Vantiva — Broadband remains the main growth driver

Vantiva (PAR: VANTI)

Last close As at 20/05/2024

EUR0.14

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Research: TMT

Vantiva — Broadband remains the main growth driver

Vantiva’s FY22 accounts show the first clear picture of the business post the spin-out of the majority of Technicolor Creative Studios (TCS). In the Connected Home (CH) segment, trading conditions remain demanding, with global macroeconomic uncertainty making network service providers (NSPs) wary. However, supply chain issues have been easing and technical enhancements continue to buoy end-user demand for domestic broadband, with additional opportunities opening in Internet of Things applications. In the smaller Supply Chain Solutions (SCS) segment, newer activities, such as vinyl pressing, present the more dynamic opportunities. The shares still sit well below their valuation on a DCF basis.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Vantiva

Broadband remains the main growth driver

FY22 accounts

Technology hardware

21 April 2023

Price

€0.23

Market cap

€82m

US$1.09/€

Net financial debt (€m), IFRS basis at 31 December 2022

263

Shares in issue

355.4m

Free float

86%

Code

VANTI

Primary exchange

Euronext Paris

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

10.4

(1.5)

(79.0)

Rel (local)

3.2

(7.9)

(81.2)

52-week high/low

€1.2

€0.2

Business description

Vantiva consists of two businesses: Connected Home, a leading global supplier of strategic customer-premises equipment solutions, and Vantiva Supply Chain Services, a global leader in the production of discs and associated logistical fulfilment.

Next events

Q123 results

27 April 2023

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Vantiva is a research client of Edison Investment Research Limited

Vantiva’s FY22 accounts show the first clear picture of the business post the spin-out of the majority of Technicolor Creative Studios (TCS). In the Connected Home (CH) segment, trading conditions remain demanding, with global macroeconomic uncertainty making network service providers (NSPs) wary. However, supply chain issues have been easing and technical enhancements continue to buoy end-user demand for domestic broadband, with additional opportunities opening in Internet of Things applications. In the smaller Supply Chain Solutions (SCS) segment, newer activities, such as vinyl pressing, present the more dynamic opportunities. The shares still sit well below their valuation on a DCF basis.

Year
end

Revenue
(€bn)

PBT*
(€m)

EPS*
(c)

DPS
(c)

EV/EBITDA
(x)

P/E
(x)

12/21

2.25

(126)

(61)

0

3.3

N/A

12/22

2.78

(497)

(197)

0

2.1

N/A

12/23e

2.72

(16)

(14)

0

2.3

N/A

12/24e

2.75

(7)

(8)

0

2.1

N/A

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

Exceeding tempered management guidance

Vantiva exceeded all its published key performance indicator (KPI) targets for FY22, with adjusted EBITDA, EBITA and free cash flow all well over earlier guidance. FY23 guidance has been maintained and should very much represent an underpinning of expectations rather than a target. We expect revenue to be slightly softer, given the business mix and some caution on ordering from the NSPs, reflected in our EBITDA forecast, with earnings benefiting from reduced interest.

Financing in place

At end FY22, Vantiva had IFRS net debt of €263m including lease liabilities (€197m without). The largest lenders are Barclays (€240m) and Angelo Gordon (€117m), maturing in September 2026 and March 2027, respectively. Covenants will be tested every six months initially. The first will be on 30 June 2023 and require total net debt to be 1.0–4.5x EBITDA. On 31 December 2022, this ratio was 1.66x. We would expect it to climb at the half year, given typically negative H1 cash flow and management’s indication of a likely working capital outflow for the year. Vantiva is to invest €10m in the TCS refinancing to protect the value of its residual holding.

Valuation: Below DCF indication

Earnings-based valuation is premature, given the Technicolor spin-out and current uncertain economic backdrop, and revenue-based metrics are inappropriate for the business. We have therefore run a discounted cash flow (DCF) based on modest sales and margin gains post the forecast period. Using a WACC of 10% and terminal growth of 1%, we derive a value of €0.57 per share, with the TCS shareholding worth an additional €0.06 per Vantiva share at current prices (prior to the intended further refinancing). At the time of our last report, these values were €0.56 and €0.14, respectively.

FY22 figures ahead of guidance

The FY22 results were released in summary in March and the full accounts have now followed, giving more detail in particular on the cash flow and balance sheet structure. A summary of the income statement by segment and with changes against the prior year is shown below.

Exhibit 1: Summary FY22 income statement

€m

Connected Home

% change

Supply Chain Solutions

% change

Corporate & other

Total

% change

Revenue

2,120

+37

655

-7

1

2,776

+23

Adjusted EBITDA

135

+31

56

-16

(30)

161

+14

Depreciation & amortisation

(67)

(33)

(3)

(103)

Other non-cash items

(1)

0

(1)

(2)

Adjusted EBITA

67

+49

23

+17

(34)

56

+44

Amortisation of purchase accounting items

(24)

(7)

0

(31)

Net impairment losses on non-current operating assets

(3)

(1)

()

(5)

Restructuring costs

(1)

(12)

(4)

(17)

Other income (expenses)

(4)

(6)

(2)

(13)

EBIT (continuing operations)

34

+209

(3)

N/A

(41)

(11)

N/A

Source: Vantiva accounts

Connected Home benefits from strong broadband demand

There was an additional boost to revenue growth from currency moves, with growth at a constant rate of 23%, implying a good Q423 (9M23 constant growth was +20%). The mix shifted further towards broadband as demand for video product, especially entry level product, continued to drop away. Broadband made up 75% of revenues for the year. There was, however, pressure on margins from underlying inflation, resulting in a dip in EBITDA margin for the division from 6.7% to 6.3%.

Supply Chain Solutions restructuring completed

SCS retains its strong positioning with the major content studios for DVD production and distribution, with management estimating global market share at 65% (90% in the United States). Volumes were markedly down following the boost to the home media market during COVID-19 lockdowns in the comparative period, resulting in a constant currency revenue retrenchment of 14%. The moves into vinyl production were curtailed by delays in the delivery of specialist pressing equipment, though underlying demand remained good. The reduction in adjusted EBITDA margin from 9.5% to 8.6% reflects the benefit of earlier cost cutting.

Loss from associates

The net result from continuing operations was a loss of €529m. At the time of the TCS spin-out in September, its value was reflected in Vantiva’s balance sheet at the then initial fair value of €354m. Post TCS’s subsequent profit warning and the consequent drop in the share price, Vantiva wrote down the value of its holding by €311m on the year-end balance sheet, showing up as a loss from associates in the income statement.

FY23 circumspection built into estimates

Within CH, management’s view is that the NSPs are being especially cautious in light of an uncertain economic background and there is less-than-normal visibility over inventories. CH’s strong supplier relationships are undoubtedly helpful and the partnership-type mindset with the NSPs makes issues such as input price inflation more manageable. Technological advances should continue to stimulate demand and the group sees considerable potential as the Internet of Things for verticals gains ground (‘vertical’ being where the gateway and the cloud-based services are provided by the same organisation), with the number of smart connected devices in the home increasing.

For SCS, the key opportunities are in the diversification opportunities being developed, with a significant scaling up of vinyl-pressing capacity and the expansion of its activities in precision bio-devices, built on its expertise in precision clean-room manufacture. Management also anticipates continued growth in the distribution and logistics activities.

Exhibit 2: Adjustments to forecasts

Revenue (€bn)

EBITDA (€m)

PBT (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2022

2.70

2.78

+3%

143

161

+13%

(123)

(497)

N/A

2023e

2.84

2.72

-4%

144

151

+5%

(50)

(16)

N/A

2024e

2.99

2.75

-8%

168

164

-2%

(10)

(7)

N/A

Source: Vantiva accounts, Edison Investment Research. Note: ‘Old’ is prior estimate.

We have trimmed our revenue estimates for both the current year and for FY24 to reflect management’s interpretation of current market conditions and doubtless there will be more commentary on this at the Q1 results later in the month. However, we are building in a small improvement to adjusted EBITDA margin to reflect the greater efficiency within the operations. PBT and earnings should benefit from the debt restructure, which significantly reduces the interest burden.

Official guidance was unchanged on the results: EBITDA greater than €140m, EBITA greater than €45m and free cash flow pre-interest and tax over €50m.

Debt structure and further investment in TCS

Vantiva retained a shareholding of 35% of TCS’s equity following the spin-off in FY22. Various trading issues mean that TCS is now seeking a further refinancing. As a major shareholder, Vantiva’s management has committed to a c €10m subscription (included in our modelling) in convertible notes, maturing in July 2026 and with a coupon of 0.75%, with a right to purchase up to €10m by way of acquisition on the secondary market of convertible notes held by Angelo Gordon within six months of the subscription date of the convertible notes (not included in our modelling). This investment sits alongside further investment by existing and new lenders, including Angelo Gordon, Barclays, BPI and Briarwood, and helps the viability of TCS and thus protects the original retained shareholding.

Barclays and Angelo Gordon are the key lenders

Exhibit 3: Debt structure at end FY22

Line

Characteristics

Ccy

Nominal (m)

IFRS (m)

Nominal rate

IFRS rate

Maturity

Notes

Vantiva

Barclays 1st Lien

EURIBOR+2.5% margin & PIK

250

240

7.5%

11.8%

Sep-26

PIK 3.0% year 1, then 4.0% year 2, 5.5% year 3, then +0.5% each year thereafter

Vantiva

Angelo Gordon 2nd Lien

EURIBOR+4.0%

125

117

11.0%

16.1%

Mar-27

PIK 5.0% year 1, then 5.5% year 2, then 6.0%

Several

Operating leases

Various

66

66

12.2%

12.2%

Other

Various

Various

8

8

Total

448

430

9.1%

12.8%

Cash & equivalents

167

167

Net debt

282

263

Source: Vantiva

Both the Barclays and the Angelo Gordon credit agreements carry an exit fee, including on maturity, and have the option to extend by one year (subject to additional charges), with the exit fee included in the calculation of the IFRS interest rate in the table above.

Should cash flow exceed the needs of the business, mandatory partial repayment would be triggered on a tiered basis above a minimum of a total net leverage ratio of 1.7x. There are also a number of additional covenants attached to this financing that restrict management’s ability to take on additional debt or conduct M&A transactions of substance.

The Wells Fargo Asset-backed lending in the United States is for a total of $125m and was extended during H222 for a further four years to September 2026.

DCF illustrates upside potential

There remain substantive uncertainties regarding trading opportunities and challenges, but the most significant element – that of the financing – looks to have been resolved for a sufficiently long period for the group to concentrate on maximising its potential.

Exhibit 4: DCF at various WACC and terminal growth rates

€/share

Terminal growth rate

-1%

0%

1%

2%

3%

WACC

14%

0.10

0.12

0.15

0.17

0.21

13%

0.17

0.19

0.22

0.26

0.30

12%

0.24

0.28

0.32

0.36

0.42

11%

0.33

0.38

0.43

0.49

0.57

10%

0.44

0.50

0.57

0.65

0.76

9%

0.57

0.65

0.74

0.86

1.02

8%

0.74

0.84

0.96

1.14

1.38

7%

0.94

1.08

1.27

1.53

1.92

6%

1.21

1.41

1.69

2.11

2.82

5%

1.56

1.87

2.33

3.09

4.63

Source: Edison Investment Research

Based on our modelling through to FY24 and modest growth and margin assumptions thereafter, the DCF provides an illustrative valuation of €0.57/share at a WACC of 10% and terminal growth of 1%, as previously. This is more than double the current market price for the shares, which is, at least in part, a reflection of the continued dominance in the value of the debt within the enterprise value.

There is potentially a further uplift in implied value from the holding in the equity of TCS, which, on a pure mechanistic basis, would currently add another €0.06.

Exhibit 5: Financial summary

€m

2021

2022

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

 

2,250

2,776

2,724

2,753

Cost of Sales

(1,976)

(2,439)

(2,388)

(2,394)

Gross Profit

274

336

336

359

EBITDA

 

 

 

105

161

151

164

EBITA

 

 

 

40

57

66

79

Amortisation of acquired intangibles

(30)

(28)

(24)

0

Exceptionals

27

20

(8)

0

Reported operating profit

(13)

(11)

19

64

Net Interest

(117)

(177)

(67)

(70)

Joint ventures & associates (post tax)

0

(311)

0

0

Profit Before Tax (norm)

 

 

 

(126)

(497)

(16)

(7)

Profit Before Tax (reported)

 

 

 

(129)

(499)

(48)

(7)

Reported tax

(14)

(30)

(36)

(22)

Profit After Tax (norm)

(143)

(529)

(52)

(29)

Profit After Tax (reported)

(143)

(529)

(84)

(29)

Minority interests

0

0

0

0

Discontinued operations

4

680

0

0

Net income (normalised)

(143)

(529)

(52)

(29)

Net income (reported)

(140)

151

(84)

(29)

Average Number of Shares Outstanding (m)

236

269

355

355

EPS - normalised (c)

 

 

 

(61)

(197)

(14)

(8)

EPS - normalised fully diluted (c)

 

 

 

(61)

(197)

(14)

(8)

Dividend per share (c)

0.00

0.00

0.00

0.00

Revenue growth (%)

(9)

23

(2)

1

Gross Margin (%)

12.2

12.1

12.4

13.0

EBITDA Margin (%)

4.7

5.8

5.6

5.9

EBITA Margin (%)

1.8

2.0

2.4

2.9

BALANCE SHEET

Fixed Assets

 

 

 

1,730

1,053

1,004

989

Intangible Assets

1,283

782

737

722

Tangible Assets (including right of use assets)

305

154

149

149

Investments & other

59

84

84

84

Deferred tax and other

83

34

34

34

Current Assets

 

 

 

1,268

1,290

1,205

1,197

Stocks

335

452

455

425

Debtors

359

343

345

323

Cash & cash equivalents

196

167

76

120

Other

377

329

329

329

Current Liabilities

 

 

 

(1,360)

(1,389)

(1,348)

(1,357)

Creditors

(671)

(855)

(839)

(848)

Tax and social security

(29)

(18)

(18)

(18)

Short term borrowings

(65)

(24)

(24)

(24)

Other

(594)

(492)

(467)

(467)

Long Term Liabilities

 

 

 

(1,505)

(633)

(625)

(625)

Long term borrowings (includes lease liabilities)

(1,170)

(407)

(398)

(398)

Deferred tax

(20)

(3)

(3)

(3)

Other long term liabilities

(315)

(224)

(224)

(224)

Net Assets

 

 

 

134

320

236

204

Minority interests

Shareholders' equity

 

 

 

134

320

236

205

CASH FLOW

Net profit

(143)

(529)

(84)

(29)

Depreciation and amortisation

139

135

100

90

Working capital

(98)

57

(21)

62

Tax and interest

(70)

(83)

(75)

(61)

Exceptional & other

61

506

103

92

Operating Cash Flow

 

 

 

(111)

86

24

154

Capex

(69)

(81)

(75)

(80)

Acquisitions/disposals

0

0

0

0

Equity financing

0

284

0

0

Dividends

0

0

0

0

Other

(33)

(14)

(40)

(30)

Net Cash Flow

(214)

275

(91)

44

Opening net debt/(cash)

 

 

 

812

1,039

263

346

FX

16

(25)

0

0

Discontinued

63

501

0

0

Other non-cash movements

(92)

25

8

0

Closing net debt/(cash)

 

 

 

1,039

263

346

302

Source: Company accounts, Edison Investment Research

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This report has been commissioned by Vantiva and prepared and issued by Edison, in consideration of a fee payable by Vantiva. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Foxtons Group — Early signs of strategic success

Foxtons Group’s Q1 trading update highlighted increased revenue per transaction and market share gains, evidence of early progress in rolling out the new strategy – characterised by upgrades to data infrastructure, investment in staff and a reinvigoration of the Foxtons brand. If the strategy succeeds, over the medium term Foxtons expects margins to expand by 500bp and operating profit to more than double. We retain our base case valuation of 59p/share and our preferred ‘bull’ case valuation of 124p/share, more than three times the current price.

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