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Research: TMT
Technicolor has announced the appointment of Richard Moat as CEO, taking over from Frédéric Rose, who had been in situ for 11 years. He is a turnaround specialist, with a telecoms background, and is tasked with accelerating growth, value creation and financial sustainability. The Q3 trading update indicated improvements in adjusted EBITDA and free cash flow, as anticipated. We have made minor downward adjustments to our full year and FY20 forecasts to reflect the shift in mix. The valuation remains well below that of peers and our DCF-derived level of €2.10.
Technicolor |
New CEO at the helm |
Board change and Q3 results |
Media |
15 November 2019 |
Share price performance
Business description
Next events
Analysts
Technicolor is a research client of Edison Investment Research Limited |
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Technicolor has announced the appointment of Richard Moat as CEO, taking over from Frédéric Rose, who had been in situ for 11 years. He is a turnaround specialist, with a telecoms background, and is tasked with accelerating growth, value creation and financial sustainability. The Q3 trading update indicated improvements in adjusted EBITDA and free cash flow, as anticipated. We have made minor downward adjustments to our full year and FY20 forecasts to reflect the shift in mix. The valuation remains well below that of peers and our DCF-derived level of €2.10.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
EV/EBIT |
P/E |
Yield |
12/17 |
4,253 |
7 |
0.02 |
0.06 |
8.8 |
42.9 |
7.2 |
12/18 |
3,988 |
(3) |
(0.01) |
0.00 |
18.9 |
N/A |
N/A |
12/19e |
3,809 |
(69) |
(0.23) |
0.00 |
17.2 |
N/A |
N/A |
12/20e |
3,747 |
(10) |
(0.02) |
0.00 |
9.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. FY19e and FY20e include IFRS16 impact
Q3 trading swings and roundabouts
Detailed Q3 figures were not given, with the broad picture painted of both adjusted EBITDA and free cash flow improving. As outlined in our August update, we expect a stronger working capital performance in H2 after the H1 outflow. Q3 performance was mixed segmentally, with good growth at both Production Services and DVD Services, but more bumps in the road for Connected Home. The latter is the largest part of the group (54% H1 revenue) and had a tough quarter. Revenues were down double digits, with good broadband growth insufficient to offset the decline in video. Weaker Latin American markets were also cited. Margins are set to pick up as the transformation plan takes effect and lower component prices kick in. Production Services revenues were up double digits, with strong growth in Film & Episodic VFX and in Animation & Games. DVD Services also had a better Q3 and, notably, has renegotiated a contract with a larger customer on ‘materially improved terms’.
New CEO
The new CEO, Richard Moat, will doubtless take some time to appraise the strengths and weaknesses of the three group businesses before clarifying any changes to strategy. Frédéric Rose has resigned from the board after an 11-year tenure, when he fundamentally reshaped the portfolio. Moat joins from Eir Ltd, the Irish telecoms operator, having previously been at EE and Orange. The group’s statement draws particular attention to his business transformation experience.
Valuation: Significant discount to peers, DCF
Good performance and corporate activity within global entertainment service peers has lifted comparator ratings for this segment, which we have discounted by 20%. Our sum-of-the-parts valuation is now €1.52, from €1.42 in August. A DCF, based on an 8% WACC and 2% terminal growth, gives €2.10, 2.5x the current share price. Given the degree of flux within the business operationally, financially and in terms of the management team, a degree of caution is appropriate, but the current discount looks overdone.
Mix shifts
The trading commentary gives no headline numbers beyond the broad percentage revenues changes by, and within, the trading segments. At the group level, revenues were slightly behind prior year, while EBITDA and cash flow were ahead.
Guidance was reiterated for H2 to show ‘significantly’ improved profitability and a better cash flow result, despite the impact on working capital of the downgrades from the ratings agencies as disclosed mid-October. We have made minor cuts to our projections in absolute terms, with the percentage changes exaggerated by being so close to the break-even level. It should be noted that all our modelling is on an IFRS 16 basis, which adds around €68m to the Entertainment Services EBITDA number and €8m to Connected Home.
Exhibit 1: Adjustments to forecasts
EPS (€) |
PBT (€m) |
EBITA (€m) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2018 |
(0.01) |
(0.01) |
- |
(3) |
(3) |
- |
98 |
98 |
- |
2019e |
(0.15) |
(0.23) |
-50 |
(44) |
(69) |
-57 |
78 |
60 |
-23 |
2020e |
0.02 |
(0.02) |
N/A |
15 |
(10) |
N/A |
116 |
99 |
-15 |
Source: Technicolor accounts, Edison Investment Research. Note: EPS normalised, fully diluted.
In terms of divisional results, the remodelled split of revenue and EBITDA for FY19e and FY20e is shown below.
Exhibit 2: Divisional splits
FY19e old |
FY19e new |
FY20e old |
FY20e new |
|||||
€m |
Revenue |
EBITDA |
Revenue |
EBITDA |
Revenue |
EBITDA |
Revenue |
EBITDA |
Connected Home |
2,105 |
106 |
2,007 |
88 |
2,097 |
146 |
1,946 |
118 |
Margin |
5.0% |
4.4% |
7.0% |
6.1% |
||||
Production Services |
838 |
878 |
879 |
922 |
||||
DVD Services |
884 |
903 |
839 |
858 |
||||
Entertainment Services |
1,721 |
233 |
1,782 |
233 |
1,719 |
244 |
1,781 |
248 |
Margin |
13.5% |
13.1% |
14.2% |
13.9% |
||||
Corporate & Other |
20 |
(20) |
20 |
(20) |
20 |
(20) |
20 |
(20) |
Group |
3,846 |
319 |
3,809 |
301 |
3,836 |
363 |
3,747 |
346 |
Margin |
8.3% |
7.9% |
9.5% |
9.2% |
||||
Source: Edison Investment Research. Note: Figures include IFRS 16.
Improving free cash flow
From negative free cash flow of €262m in H119, we expect an inflow in H219 as indicated by management, with the inventory position in Connected Home correcting and stage payments in Production Services being made. For the full year FY19, we now forecast a small negative free cash flow figure, revised from an inflow of €13m at the time of our August update, rising to €71m (from €74m) for FY20e.
Connected Home
■
Q3 constant currency revenues down in double-digits
The revenue decline is attributed to a slowdown in demand in Latin America, not previously a notable issue, and strong comparatives in Broadband.
Broadband continues to be a good market in North America, but the tail-off in the video segment has been marked. However, the group is picking up good business in android-TV solutions, where it is a leading provider.
The focus on DOCSIS 3.1 and on fibre moves Connected Home further from the more commoditised market segments, with the first wins from the new Wi-Fi 6 platform coming through in the quarter.
Margins should continue to improve in Q4, with the excess inventories now sold through and the productivity improvements from the transformation programme having a greater impact.
Production Services
■
Q3 double-digit revenue growth
A very busy quarter in Film & Episodic VFX generated ‘strong double-digit’ growth, with 11 major projects completed, including several for Disney. 17 theatrical projects and six non-theatrical (ie episodic and/or streaming) projects are in progress into Q4, for clients including Disney, Fix, Universal and Netflix. Advertising is described as achieving high single-digit revenue growth year-on-year, with Animation & Games producing strong double-digit increases. This is across both elements, with work continuing on The SpongeBob Movie and two other feature films as well as episodic animation work, while games included completion of new titles for Electronic Arts (FIFA2020, NHL20) and for 2K (NBA 2K20). The exposure to the more difficult post-production market has been limited by the decision to exit underperforming businesses last year and like-for-like business was slightly ahead.
DVD Services
■
Replication volumes up 7% y-o-y in Q3
The gain refers specifically to volumes and there is no mention in the statement of revenues for this segment.
However, this is a better situation than we had earlier envisaged, which may in part be due to some phasing of production into Q3 that had been expected in Q4.
The most important news for this segment is the progress in the contract renegotiations with major clients. When we published in August, the first contract extension with a major customer had been completed, taking effect on 1 July. A more significant contract has now been renewed with one of the largest studio clients on ‘materially improved terms’. As described in our initiation, renegotiation of contracts to volume and activity-based pricing is the crux of the investment case for this division, and this progress is encouraging. The major studios still make a lot of cash from physical product and there are very limited alternative options given the amount of capacity that has been taken out of the global market. Timing on improving divisional operating margins will depend on when agreement is reached across the contract base.
Valuation
Our valuation methodology is the same as previous notes, looking at the group on a sum-of-the-parts basis. Entertainment Services is valued on an EV/EBIT basis whilst Connected Home is valued on an EV/EBITDA multiple.
The major difference this time around is in the ratings of the peers for the Entertainment Services business, where corporate activity has been the primary driver of multiple expansion. At the end of July, the peer EV/EBITE multiple for FY19 was 19.0x and for FY20e was 14.8x. These have lifted to 22.5x and 19.1x respectively. We have now discounted the comparative multiple by 20% to reflect corporate activity within the sector. In future periods we will also include forthcoming IPO, DNEG, in the peer set.
This has lifted the implied value per share from €1.42 to €1.52.
Exhibit 3: SOTP
€m unless stated |
Valuation method |
FY19e |
FY20e |
Average implied EV |
|||||
Applied multiple |
EBIT or EBITDA |
Implied EV |
Applied multiple |
EBIT or EBITDA (x) |
Implied EV |
||||
Entertainment Services |
Peer group EV/EBIT |
22.5 |
53 |
1,193 |
19.1 |
72 |
1,375 |
1,284 |
|
Discount by 20% |
1,027 |
||||||||
Connected Home |
Target EV/EBITDA |
7.9 |
88 |
695 |
7.9 |
118 |
932 |
814 |
|
Less net Corporate & other |
|
10 |
15 |
(150) |
10 |
15 |
(150) |
(150) |
|
Total EV |
|
|
|
|
|
|
|
1,691 |
|
Less net debt and minority |
|
|
|
|
|
|
|
(1,061) |
|
Implied equity value |
|
|
|
|
|
|
|
630 |
|
Implied equity value per share (€) |
|
|
|
|
|
|
|
1.52 |
|
Source: Edison Investment Research
We have also repeated our DCF exercise on the adjusted forecasts and here the revision is down from €2.50 in August to €2.10 now.
Both techniques derive values well in excess of the current share price of €0.83. Although some degree of caution is appropriate, given the degree of flux within the business operationally, financially and in terms of the management team, the scale of the discount looks overdone.
Exhibit 4: Financial summary
€m |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
4,253 |
3,988 |
3,809 |
3,747 |
Cost of Sales |
(3,651) |
(3,521) |
(3,363) |
(3,272) |
||
Gross Profit |
602 |
467 |
446 |
475 |
||
EBITDA |
|
|
341 |
266 |
301 |
346 |
Operating Profit (before amort. and except.) |
|
|
103 |
48 |
53 |
101 |
Amortisation of acquired intangibles |
(9) |
(81) |
(59) |
(59) |
||
Exceptionals |
(54) |
(86) |
(32) |
0 |
||
Share-based payments |
0 |
0 |
0 |
0 |
||
Reported operating profit |
40 |
(119) |
(38) |
42 |
||
Net Interest |
(96) |
(51) |
(121) |
(111) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7 |
(3) |
(69) |
(10) |
Profit Before Tax (reported) |
|
|
(56) |
(170) |
(160) |
(69) |
Reported tax |
(112) |
(54) |
51 |
18 |
||
Profit After Tax (norm) |
7 |
(3) |
(93) |
(9) |
||
Profit After Tax (reported) |
(168) |
(224) |
(109) |
(51) |
||
Minority interests |
1 |
(1) |
0 |
0 |
||
Discontinued operations |
(5) |
157 |
0 |
0 |
||
Net income (normalised) |
8 |
(4) |
(93) |
(9) |
||
Net income (reported) |
(172) |
(68) |
(109) |
(51) |
||
Average Number of Shares Outstanding (m) |
413 |
413 |
414 |
414 |
||
EPS - normalised (c) |
|
|
1.9 |
(1.0) |
(22.5) |
(2.1) |
EPS - normalised fully diluted (c) |
|
|
1.9 |
(1.0) |
(22.5) |
(2.1) |
Dividend per share (c) |
0.06 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
(8) |
(6) |
(4) |
(2) |
||
Gross Margin (%) |
14.2 |
11.7 |
11.7 |
12.7 |
||
EBITDA Margin (%) |
8.0 |
6.7 |
7.9 |
9.2 |
||
Normalised Operating Margin (%) |
2.4 |
1.2 |
1.4 |
2.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
2,161 |
2,101 |
2,529 |
2,385 |
Intangible Assets |
1,567 |
1,591 |
1,743 |
1,606 |
||
Tangible Assets |
243 |
233 |
509 |
502 |
||
Investments & other |
351 |
277 |
277 |
277 |
||
Current Assets |
|
|
1,551 |
1,659 |
1,495 |
1,403 |
Stocks |
238 |
268 |
261 |
244 |
||
Debtors |
684 |
677 |
634 |
592 |
||
Cash & cash equivalents |
319 |
291 |
177 |
144 |
||
Other |
310 |
423 |
423 |
423 |
||
Current Liabilities |
|
|
(1,669) |
(1,909) |
(1,927) |
(1,935) |
Creditors |
(947) |
(1,135) |
(1,078) |
(1,086) |
||
Tax and social security |
(33) |
(34) |
(34) |
(34) |
||
Short term borrowings |
(20) |
(20) |
(95) |
(95) |
||
Other |
(669) |
(720) |
(720) |
(720) |
||
Long Term Liabilities |
|
|
(1,707) |
(1,578) |
(1,817) |
(1,817) |
Long term borrowings |
(1,077) |
(1,004) |
(1,243) |
(1,243) |
||
Other long term liabilities |
(630) |
(574) |
(574) |
(574) |
||
Net Assets |
|
|
336 |
273 |
280 |
36 |
Minority interests |
3 |
1 |
1 |
1 |
||
Shareholders' equity |
|
|
339 |
274 |
281 |
37 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
269 |
92 |
128 |
160 |
||
Working capital |
34 |
(12) |
(21) |
53 |
||
Exceptional & other |
9 |
91 |
0 |
0 |
||
Tax |
(13) |
(14) |
51 |
18 |
||
Net operating cash flow |
|
|
299 |
157 |
158 |
231 |
Capex |
(145) |
(162) |
(160) |
(160) |
||
Acquisitions/disposals |
(25) |
1 |
0 |
0 |
||
Net interest |
(44) |
(39) |
(103) |
(111) |
||
Equity financing |
1 |
0 |
0 |
0 |
||
Dividends |
(25) |
0 |
0 |
0 |
||
Other |
(13) |
28 |
(4) |
7 |
||
Net Cash Flow |
48 |
(15) |
(109) |
(33) |
||
Opening net debt/(cash) |
|
|
679 |
778 |
733 |
1,081 |
FX |
(39) |
1 |
5 |
0 |
||
Discontinued |
(88) |
105 |
||||
Other non-cash movements |
(20) |
(46) |
(244) |
(62) |
||
Closing net debt/(cash) |
|
|
778 |
733 |
1,081 |
1,176 |
Source: Company accounts, Edison Investment Research. Note: Historical numbers have not been restated for IFRS 16.
|
|
Research: TMT
Over the last 12 months Cyan has focused on integrating its I-New acquisition and preparing for its Orange roll-out. Sustaining this focus on delivery over the next few months will be crucial. The company is targeting revenues of €75m by FY21, a significant uplift from the current (€16m) run rate. Investor confidence will be boosted if Cyan can deliver the large sequential jump in revenues implied by FY19 guidance and complete technical integration with Orange on time.