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Research: TMT
Technicolor has announced the disposal of the post-production house of Production Services for €30m, for completion in H121. This leaves the segment focused on VFX (visual special effects) and animation, where growth and margin prospects are higher. FY21 has a good project pipeline, with around two-thirds of the year’s expected film and episodic VFX sales in place. No group level update was given, although Connected Home recently passed the milestone of shipping 20m DOCSIS 3.1 boxes. We have made a precautionary trim of 3% to our FY21e revenue to reflect the continuing COVID impact, reducing EBITA by €7m to €97m. CEO Richard Moat purchased €1.1m of shares in December, as agreed at the restructure.
Technicolor |
Portfolio focus |
Intended disposal |
Media |
21 January 2021 |
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 disposal of the post-production house of Production Services for €30m, for completion in H121. This leaves the segment focused on VFX (visual special effects) and animation, where growth and margin prospects are higher. FY21 has a good project pipeline, with around two-thirds of the year’s expected film and episodic VFX sales in place. No group level update was given, although Connected Home recently passed the milestone of shipping 20m DOCSIS 3.1 boxes. We have made a precautionary trim of 3% to our FY21e revenue to reflect the continuing COVID impact, reducing EBITA by €7m to €97m. CEO Richard Moat purchased €1.1m of shares in December, as agreed at the restructure.
Year end |
Revenue (€m) |
EBITDA |
EBITA |
PBT* |
EPS* |
EV/EBITDA |
12/18 |
3,988 |
266 |
98 |
7 |
(3.07) |
5.3 |
12/19 |
3,800 |
325 |
42 |
(73) |
(4.92) |
4.3 |
12/20e |
3,100 |
169 |
(64) |
10 |
(0.08) |
8.3 |
12/21e |
3,350 |
329 |
97 |
(28) |
(0.21) |
4.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Growing production pipeline
While the scale of the post-production operation in revenue and profit terms is not disclosed, this area is fairly commoditised and competitive. Technicolor is keen to put its resource (financial and people) into the higher growth and higher potential margin areas of VFX and animation. The group’s expertise in CGI crosses both these areas, with applications beyond film and episodic TV through advertising, gaming and live events. Management confirms that Production Services is slated to work in FY21 on Disney’s live action remakes of The Little Mermaid and Pinocchio and the prequel to The Lion King. In animation, Technicolor’s in-house pre-school property, Gus – The Itsy Bitsy Knight, is scheduled for broadcast globally in FY21, with an initial run of 52x11-minute episodes. It has been licensed to Mattel to produce Fischer-Price toys.
DOCSIS 3.1 gains further ground
Connected Home will dominate the FY20 figures (62% of our modelled revenue, with Production Services at 14% and DVD Services at 23%), given the impact of COVID-19 on film and TV production. The requirement for reliable broadband in the home, from home-working, streaming and gaming, continues to stimulate demand for the group’s DOCSIS 3.1 gateways (see our July Outlook note). This trend should continue through FY21 with upgrades to WiFi-6. Demand from South and Central America is likely to remain fairly subdued however, as a result of both the continuing pandemic and the weak currencies rendering imports more expensive.
Valuation: Steady build from lows
The share price bottomed out at €1.16 in late of September, with completion of the financial reconstruction. It has since climbed 63%, increasingly reflecting improving underlying trading prospects, albeit that the equity remains dominated by the value of the debt. The significant investment by the CEO underlines management’s confidence in the prospects.
Exhibit 1: Financial summary
€m |
2018 |
2019 |
2020e |
2021e |
||
Year-end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
3,988 |
3,800 |
3,100 |
3,350 |
Cost of Sales |
(3,521) |
(3,375) |
(2,841) |
(2,941) |
||
Gross Profit |
467 |
425 |
259 |
409 |
||
EBITDA |
|
|
266 |
325 |
169 |
329 |
EBITA |
|
|
98 |
42 |
(64) |
97 |
Amortisation of acquired intangibles |
(81) |
(54) |
(59) |
(59) |
||
Exceptionals |
(127) |
(79) |
(145) |
(20) |
||
Reported operating profit |
(119) |
(121) |
(268) |
18 |
||
Net Interest |
(51) |
(84) |
(90) |
(125) |
||
Joint ventures & associates (post tax) |
0 |
(1) |
0 |
0 |
||
Exceptionals |
0 |
0 |
164 |
0 |
||
Profit Before Tax (norm) |
|
|
7 |
(73) |
10 |
(28) |
Profit Before Tax (reported) |
|
|
(170) |
(206) |
(194) |
(107) |
Reported tax |
(54) |
(3) |
(20) |
(20) |
||
Profit After Tax (norm) |
(47) |
(75) |
(10) |
(48) |
||
Profit After Tax (reported) |
(224) |
(208) |
(214) |
(127) |
||
Minority interests |
(1) |
0 |
0 |
0 |
||
Discontinued operations |
157 |
(22) |
(20) |
0 |
||
Net income (normalised) |
(48) |
(75) |
(10) |
(48) |
||
Net income (reported) |
(68) |
(230) |
(234) |
(127) |
||
Average Number of Shares Outstanding (m) |
15 |
15 |
120 |
230 |
||
EPS - normalised (c) |
|
|
(306.94) |
(492.18) |
(8.41) |
(20.73) |
EPS - normalised fully diluted (c) |
|
|
(306.94) |
(492.18) |
(7.33) |
(19.25) |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
(6) |
(5) |
(18) |
8 |
||
Gross Margin (%) |
11.7 |
11.2 |
8.4 |
12.2 |
||
EBITDA Margin (%) |
6.7 |
8.6 |
5.4 |
9.8 |
||
EBITA Margin (%) |
2.5 |
1.1 |
(2.1) |
2.9 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
2,101 |
2,082 |
1,761 |
1,625 |
Intangible Assets |
1,591 |
1,483 |
1,274 |
1,140 |
||
Tangible Assets |
233 |
476 |
364 |
362 |
||
Investments & other |
26 |
40 |
40 |
40 |
||
Deferred tax and other |
251 |
84 |
84 |
84 |
||
Current Assets |
|
|
1,659 |
1,126 |
1,365 |
1,439 |
Stocks |
268 |
243 |
208 |
225 |
||
Debtors |
677 |
507 |
558 |
573 |
||
Cash & cash equivalents |
291 |
64 |
286 |
329 |
||
Other |
423 |
312 |
312 |
312 |
||
Current Liabilities |
|
|
(1,909) |
(1,542) |
(1,343) |
(1,344) |
Creditors |
(1,135) |
(825) |
(694) |
(695) |
||
Tax and social security |
(34) |
(41) |
(41) |
(41) |
||
Short term borrowings |
(20) |
(95) |
(81) |
(81) |
||
Other |
(720) |
(581) |
(527) |
(527) |
||
Long Term Liabilities |
|
|
(1,385) |
(1,604) |
(1,532) |
(1,578) |
Long term borrowings |
(1,004) |
(1,203) |
(1,131) |
(1,177) |
||
Deferred tax |
(193) |
(27) |
(27) |
(27) |
||
Other long-term liabilities |
(381) |
(401) |
(401) |
(401) |
||
Net Assets |
|
|
466 |
62 |
251 |
142 |
Minority interests |
1 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
467 |
62 |
251 |
142 |
CASH FLOW |
||||||
Net profit |
(224) |
(208) |
(214) |
(127) |
||
Depreciation and amortisation |
234 |
322 |
292 |
281 |
||
Working capital |
2 |
(69) |
(202) |
(30) |
||
Tax and interest |
(53) |
(76) |
(90) |
(81) |
||
Exceptional & other |
159 |
101 |
21 |
145 |
||
Operating cash flow |
|
|
118 |
70 |
(193) |
188 |
Capex |
(113) |
(169) |
(110) |
(145) |
||
Acquisitions/disposals |
1 |
(2) |
0 |
0 |
||
Equity financing |
0 |
1 |
60 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
28 |
3 |
(40) |
0 |
||
Net Cash Flow |
34 |
(97) |
(283) |
43 |
||
Opening net debt/(cash) |
|
|
778 |
733 |
1,234 |
926 |
FX |
1 |
(10) |
0 |
|||
Discontinued |
105 |
(35) |
(20) |
0 |
||
Other non-cash movements |
(95) |
(369) |
621 |
(46) |
||
Closing net debt/(cash) |
|
|
733 |
1,234 |
926 |
929 |
Source: Company accounts, Edison Investment Research
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