stocks |
268 |
243 |
208 |
232 |
||
Debtors |
677 |
507 |
558 |
592 |
||
Cash & cash equivalents |
291 |
64 |
286 |
333 |
||
Other |
423 |
312 |
312 |
312 |
||
Current Liabilities |
|
|
(1,909) |
(1,542) |
(1,343) |
(1,367) |
Creditors |
(1,135) |
(825) |
(694) |
(718) |
||
Tax and social security |
(34) |
(41) |
(41) |
(41) |
||
Short term borrowings |
(20) |
(95) |
(81) |
(81) |
||
Other |
(720) |
(581) |
(527) |
(527) |
||
Long Term Liabilities |
|
|
(1,385) |
(1,604) |
(1,532) |
(1,578) |
Long term borrowings |
(1,004) |
(1,203) |
(1,131) |
(1,177) |
||
Deferred tax |
(193) |
(27) |
(27) |
(27) |
||
Other long-term liabilities |
(381) |
(401) |
(401) |
(401) |
||
Net Assets |
|
|
466 |
62 |
251 |
149 |
Minority interests |
1 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
467 |
62 |
251 |
149 |
CASH FLOW |
||||||
Net profit |
(224) |
(208) |
(214) |
(120) |
||
Depreciation and amortisation |
234 |
322 |
292 |
281 |
||
Working capital |
2 |
(69) |
(202) |
(33) |
||
Tax and interest |
(53) |
(76) |
(90) |
(81) |
||
Exceptional & other |
159 |
101 |
21 |
145 |
||
Net operating cash flow |
|
|
118 |
70 |
(193) |
192 |
Capex |
(113) |
(169) |
(110) |
(145) |
||
Acquisitions/disposals |
1 |
(2) |
0 |
0 |
||
Equity financing |
0 |
1 |
60 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
28 |
3 |
(40) |
0 |
||
Net cash flow |
34 |
(97) |
(283) |
47 |
||
Opening net debt/(cash) |
|
|
778 |
733 |
1,234 |
926 |
FX |
1 |
(10) |
0 |
|||
Discontinued |
105 |
(35) |
(20) |
0 |
||
Other non-cash movements |
(95) |
(369) |
621 |
(46) |
||
Closing net debt/(cash) |
|
|
733 |
1,234 |
926 |
925 |
Source: Company accounts, company guidance, Edison Investment Research
|
|
Research: Energy & Resources
Hellenic Petroleum experienced a challenging Q320 as benchmark refining margins fell to record-low levels. Demand for global crude oil and oil products remained low during the quarter that is typically strong for the company due to high tourist activity in Greece. Despite the current adversities, Hellenic maintained a strong operating performance and was capable of minimising the impacts of COVID-19. This was possible due to its storage capacity and the flexibility of its refining system. We have updated our estimates and valuation to reflect Q320 results and the impact of new lockdown measures in Europe. Our updated valuation is down 4% to €6.55/share, with an upside of 26% to the current share price.