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Research: TMT
Vantiva has been operating in difficult markets for both its segments in its first half. At Connected Home (78% group H123 revenue), the customer base is holding high inventory levels against caution in their own underlying end markets, suppressing demand. At Supply Chain Services (SCS), DVD demand has been poorer than expected, dropping away before the benefits of the diversification programme have fully kicked in. Prospects, particularly at Connected Home where broadband equipment is the key driver, are better for H2 and management has maintained full year guidance. Our modelling has been reined in to match.
Vantiva |
FY23 guidance maintained post difficult H1 |
Interim results |
Technology hardware |
7 August 2023 |
Share price performance
Business description
Next events
Analyst
Vantiva is a research client of Edison Investment Research Limited |
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Vantiva has been operating in difficult markets for both its segments in its first half. At Connected Home (78% group H123 revenue), the customer base is holding high inventory levels against caution in their own underlying end markets, suppressing demand. At Supply Chain Services (SCS), DVD demand has been poorer than expected, dropping away before the benefits of the diversification programme have fully kicked in. Prospects, particularly at Connected Home where broadband equipment is the key driver, are better for H2 and management has maintained full year guidance. Our modelling has been reined in to match.
Year |
Revenue |
PBT* |
EPS* |
DPS |
EV/EBITDA |
P/E |
12/21 |
2.25 |
(126) |
(61) |
0 |
4.8 |
N/A |
12/22 |
2.78 |
(497) |
(197) |
0 |
3.1 |
N/A |
12/23e |
2.64 |
(22) |
(8) |
0 |
3.6 |
N/A |
12/24e |
2.70 |
(14) |
(4) |
0 |
3.3 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Better H2 needed to reach guidance
Management’s FY23 guidance has been maintained for adjusted EBITDA of over €140m, adjusted EBITA of at least €45m and adjusted free cash flow (pre interest and tax) of at least €50m. Our previous modelling showed adjusted EBITDA of €151m on revenues down 1.9% year-on-year, now revised to a decline of 4.9%. This requires better performance in H2, delivering adjusted EBITDA of €91m, from the €49m posted for H1. This should be achievable if, as expected, broadband demand improves at Connected Home as inventory levels normalise. There are a number of technological advances in train and in the wings, such as DOCSIS 4.0, Wi-Fi 7 and 5G FWA, where Vantiva is at the forefront of product development, which should spur demand as these are introduced by the service providers.
Cash flow should improve through H2
Working capital is generally negative in H1 and positive in H2, and it will be the timing of the improvement that will determine the snapshot position as at the year end. Capex in the current year is also likely to have been H1 weighted, given the spend on vinyl presses to increase capacity within SCS. Vantiva has taken a €133m write-down on goodwill on SCS’s disc business with these figures. Our view is that additional funding would allow for faster growth, so quicker debt paydown.
Valuation: Appraisal pending timing
The market value of the equity is currently overshadowed by the value of the debt, which accounts for 87% of the group’s enterprise value. With management guidance maintained, there is a path to net profitability with modest top-line progress and continuing careful control of costs. The current share price is suggesting either mid-single-digit growth, based on a discounted cash flow with a weighted average cost of capital of 10%, or faster progress in building the EBITDA margin than we have currently assumed.
H1 results reflect customer caution and inventory
Better prospects in H223 at Connected Home
At Connected Home, the key issue has been the high levels of inventory held by the telco service providers that are the group’s key customers. Chipset supply conditions have now eased, although prices are still elevated and lead times long, contributing to the caution in the customer base. Broadband revenues were down 7.5% at constant currency in H1, which was nevertheless a much better performance than for Video customer premise equipment, where revenues were 19.7% below H122 (at constant currency) and against demanding comparatives. Broadband represents 80% of the division’s revenue base.
Despite the lower volumes, the Video business remains profitable and continues to be the solution for TV content distribution in countries and territories where the infrastructure for cable is either not there or is not suitable. Fibre was the main positive in H1, with good demand particularly in EMEA, and good levels of interest in new technologies. Adoption by any of the major customers of these new products and/or technologies should lead to rapid wider take-up, given the competitive nature of the market and the importance of performance delivery in maintaining market share.
Tough disc market means write-down at SCS
At SCS, the comparative period was also tough, and, again, the unwinding of inventory in the supply chain suppressed demand. Disc manufacturing volumes were down 40% versus H122, with management attributing about half of that to the industry inventory issues. Overall divisional revenues were down 22.4% at constant currency, as some pricing benefits came through and the newer initiatives start to feed through.
The investment in diversification continues apace, with new vinyl presses installed and operational in H123, taking the total to 22, and more to come in H223 and H124, including in Europe and Australia. The other non-disc activities are also making good progress, with the distribution and logistics revenues up 40%, albeit off a low base, and good interest building in precision moulding and biodevices manufacturing.
The faster decline in the disc business than previously anticipated has led to a re-examining of the longer-term growth assumptions, particularly in respect of DVDs. This has resulted in the group taking a goodwill impairment of €133m with these figures, which is the bulk of the €146m of non-recurring items.
Free cash flow set to improve in H223
With an outflow of €74m in H123 and a full year forecast of over €50m, management is assuming that the cash performance in the second half will be much stronger. Working capital is generally positive in H2, so this should be a significant boost towards this goal.
Liquidity at the end of June totalled €66m, being cash on hand of €39m plus liquidity remaining available to be drawn from the Wells Fargo facility of €27m. Gross IFRS debt was €478m at the half year (€487m nominal), including operating leases of €70m. Management has indicated that it is seeking additional financing, with more flexibility to cater for seasonal swings in working capital than its existing arrangements provide. This would allow faster progress towards building the higher-growth, potentially higher-margin, elements of the business mix, tilting value back towards the group’s equity base.
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Exhibit 1: Financial summary |
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Source: Company accounts, Edison Investment Research |
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Research: Investment Companies
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