Quarto Group Inc. (The)
The Quarto Group |
Publishing performance in line |
Year-end trading update |
Media |
31 January 2017 |
Share price performance
Business description
Next events
Analysts
Quarto Group is a research client of Edison Investment Research Limited |
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Quarto’s year-end update indicates that the publishing operations have delivered the performance as expected, despite challenges in the UK retail market and the tailing off of the colouring book trend. 2016’s acquisitions have done notably well and our forecasts are unchanged. A buyer has been found for Australian/New Zealand distributor, Books and Gifts Direct (BGD), which will allow greater focus on opportunities for the core publishing business. Net debt of $62.2m was ahead of end FY15 due to working capital timing and weaker trading at BGD. Quarto has an attractive yield and continues to trade at an overlarge discount to peers.
Year |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
171.3 |
11.9 |
44.1 |
13.7 |
9.0 |
3.5 |
12/15 |
182.2 |
14.1 |
49.5 |
14.5 |
8.0 |
3.7 |
12/16e |
195.0 |
15.5 |
52.3 |
15.3 |
7.6 |
3.9 |
12/17e |
212.5 |
17.1 |
57.4 |
15.8 |
6.9 |
4.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Focus on publishing; Value in IP
The intended disposal of BGD removes a drag on financial performance and on management time. Completion should be before preliminary results on 22 March 2017 and its figures classed as discontinued business. The indicated price of A$5.75m (being A$1.0m in cash and $4.75m in interest-bearing loan notes) implies a write-down of c $11.0m. BGD accounted for 12% of FY15 group revenues and 13% of group EBITDA, with profits second-half weighted. The update contains a reference to a revised methodology for recognising the (long) useful lives of the backlist titles. This should more accurately reflect the underlying value of the IP contained within the group but not currently recognised on the balance sheet. We have historically estimated this ‘missing’ value through trade transaction values per backlist title and welcome the formalisation.
Debt reduction temporarily slowed
Working capital swings relate to retailer payments over the Christmas period, along with the mix effect of a greater proportion of revenues generated from publishing rather than co-edition publishing (where a proportion of cash is received in advance). With weak trading at BGD, the FY16 balance sheet shows net debt higher than the prior year. Edison’s $69.1m end-FY16e net debt includes $7.5m of outstanding loan notes from August 2016’s becker&mayer acquisition. Quarto’s indicated figure of $62.2m is equivalent to our $61.6m. The underlying trend remains in the right direction, signalled by the intention to raise the final dividend.
Valuation: Overlarge discount
Quarto’s share price has performed well over the last year, gaining over 30%, as the market has started to recognise the underlying value of the business and its IP. However, its 2017e P/E is still just 6.9x (EV/EBITDA 6.5x) and it carries a premium yield of 4.0% on our assumed payout. This fails to reflect its earnings and dividend progression, underlying trend of debt reduction and valuable backlist. Other smaller publishing companies currently trade on a 12.5x FY17e P/E.
Exhibit 1: Financial summary
Year end 31 December |
|
US$'000s |
2014 |
2015 |
2016e |
2017e |
Accounting basis |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
Revenue |
|
|
171,338 |
182,165 |
195,000 |
212,477 |
Cost of sales |
(116,325) |
(122,803) |
(131,430) |
(143,210) |
||
Gross profit |
|
|
55,013 |
59,362 |
63,570 |
69,268 |
EBITDA |
|
|
17,025 |
18,395 |
19,674 |
21,204 |
Operating profit (before GW and except) |
|
46,852 |
50,464 |
54,072 |
58,791 |
|
Amortisation of intangibles |
|
|
(503) |
(724) |
(924) |
(924) |
Exceptionals |
|
|
566 |
(445) |
(200) |
0 |
Amortisation of pre-production costs |
|
|
(30,933) |
(33,258) |
(35,588) |
(38,777) |
Operating profit |
|
|
15,982 |
16,037 |
17,360 |
19,090 |
Net interest |
|
|
(3,977) |
(3,098) |
(3,008) |
(2,904) |
Profit before tax (norm) |
|
|
11,942 |
14,108 |
15,476 |
17,110 |
Profit before tax IFRS |
|
|
12,005 |
12,939 |
14,352 |
16,186 |
Tax |
|
|
(2,922) |
(3,685) |
(4,055) |
(4,620) |
Adjustment to tax for normalised earnings |
|
|
(16) |
(645) |
(231) |
(236) |
Minority charge |
|
|
(310) |
(388) |
(375) |
(388) |
Profit after tax (norm.) |
|
|
8,696 |
9,778 |
10,815 |
11,866 |
Profit after tax (FRS3) |
|
|
8,773 |
8,866 |
9,922 |
11,178 |
|
|
|
|
|
|
|
Average number of shares outstanding (m) |
|
|
19.7 |
19.7 |
20.7 |
20.7 |
EPS - normalised fully diluted (c) |
|
|
44.1 |
49.5 |
52.3 |
57.4 |
EPS - IFRS (c) |
|
|
44.5 |
45.0 |
50.4 |
56.8 |
Dividend per share (c) |
13.7 |
14.5 |
15.3 |
15.8 |
||
|
|
|
|
|
|
|
EBITDA margin (%) |
|
|
10% |
10% |
10% |
10% |
Operating margin (before GW and except) (%) |
|
27% |
28% |
28% |
28% |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
Fixed assets |
|
|
102,416 |
104,433 |
124,948 |
124,774 |
Intangible assets |
|
|
42,025 |
41,622 |
61,448 |
61,274 |
Tangible assets |
|
|
2,857 |
3,368 |
4,500 |
4,500 |
Investment in associates |
|
|
57,534 |
59,443 |
59,000 |
59,000 |
Current assets |
|
|
99,702 |
108,369 |
108,180 |
124,173 |
Intangible assets: pre-publication costs |
|
|
0 |
0 |
0 |
0 |
Stocks |
|
|
24,851 |
26,147 |
27,989 |
30,498 |
Debtors |
|
|
51,741 |
57,163 |
61,191 |
66,675 |
Cash |
|
|
23,110 |
25,059 |
19,000 |
27,000 |
Current liabilities |
|
|
(144,919) |
(70,635) |
(81,300) |
(101,602) |
Creditors |
|
|
(55,769) |
(65,635) |
(70,935) |
(78,036) |
Short-term borrowings |
|
|
(89,150) |
(5,000) |
(10,365) |
(23,566) |
Long-term liabilities |
|
|
(6,875) |
(87,127) |
(82,847) |
(70,100) |
Long-term borrowings |
|
|
0 |
(79,562) |
(77,747) |
(65,000) |
Other long-term liabilities |
|
|
(6,875) |
(7,565) |
(5,100) |
(5,100) |
Net assets |
|
|
50,324 |
55,040 |
68,981 |
77,245 |
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
Operating cash flow |
|
|
47,529 |
52,941 |
47,530 |
53,800 |
Net interest |
|
|
(3,310) |
(2,749) |
(3,176) |
(3,072) |
Tax |
|
|
(759) |
(1,981) |
(3,777) |
(4,196) |
Capex |
|
|
(33,018) |
(36,882) |
(36,000) |
(36,000) |
Acquisitions/disposals |
|
|
(2,008) |
(1,614) |
(11,329) |
0 |
Financing |
|
|
0 |
0 |
0 |
0 |
Dividends |
|
|
(2,739) |
(2,346) |
(2,857) |
(3,004) |
Other |
|
|
0 |
0 |
0 |
19 |
Net cash flow |
|
|
5,695 |
7,369 |
(9,609) |
7,546 |
Opening net debt/(cash) |
|
|
71,015 |
66,040 |
59,503 |
69,112 |
HP finance leases initiated |
|
|
0 |
0 |
0 |
0 |
Loans acquired with acquisitions |
|
|
0 |
0 |
0 |
0 |
Translation differences |
|
|
(720) |
(832) |
0 |
0 |
Closing net debt/(cash) |
|
|
66,040 |
59,503 |
69,112 |
61,566 |
Source: Company accounts, Edison Investment Research
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