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Research: TMT
Edel’s H119 results to March showed a modest improvement in revenues, which were up 2% on the prior period, and a broadly stable EBITDA and margin. Increased depreciation impacts further down the income statement. Management has been passed down a generation to Jonas Haentjes, post Edel’s transition to a partnership limited by shares (the founding family retains its 64% stake). The shares trade at a substantial discount to global entertainment content and publishing stocks, partly due to the limited market liquidity.
Edel |
Streaming positivity
Media |
Scale research report - Update
2 July 2019 |
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Edel’s H119 results to March showed a modest improvement in revenues, which were up 2% on the prior period, and a broadly stable EBITDA and margin. Increased depreciation impacts further down the income statement. Management has been passed down a generation to Jonas Haentjes, post Edel’s transition to a partnership limited by shares (the founding family retains its 64% stake). The shares trade at a substantial discount to global entertainment content and publishing stocks, partly due to the limited market liquidity.
Peak investment phase passed
Over the past three years Edel has invested heavily to take advantage of the opportunities in both physical and digital production and distribution in the music, publishing and film markets. Capital spend was €20.4m in FY17 and €19.3m in FY18 but now the peak investment has passed in H119 it was less than half the prior year at €5.1m. Vinyl pressing continued to increase, but CD/DVD production declined, leading to a somewhat disappointing performance at optimal media. Streaming remains a strong market, with Kontor New Media (licensing and content management) well placed, distributing content on platforms such as Apple Music (where it is a Preferred Plus partner), Amazon and Spotify. The group’s book publishing and film and children’s operations also performed well. The change in mix lowered the gross margin by 200bp to 49%, while the higher depreciation charge post the capex programme weighed on pre-tax profit and EPS. There was no update to earlier FY19 company guidance (there are no broker forecasts).
Ongoing shift to digital but vinyl resists trend
Industry figures (IFPI) show revenues from streaming approaching half of the total music market globally at $8.9bn, having climbed to 47% in 2018 from 39% in 2017. The global physical market was down 10% on the prior year as the production of CDs and DVDs continues to decline, but vinyl continues its (13-year) positive run, up 6.0% at 3.6% of the total market. The German market is now the fourth largest global music market, having been overtaken by the UK.
Valuation: Discount to content, publishing
We have maintained the same valuation approach as in our previous notes, comparing the company’s rating with the global media subsectors of entertainment content and publishing. Edel’s shares trade at a significant discount on EV/sales multiples, most likely reflecting the manufacturing contribution. On current year EV/EBITDA (based on company guidance), the discount is 41%. On a P/E basis, the multiple is 10.1x vs 17.2x.
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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
The group published its half year report to end March 2019 in June.
Exhibit 1: Half year to 31 March 2019 vs H118
€000s |
H119 |
H118 |
% |
||
Year end 30 September |
HGB/German GAAP |
HGB/German GAAP |
change |
||
Income statement |
|||||
Revenue |
108,074 |
106,104 |
+2 |
||
EBITDA |
10,469 |
10,400 |
+1 |
||
EBITDA margin (%) |
9.7 |
9.8 |
|||
Profit before tax (as reported) |
4,904 |
5,607 |
-13 |
||
Net income (as reported) |
3,211 |
3,649 |
-12 |
||
Source: Edel accounts
As management did not update its FY19 sales guidance of €207.5m, this maintained figure now allows for a more difficult H2 (a 4% reduction in sales). Working backwards from the company’s guided net income of €4.7m suggests to us FY19 EBITDA in the €18.5–19.5m range (we do not model the company financially in full and there are no broker forecasts). This now implies EBITDA of €8–9m in H2, from the low of €6.9m in H218. The EBITDA margin has recovered to over 9%, having dipped to 6.7% in H218.
Management did not provide detail on the revenue split at this stage, but did outline the trading performance by segment. Streaming is the main growth driver at Kontor New Media, where the group’s strong relationships with the major platforms position it as a market leader. At optimal media, where the capex programme has been focused, the activities in vinyl and in book publishing both remain positive as the state-of-the-art facilities make the group an attractive partner. The book publishing imprint, ZS Verlag, had a particularly successful trading period with a number of top 10 sellers in various categories. The Film and Children’s operations also showed positive earnings growth. However, physical digital (CD, DVD, Blu-Ray) remains a more difficult market, leading to overall reduced revenues from optimal media.
Net debt at the half-year stage was €54.8m vs €56.3m at the end of FY18. With capex reverting to near-maintenance levels, we would expect net debt to continue to reduce.
Valuation
Our valuation framework for Edel is unchanged from our previous note. 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 limited. Given these constraints, rather than selecting a set of inadequate peers, we have looked globally across the main subsectors in which Edel operates, particularly entertainment content and publishing, to examine key valuation metrics based on consensus forecasts. We have stripped out unprofitable companies from our 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) |
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Last |
FY1 |
FY2 |
Last |
FY1 |
FY2 |
Last |
FY1 |
FY2 |
|
Publishing |
22.0 |
15.4 |
15.0 |
1.5 |
1.5 |
1.5 |
7.9 |
6.8 |
6.5 |
Broadcast & Entertainment |
17.2 |
19.0 |
12.0 |
1.7 |
1.5 |
1.4 |
9.7 |
7.4 |
6.4 |
Edel |
13.3 |
10.1 |
N/A |
0.5 |
0.5 |
N/A |
6.0 |
5.9 |
N/A |
Source: Refinitiv, Edison Investment Research. Note: Prices as at 1 July 2019. Edel FY1 based on company guidance.
We would expect that the multiple to sales for Edel would be lower than the comparator groups due to the large volumes of third-party revenues that it handles, which will also distort margin comparisons.
The change in corporate structure ensures stability but diminishes the potential sway of the minority shareholders and the possible valuation. Nevertheless, Edel’s share price appears to be well below the global market on both P/E and EV/EBITDA multiples, in part due to its comparatively modest size and limited liquidity, given the family’s 64% shareholding. At present, Edel’s current-year P/E multiple is at a 41% discount to peers, while on EV/EBITDA it trades at a 17% discount.
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