7digital Group’s FY17 trading update shows that while revenues were short of our forecasts, at the EBITDA level it is well ahead of our expectations, with the group’s restructuring programme delivering ahead of plan. We update our FY17 numbers and incorporate the recent fund-raise, but otherwise leave our forecasts unchanged.
Written by
7digital Group |
FY18 profitability on track |
Placing |
Media |
9 February 2018 |
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7digital Group is a research client of Edison Investment Research Limited |
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7digital Group’s FY17 trading update shows that while revenues were short of our forecasts, at the EBITDA level it is well ahead of our expectations, with the group’s restructuring programme delivering ahead of plan. We update our FY17 numbers and incorporate the recent fund-raise, but otherwise leave our forecasts unchanged.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
DPS |
EV/EBITDA |
P/E |
12/16 |
11.9 |
(3.5) |
(4.7) |
(4.1) |
0.0 |
N/A |
N/A |
12/17e |
17.3 |
(1.0) |
(2.1) |
(1.3) |
0.0 |
N/A |
N/A |
12/18e |
24.9 |
3.0 |
2.1 |
0.5 |
0.0 |
4.0 |
9.1 |
12/19e |
27.6 |
4.6 |
3.8 |
0.8 |
0.0 |
2.5 |
5.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Trading update; FY18 profitability on track
FY17 revenues are £17.3m, up 52% y-o-y, and H217 increased by 91% on H117 owing to the 24-7 acquisition and the additional work contracted for MediaMarktSaturn (MMS). Importantly, the operational restructuring of the group is on track and EBITDA will be considerably better than consensus (we had negative £1.7m), putting 7digital on track to bring the group to profitability in 2018.
Forecast changes: Update for placing
Revenues are £1.8m below our FY17 forecast of £19.1m. £1.3m of this miss relates to the £6.5m of contracted revenues from MMS for the transition of its platform to 7digital’s. This work has been substantially completed; however, as the platform does not go live until Q118, part of this will be recognised in FY18. At the EBITDA level the group is significantly ahead, suggesting it was profitable in the second half of the year. We update FY17 forecasts for the trading statement, but make no changes at the revenue and EBITDA levels in 2018 and continue to forecast cash flow break-even from H218. As indicated in our December note, the £8.5m fund-raise results in significant dilution at the EPS level, and we reduce FY18 and FY19 forecasts by 55%.
Valuation: 2018 pivotal year
7digital starts 2018 on a much stronger financial footing; the £8.5m raise, while dilutive, strengthens its balance sheet and the 24-7 acquisition last year provides the platform for profitable growth. We expect the deals announced over the course of 2017 to start to convert to revenues during 2018 as services are launched which, together with the restructuring, provides the basis for our forecast profitability in 2018. Almost half the current market cap reflects the value of the cash raised, suggesting the platform and customer and industry relationships are valued at c £12m. Adjusting net debt at end June 2017 for the fund-raise implies an FY18e EV/EBITDA of c 4.0x. We believe this is an attractive valuation for a group well positioned in the rapidly evolving market for music streaming services.
Summary forecast changes
The table below summarises our forecast changes, with full forecasts presented in Exhibit 2.
Exhibit 1: Summary forecast changes
FY17e |
FY18e |
FY19e |
|||||||
Old |
New |
Change (%) |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
Revenues |
19,110 |
17,300 |
(9.5) |
24,856 |
24,856 |
N/A |
27,587 |
27,587 |
N/A |
EBITDA |
(1,747) |
(1,000) |
42.8 |
2,965 |
2,965 |
N/A |
4,646 |
4,646 |
N/A |
Normalised operating profit |
(2,875) |
(2,128) |
26.0 |
2,145 |
2,145 |
N/A |
3,762 |
3,762 |
N/A |
Reported operating profit |
(4,267) |
(3,520) |
17.5 |
493 |
493 |
N/A |
3,762 |
3,762 |
N/A |
Normalised PBT |
(2,875) |
(2,128) |
26.0 |
2,145 |
2,145 |
N/A |
3,762 |
3,762 |
N/A |
Reported PBT |
(4,267) |
(3,520) |
17.5 |
493 |
493 |
N/A |
3,762 |
3,762 |
N/A |
Normalised net income |
(2,875) |
(2,128) |
26.0 |
2,145 |
2,145 |
N/A |
3,386 |
3,386 |
N/A |
Reported net income |
(4,267) |
(3,520) |
17.5 |
493 |
493 |
N/A |
3,386 |
3,386 |
N/A |
Normalised basic EPS |
(1.8) |
(1.3) |
(29.9) |
1.2 |
0.5 |
(55.2) |
1.9 |
0.8 |
(55.3) |
Normalised diluted EPS |
(1.8) |
(1.3) |
(29.9) |
1.2 |
0.5 |
(55.2) |
1.9 |
0.8 |
(55.3) |
Net debt/(cash) |
896 |
(7,577) |
N/A |
1,617 |
(7,136) |
N/A |
(414) |
(9,167) |
2114.2 |
Source: Edison Investment Research
Exhibit 2: Financial summary
£'000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||||
Revenue |
|
|
10,212 |
10,392 |
11,899 |
17,300 |
24,856 |
27,587 |
Cost of Sales |
(4,882) |
(3,308) |
(3,451) |
(2,451) |
(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) |
(1,000) |
2,965 |
4,646 |
Normalised operating profit |
|
|
(3,775) |
(2,862) |
(4,684) |
(2,128) |
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) |
(3,520) |
493 |
3,762 |
||
Net Interest |
3 |
11 |
(13) |
0 |
0 |
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) |
(2,128) |
2,145 |
3,762 |
Profit Before Tax (reported) |
|
|
(2,612) |
(7,883) |
(5,478) |
(3,520) |
493 |
3,762 |
Reported tax |
(17) |
(3) |
(12) |
0 |
0 |
(376) |
||
Profit After Tax (norm) |
(1,901) |
(7,621) |
(4,709) |
(2,128) |
2,145 |
3,386 |
||
Profit After Tax (reported) |
(2,629) |
(7,886) |
(5,490) |
(3,520) |
493 |
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) |
(2,128) |
2,145 |
3,386 |
||
Net income (reported) |
375 |
(7,886) |
(5,490) |
(3,520) |
493 |
3,386 |
||
Basic average number of shares outstanding (m) |
87 |
108 |
114 |
169 |
399 |
399 |
||
EPS - basic normalised (p) |
|
|
(2.2) |
(7.1) |
(4.1) |
(1.3) |
0.5 |
0.8 |
EPS - diluted normalised (p) |
|
|
(2.2) |
(7.1) |
(4.1) |
(1.3) |
0.5 |
0.8 |
EPS - basic reported (p) |
|
|
0.4 |
(7.3) |
(4.8) |
(2.1) |
0.1 |
0.8 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
N/A |
1.8 |
14.5 |
45.4 |
43.7 |
11.0 |
||
Gross Margin (%) |
52.2 |
68.2 |
71.0 |
85.8 |
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 |
13,354 |
14,590 |
17,110 |
Stocks |
44 |
62 |
177 |
177 |
177 |
177 |
||
Debtors |
3,095 |
4,502 |
3,575 |
4,266 |
6,129 |
6,802 |
||
Cash & cash equivalents |
5,312 |
1,656 |
838 |
8,911 |
8,285 |
10,131 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(4,984) |
(3,975) |
(7,193) |
(7,942) |
(8,198) |
(7,354) |
Creditors |
(4,796) |
(3,804) |
(6,731) |
(7,480) |
(7,736) |
(6,892) |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
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) |
7,359 |
7,852 |
11,238 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
11,128 |
3,366 |
(1,571) |
7,359 |
7,852 |
11,238 |
CASH FLOW |
||||||||
Op Cash Flow before WC and tax |
(3,108) |
(2,102) |
(3,528) |
(1,000) |
2,965 |
4,646 |
||
Working capital |
(2,788) |
(2,439) |
4,098 |
58 |
(1,606) |
(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) |
(1,782) |
259 |
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 |
0 |
0 |
||
Equity financing |
6,952 |
0 |
0 |
10,840 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(1) |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
4,022 |
(3,703) |
(818) |
8,258 |
(441) |
2,031 |
||
Opening net debt/(cash) |
|
|
(1,290) |
(5,312) |
(1,656) |
681 |
(7,577) |
(7,136) |
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 |
(7,577) |
(7,136) |
(9,167) |
Source: 7digital (historicals), Edison Investment Research (forecasts)
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