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Research: TMT
Edel’s FY18 results showed a 6% sales increase and 7% improvement in EBITDA as it benefited from continued demand for vinyl and subsidiary Kontor New Media’s strong positioning in digital music. H2 was markedly tougher, as foreshadowed in the November trading update, reflecting pressure on the book publishing, one-off issues at Pandastorm Pictures and a write-down at Edel Italy. Guidance for FY19 indicates broadly stable revenues but significantly improved profitability, benefiting from the major investment programme completed in FY18. The shares trade at a clear discount to global entertainment content and publishing stocks, partly explained by the limited market liquidity.
Edel |
Mixed media
Media |
Scale research report - Update
7 February 2019 |
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Share details
Business description
Bull
Bear
Analysts
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Edel’s FY18 results showed a 6% sales increase and 7% improvement in EBITDA as it benefited from continued demand for vinyl and subsidiary Kontor New Media’s strong positioning in digital music. H2 was markedly tougher, as foreshadowed in the November trading update, reflecting pressure on the book publishing, one-off issues at Pandastorm Pictures and a write-down at Edel Italy. Guidance for FY19 indicates broadly stable revenues but significantly improved profitability, benefiting from the major investment programme completed in FY18. The shares trade at a clear discount to global entertainment content and publishing stocks, partly explained by the limited market liquidity.
Media services and content marketing
Edel is unusual in having its feet strongly planted in both physical and digital media camps. The capital investment programme – €20.4m in FY17 and a €19.3m in FY18 – has given the group state-of-the-art manufacturing facilities for vinyl pressing and book printing and publishing. These give the group competitive advantages in terms of speed, quality and cost in markets where margins can be tight. The German printing market is dominated by small firms unable to scale up volume or investment. Edel is one of the largest independent music companies in Europe and its digital music operation, Kontor New Media, has been selected as one of three Preferred Plus partners by Apple. In CD and DVD markets, reducing demand is putting pressure on all suppliers, but Edel has the advantages of efficient production and distribution, which places it well for market share gains.
Net income to rebuild FY19
The guided FY19 sales figure of €207.5m reflects an element of caution on some of the underlying markets. EBITDA margins should strengthen with the efficiency benefits of the investment programme, but depreciation will also step up. FY19 net income is guided to €4.7m, up from €4.0m in FY18 (FY16: €4.5m).
Valuation: Discount to content, publishing
We have maintained the same valuation approach as in our previous notes, comparing the rating of the company with the global media subsectors of entertainment content and publishing. Edel’s shares trade at a significant discount on EV/Sales, most likely reflecting the manufacturing contribution. On forward EV/EBITDA, the discount is 38%. On a P/E basis, the multiple is 11.5x vs 17.8x.
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Consensus estimates*
Source: Edel accounts, * Note: company guidance |
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
Exhibit 1: Half year and full year progression to 30 September 2018
€000s |
H118 |
% change |
H218 |
FY18 |
% change |
|||
Year end 30 September |
HGB/German GAAP |
HGB/German GAAP |
HGB/German GAAP |
|||||
Income statement |
||||||||
Revenue |
106,104 |
+8 |
103,077 |
+4 |
209,181 |
+6 |
||
EBITDA |
10,400 |
+14 |
6,898 |
-1 |
17,298 |
+7 |
||
EBITDA margin (%) |
9.8 |
6.7 |
8.3 |
|||||
Profit before tax (as reported) |
5,607 |
+21 |
985 |
-55 |
6,592 |
-3 |
||
Net income (as reported) |
3,649 |
+21 |
335 |
-77 |
3,984 |
-11 |
||
Source: Edel accounts
Splitting out the H1 from the H2 performance above shows the deterioration more clearly. The November trading update pointed out that some of this was due to weaker earnings in the book publishing operations of Edel Germany and ZS Verlag and some attributable to one-off effects at Pandastorm Pictures (75% owned) and the partial write-down in the equity holding in Edel Italy as the group refocused on its core DACH markets. These latter two were not separately quantified.
The small reduction in FY19 guided sales to €207.5m will be a function of the mix. Working backwards from the company guided net income of €4.7m suggests to us an EBITDA in the €18.5–19.5m range (we do not model the company financially in full and there are no broker forecasts). This implies recovery in EBITDA margin to back over 9%.
Valuation
Our valuation framework for Edel is unchanged from our previous commentary. 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 flawed. Given these constraints, rather than picking out a set of inadequate peers, we have looked globally across the key subsectors in which Edel operates, particularly entertainment content and publishing, at key valuation metrics. We have stripped out the unprofitable companies from the EV/EBITDA and P/E calculations, as well as any obvious distortive outliers.
Exhibit 2: Sectoral valuations for related activities
P/E (x) |
EV/sales (x) |
EV/EBITDA (x) |
|||||||
Last |
FY 1 |
FY 2 |
Last |
FY 1 |
FY 2 |
Last |
FY 1 |
FY 2 |
|
Publishing |
16.5 |
17.1 |
15.2 |
2.1 |
2.0 |
1.9 |
10.8 |
9.2 |
8.3 |
Broadcast & Entertainment |
21.5 |
18.5 |
15.3 |
2.8 |
2.6 |
2.5 |
9.4 |
9.3 |
7.9 |
Edel |
15.1 |
11.5 |
- |
0.5 |
0.5 |
- |
6.4 |
5.7 |
- |
Source: Refinitiv, Edison Investment Research. Note: Prices as at 4 February 2019.
It would be expected that the sales based multiple would be lower than the comparator groups due to the large volumes of third-party revenues, which will also distort margin comparisons.
The corporate structure will be changing (anticipated in Q2) to a partnership limited with shares, with a strong influence of the younger generation of the founding Haentjes family. Their 64% shareholding has an impact on the potential valuation. Nevertheless, Edel’s share price looks to be well below the global market on both P/E and EV/EBITDA multiples, partly reflecting its comparatively modest size and limited liquidity. The current rating is at a 35% discount on current year P/E (38% discount on EV/EBITDA).
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Research: Real Estate
During the three months to 31 December 2018 (Q219), Target made good progress with deploying available capital resources, including the £50m gross proceeds from the November share placement. The portfolio also continues to perform well, delivering a 2.3% quarterly NAV total return (9.5% annualised). The attractive dividend yield is backed by very long leases, mostly RPI-linked, and supported by careful asset and operator selection. We continue to forecast a fully covered dividend in FY20.