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Research: TMT
Technicolor’s Q121 figures show (constant currency) revenue up 3.6% on prior year, buoyed by continued strong demand in Connected Home. The outlook for Production Services is considerably improved as filming gets underway and projects are greenlit. Full year and FY22 earnings guidance is maintained, with margins set to improve after earlier streamlining and ongoing cost control. Following FY20’s financial restructure, the equity proportion of Technicolor’s enterprise value is no longer greatly overshadowed by the debt. With improving cash flow, a revaluation of the equity seems underway, with the share price up 72% year-to-date.
Technicolor |
Growing animation in performance |
Q1 results |
Media |
14 May 2021 |
Share price performance
Business description
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Analysts
Technicolor is a research client of Edison Investment Research Limited |
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Technicolor’s Q121 figures show (constant currency) revenue up 3.6% on prior year, buoyed by continued strong demand in Connected Home. The outlook for Production Services is considerably improved as filming gets underway and projects are greenlit. Full year and FY22 earnings guidance is maintained, with margins set to improve after earlier streamlining and ongoing cost control. Following FY20’s financial restructure, the equity proportion of Technicolor’s enterprise value is no longer greatly overshadowed by the debt. With improving cash flow, a revaluation of the equity seems underway, with the share price up 72% year-to-date.
Year end |
Revenue (€m) |
EBITDA |
EBITA |
PBT* |
EPS* |
EV/EBITDA |
12/19 |
3,800 |
325 |
42 |
(73) |
(4.92) |
5.6 |
12/20 |
3,006 |
167 |
(56) |
(43) |
(0.38) |
10.8 |
12/21e |
2,933 |
270 |
60 |
(3) |
(0.03) |
6.7 |
12/22e |
3,255 |
385 |
180 |
117 |
0.46 |
4.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Encouraging signs across the portfolio
Demand for high-quality broadband gateways continues to be strong in North America and is improving in Eurasia as people’s digital domestic consumption continues to rise. The limiting factor is the availability of memory and processing componentry. Here, the group’s leading market position gives some protection on supply and some leverage on passing through additional costs. Production Services is also benefiting from a good recovery in demand, with MPC Episodic particularly busy with projects for streamers. DVD Services revenues were down less than expected, with EBITDA margins starting to lift as pricing improvements from contract renegotiations kick in.
Profits and cash weighted to H2
Our forecasts continue to be aligned with management guidance, which was adjusted for the disposal of Post Production in April. Guidance also has sufficient leeway to cater for the impact of the component situation in Connected Home. Profits and cash flow are likely to be skewed to the second half, with cash flow benefiting from a more normalised working capital position in Connected Home and a resumption of down payments in Production Services. Our model points to a year-end net debt position of €837m, which would be 3.1x adjusted EBITDA, well within management’s target of less than 4.0x.
Valuation: Revaluation underway
Since the completion of the financial restructuring in September 2020, the shares have risen from €1.16. The valuation is now starting to reflect improving underlying trading, albeit that the equity remains dominated by the value of the debt (although no longer dwarfed). As confidence grows that guidance on profitability and cash generation can be achieved, we would expect the rating to improve further.
Q121 shows a turnaround is underway
We show the Q1 figures below at constant currency but note that adverse forex movements mean that at current rates, revenues would be down 3.7% on the prior year.
During this quarter, Production Service’s activities were still overshadowed by the impact of the pandemic, with Connected Home generating 60% of group revenues and 65% of adjusted EBITDA. On a group basis, adjusted EBITA almost reached break even.
Group free cash flow (before financials and tax) improved from an outflow of €314m in Q120 to an outflow of €196m, which reflects a significant improvement in the working capital position. For the full year, management continues to expect that this figure will be around break even.
Segmental performances and prospects are discussed separately below.
Exhibit 1: Summary Q120 results
€m |
Production Services |
Change |
DVD Services |
Change |
Connected Home |
Change |
Corporate & Other |
Change |
Group |
Change |
Revenue |
140 |
-16.6% |
139 |
-7.7% |
428 |
+18.3% |
5 |
-40.3% |
711 |
+3.6% |
Adjusted EBITDA |
14 |
+29.5% |
4 |
N/A |
28 |
+90.5% |
(3) |
N/A |
43 |
+71.7% |
Margin |
9.7% |
3.1% |
6.4% |
(48.7%) |
6.0% |
|||||
Adjusted EBITA |
(2) |
N/A |
(6) |
N/A |
10 |
N/A |
(4) |
-81.3% |
(1) |
+97.8% |
Margin |
(1.5%) |
(4.2%) |
2.4% |
(65.6%) |
(0.1%) |
Source: Company accounts. Note: Changes at constant currency.
Connected Home (60% of Q121 revenue): Trading and outlook
As might be expected, the revenue growth within Connected Home stemmed from strong demand for domestic broadband, particularly in North America, which represented 62% of segmental revenues and where revenues were ahead by 34.4% at constant currency. Cable customers are still looking to upgrade their broadband to cope with stepped up demand from home working, home education and entertainment.
There was also good growth in Europe, the Middle East and Africa (+24.5%) and in Asia-Pacific (+37.7%). Latin America continues to be a very challenging market, with the twin impacts of weak currency and continuing severe community COVID-19 cases.
EBITDA margins of 6.4% compare to Q120 at 4.1%, boosted by the cost reductions from the transformation plan as discussed in previous reports.
The key issue for Connected Home is the availability and pricing of componentry, a well-documented problem across many industries stemming from supply and distribution issues exacerbated by the pandemic. This is expected to persist at least through Q2 and Q3 before plateauing in Q421. Supply squeezes are a recurring issue, and this iteration is broader than simply memory. However, Connected Home is an important supplier to the cable companies, who themselves are anxious not to disappoint their own customers, putting the group in a stronger position than some smaller players, particularly in terms of passing through a proportion of cost increases.
Management is confident that the demand side of the equation will continue to be strong, with continued upgrades in Wi-Fi technologies and higher speeds.
DVD Services (20% of Q121 revenue): Trading and outlook
Disc volumes continued their decline, down 10.7% in volumes on Q120. However, the segmental revenue decline was lower at -7.7% at constant currency. This mostly reflects the pricing renegotiations achieved last year, along with some benefit from handling of logistics for non-disc products.
With a severely depleted programme of studio releases, this represents a relatively strong performance, driven by good demand for library titles.
The revised pricing agreements also helped improve the achieved adjusted EBITDA margin, which was 3.1% from 0.6% in Q120. We would expect further progress here over the rest of the year, reflecting the realignment of the physical estate as well as the benefit of higher volumes as release schedules replenish.
Production Services (20% of Q121 revenues): Trading and outlook
With the disposal of Post Production, this segment is to be rebadged as Technicolor Creative Services, leveraging the brand’s fame.
Like-for-like revenues were unsurprisingly soft in the quarter, down 16.6% at constant currency, as the comparative period was prior to the drastic impact of lockdowns on live filming for the film and TV industry. Within this, however, it is notable that MPC Episodic, which works primarily with the major streaming companies, doubled its revenues. Adjusted EBITDA margins climbed from 6.2% in Q120 to 9.7% Q121, as efficiencies within the transformation plan are starting to take effect.
Prospects for the rest of the year are on an improving trajectory as the industry reopens and with underlying thirst for content a constant. Much work continues to be done in rebuilding as a more efficient concern, with much more co-operation behind the brand frontages in areas such as R&D and technology. The group held onto its key talent through the pandemic, but the industry runs with a meaningful contingent of freelance labour and it is likely that there may be some pressure on wage inflation here. However, it is worth noting that the group recruits globally, with India a key location, so there is potential for some substitution from the highest labour cost territories.
Production schedules are looking strong through the remainder of the year and well into FY22 as content companies look to refill their hoppers. 90% of the segment’s FY21 budget for film and episodic is already in place.
The appointment of Andrea Miloro as head of Mikros Animation is potentially important and is a clear commitment from management to build share in the animation segment. Andrea Miloro is a well-known industry figure, having been co-president of Fox Animation and previously holding various senior production roles at Fox/BlueSky Studios and Sony Pictures Animation.
Exhibit 2: Financial summary
€m |
2019 |
2020 |
2021e |
2022e |
||
Year-end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
3,800 |
3,006 |
2,933 |
3,255 |
Cost of Sales |
(3,375) |
(2,725) |
(2,575) |
(2,830) |
||
Gross Profit |
425 |
281 |
358 |
425 |
||
EBITDA |
|
|
325 |
167 |
270 |
385 |
EBITA |
|
|
42 |
(56) |
60 |
180 |
Amortisation of acquired intangibles |
(54) |
(41) |
(41) |
(41) |
||
Exceptionals |
(79) |
(151) |
(10) |
(10) |
||
Reported operating profit |
(121) |
(264) |
27 |
147 |
||
Net Interest |
(84) |
77 |
(81) |
(81) |
||
Joint ventures & associates (post tax) |
(1) |
0 |
0 |
0 |
||
Exceptionals |
0 |
155 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(73) |
(43) |
(3) |
117 |
Profit Before Tax (reported) |
|
|
(206) |
(188) |
(54) |
66 |
Reported tax |
(3) |
(5) |
(5) |
(5) |
||
Profit After Tax (norm) |
(75) |
(48) |
(8) |
112 |
||
Profit After Tax (reported) |
(208) |
(193) |
(59) |
61 |
||
Minority interests |
0 |
0 |
0 |
0 |
||
Discontinued operations |
(22) |
(15) |
0 |
0 |
||
Net income (normalised) |
(75) |
(48) |
(8) |
113 |
||
Net income (reported) |
(230) |
(207) |
(59) |
61 |
||
Average Number of Shares Outstanding (m) |
15 |
126 |
241 |
247 |
||
EPS - normalised (c) |
|
|
(492.18) |
(38.38) |
(3.18) |
45.73 |
EPS - normalised fully diluted (c) |
|
|
(492.18) |
(33.64) |
(2.97) |
42.67 |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
(5) |
(21) |
(2) |
11 |
||
Gross Margin (%) |
11.2 |
9.4 |
12.2 |
13.1 |
||
EBITDA Margin (%) |
8.6 |
5.6 |
9.2 |
11.8 |
||
EBITA Margin (%) |
1.1 |
(1.9) |
2.1 |
5.5 |
||
|
||||||
Fixed Assets |
|
|
2,082 |
1,674 |
1,606 |
1,538 |
Intangible Assets |
1,483 |
1,251 |
1,185 |
1,119 |
||
Tangible Assets |
476 |
288 |
286 |
284 |
||
Investments & other |
40 |
62 |
62 |
62 |
||
Deferred tax and other |
84 |
72 |
72 |
72 |
||
Current Assets |
|
|
1,127 |
1,344 |
1,319 |
1,549 |
Stocks |
243 |
195 |
190 |
211 |
||
Debtors |
507 |
425 |
415 |
460 |
||
Cash & cash equivalents |
64 |
330 |
321 |
484 |
||
Other |
312 |
394 |
394 |
394 |
||
Current Liabilities |
|
|
(1,542) |
(1,379) |
(1,326) |
(1,406) |
Creditors |
(825) |
(710) |
(657) |
(737) |
||
Tax and social security |
(41) |
(21) |
(21) |
(21) |
||
Short term borrowings |
(95) |
(72) |
(72) |
(72) |
||
Other |
(581) |
(576) |
(576) |
(576) |
||
Long Term Liabilities |
|
|
(1,631) |
(1,466) |
(1,482) |
(1,498) |
Long term borrowings |
(1,203) |
(1,070) |
(1,086) |
(1,102) |
||
Deferred tax |
(27) |
(15) |
(15) |
(15) |
||
Other long term liabilities |
(401) |
(381) |
(381) |
(381) |
||
Net Assets |
|
|
37 |
172 |
118 |
183 |
Minority interests |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
37 |
172 |
118 |
183 |
CASH FLOW |
||||||
Net profit |
(208) |
(193) |
(59) |
61 |
||
Depreciation and amortisation |
322 |
263 |
213 |
213 |
||
Working capital |
(69) |
(101) |
(38) |
15 |
||
Tax and interest |
(76) |
(41) |
(66) |
(66) |
||
Exceptional & other |
101 |
(9) |
56 |
86 |
||
Operating cash flow |
|
|
70 |
(81) |
106 |
309 |
Capex |
(169) |
(138) |
(145) |
(145) |
||
Acquisitions/disposals |
(2) |
0 |
30 |
0 |
||
Equity financing |
1 |
60 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
3 |
5 |
0 |
0 |
||
Net Cash Flow |
(97) |
(154) |
(9) |
164 |
||
Opening net debt/(cash) |
|
|
733 |
1,234 |
812 |
837 |
FX |
(16) |
0 |
0 |
|||
Discontinued |
(35) |
(23) |
0 |
0 |
||
Other non-cash movements |
(369) |
615 |
(16) |
(16) |
||
Closing net debt/(cash) |
|
|
1,234 |
812 |
837 |
690 |
Source: Company accounts, Edison Investment Research
|
|
Research: Metals & Mining
Notwithstanding continued low-level coronavirus induced disruptions, Newmont’s financial results were materially better than Edison’s forecasts for Q121 largely as a consequence of an effective tax rate that was substantially lower than both our forecast and also Newmont’s guidance for the full year. Significantly, the company maintained its quarterly dividend, indicating management’s confidence in both its improving production profile as well as the gold price. This note updates our forecasts for FY21 in the light of Q1 results, as well as prevailing metals prices and assumptions regarding the treatment of tax.