Edel — Good demand for lockdown entertainment

Edel (DB: EDL)

Last close As at 26/04/2024

5.00

−0.10 (−1.96%)

Market capitalisation

114m

More on this equity

Research: TMT

Edel — Good demand for lockdown entertainment

Edel’s FY20 results were ahead of previous indications, as demand for home entertainment content rose due to pandemic restrictions across Europe. The group’s range of physical and digital provision enabled it to counter the impact of closures of physical retail. A lower cost base at optimal media helped support H2 margins, but momentum remains firmly in digital, particularly in music. Here the group is well placed to continue to benefit from streaming growth. The shares trade at a substantial discount to global entertainment content and publishing stocks on historical EV/EBITDA and EV/sales multiples, in part due to limited liquidity.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Edel

Good demand for lockdown entertainment

Media

Scale research report – Update

11 February 2021

Price

€2.22

Market cap

€50m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt at 30 Sept 2020

€41.2m

Business description

Edel is one of Europe’s leading independent media groups. It is both a publisher and a producer. Edel offers the music, film and book industry a unique full-service model, covering marketing and production as well as the distribution of audio content, video content and books.

Bull

Diversity of revenue streams.

Full-service, third-party offering.

Resurgence of vinyl.

Bear

Difficult CD, DVD and Blu-ray markets.

Small free float.

Spotify’s dominance in streaming.

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Edel’s FY20 results were ahead of previous indications, as demand for home entertainment content rose due to pandemic restrictions across Europe. The group’s range of physical and digital provision enabled it to counter the impact of closures of physical retail. A lower cost base at optimal media helped support H2 margins, but momentum remains firmly in digital, particularly in music. Here the group is well placed to continue to benefit from streaming growth. The shares trade at a substantial discount to global entertainment content and publishing stocks on historical EV/EBITDA and EV/sales multiples, in part due to limited liquidity.

Growth on stream

The physical production and logistics business, optimal media, is now the smaller part of the business at 47% of FY20 revenues, down 8% on the prior year. Its highly efficient production and distribution facilities give it commercial advantage in a competitive market, although there remains upward pressure on input costs. With the spread of the COVID-19 pandemic, retail closures were an issue, dampening demand. This will have continued into H121. The positive feature of Edel’s results was the 13% revenue growth in the Marketing & Sales segment, which covers the group’s digital offering. Here, Kontor New Media acts as an aggregator between rights owners and platform providers (including Spotify, Amazon, Apple Music and iTunes). It remains well positioned as downloads and streaming continue their strong progress, evidenced by an increase in fee and licence costs of 21% year-on-year. Growth in audio streaming/podcasts is also a positive trend.

Guidance for FY21 reverts to FY19 levels

FY20 group revenues were up by 2%, with a stronger growth in EBITDA, up 17%. This reflects reduced costs, particularly in personnel, €5.7m below the prior year on headcount down by 78. Most of this was at optimal media. Management guidance is for FY21 sales to be around 2% below those of FY20, roughly at the same level delivered in FY18 and FY19. Consolidated net income is guided at €2.0–2.4m, from the €2.7m achieved in FY20. This relative caution reflects the ongoing decline in physical markets, coupled with uncertainty regarding the pandemic.

Valuation: Continued discount to content, publishing

Key financials

Year
end

Revenue
(€m)

EBITDA (€m)

PBT
(€m)

Adjusted EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/18

209.2

17.3

6.6

0.16

0.10

13.9

4.5

09/19

209.5

16.0

4.4

0.08

0.10

27.8

4.5

09/20

214.1

18.7

7.2

0.12

0.10

18.5

4.5

Source: Edel accounts

We have maintained the same valuation approach as previously, comparing Edel’s rating with the global media subsectors of entertainment content and publishing. The shares trade at a significant discount on EV/sales, most likely reflecting the manufacturing element. While the P/E multiple is at a premium, the discount on historical EV/EBITDA remains substantial at 54%.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials

The group published its full year report to end September 2020 in late January.

Exhibit 1: Half- and full-year progression to 30 September 2020

€000s

H120

% change

H220

FY20

% change

Year end 30 September

Revenue

111,408

+3

102,693

+1

214,101

+2

EBITDA as reported

10,222

-2

8,527

+53

18,749

+17

EBITDA margin (%)

9.2

8.3

8.8

Profit before tax (as reported)

4,590

-6

2,565

N/A

7,155

+62

Net income (as reported), before minority

3,008

-6

(301)

N/A

2,707

+21

Source: Edel accounts. Note: Figures reported under HGB/German GAAP.

These results are clearly better than levels guided by management earlier in 2020, which were for FY20 sales to be at a slightly lower level than FY19 (€209.5m), with consolidated net income at around the prior year level (€2.2m). Manufacturing and logistics (optimal media) accounted for 47% of FY20 revenues, down from 52% in FY19 and 54% in FY18, which represents a fall of 7.1% in absolute revenues. Marketing and sales (book and audio-visual content) grew revenues by 12.6% over the prior year.

There has also been a shift in the geographic distribution of revenues, with Germany (the larger market for physical media) declining 9.1%, to 40% of the group. Sales into the UK were up 4.5%, at 22% of the group. The impact of Brexit on sales into the UK remains to be seen and could also be a contributing factor to the relative caution of the outlook guidance. The group’s third largest market, the Netherlands, put in a particularly strong performance, with revenues ahead by 29.9%, taking it to 17% of group.

The shift in the mix more heavily towards digital weighed on gross margin (due to the fee and licence expenses), taking it from 47.3% to 45.8%. While the revenue line was 2–3% ahead of management guidance, there is a far greater outperformance at the EBITDA level. As mentioned above, much of this is down to reduced personnel costs, with a shorter working week put in place early on during the pandemic. The EBITDA margin of 8.8% compares with 7.7% in FY19.

The income statement accounts for potential tax liabilities that may arise from the application of trade taxes on additional licences and from the treatment of revenues derived from pursuing those that have illegally abused rights, as previously guided. Minority interests are reduced from €0.6m to €0.2m, stemming from the physical side of the group.

Net debt was €41.2m at end FY20, well below the €51.9m at end FY19 compared to €56.3m at the end of FY18. With the shift in business mix favouring digital product and services, working capital requirements should continue to reduce. Coupled with capex reverting to near-maintenance levels, we would expect group net debt to continue to fall, barring acquisitions. The group still wants to increase its ownership of rights (although the market here is currently very ‘frothy’, particularly in music). Management would also like to extend group publishing interests. As at end December, Edel had undrawn credit lines totalling €25.2m.

FY21 guidance is for sales of €207–211m, so down 1–3% on FY20, which should be seen in the context that FY20 covered around six months of operation in the period of the COVID-19 pandemic. Net income is predicted to be in a range of €2.0m to €2.4m, around the level achieved in FY19 (€2.2m), but well down on the €2.7m posted for FY20.

Valuation

Our valuation framework for Edel is unchanged from our previous note. Analysis is complicated by the range of the company’s activities, from pressing CDs for third parties through children’s animated TV, to being the market-leading publisher of cookery books, and handling logistics and services for the world’s largest music publishers. Any peer group comparison is therefore inevitably limited. Given these constraints, rather than selecting a set of inadequate peers, we have looked globally across the main subsectors in which Edel operates, particularly entertainment content and publishing, to examine key valuation metrics based on consensus forecasts. We have stripped out unprofitable companies from our EV/EBITDA and P/E calculations, as well as any obvious distortive outliers.

Exhibit 2: Sector valuations for related activities

P/E (x)

EV/sales (x)

EV/EBITDA (x)

Last

FY1

FY2

Last

FY1

FY2

Last

FY1

FY2

Publishing

17.7

20.8

18.1

1.5

1.3

1.3

9.7

10.1

8.1

Broadcast & Entertainment

15.0

17.3

16.9

2.2

3.0

2.3

11.5

12.5

11.1

Edel

18.5

N/A

N/A

0.4

0.4*

N/A

4.9

N/A

N/A

Source: Refinitiv, Edison Investment Research. Note: *Based on midpoint of management forecast range. Prices at 1 February 2021.

We would expect that the EV/sales multiple for Edel would be lower than the comparator groups due to the large volumes of third-party revenues that it handles, which will also distort margin comparisons. The change in the group’s legal identity to a partnership limited by shares in March 2019 (deemed more appropriate for the family-based group structure) reduced the potential influence of minority shareholders and so also has valuation implications. The founding family retains a 64% stake.

Edel’s share price appears to be well below the global market on both EV/sales and EV/EBITDA multiples, in part due to its comparatively modest size and limited liquidity, given the family majority shareholding. At present values, Edel’s historical EV/EBITDA multiple is at a 54% discount to peers.


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United States of America

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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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