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Research: TMT
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.
Edel |
Good demand for lockdown entertainment
Media |
Scale research report – Update
11 February 2021 |
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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
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Key financials
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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