The Quarto Group
The Quarto Group |
Accretive US expansion |
Interims and acquisition |
Media |
10 August 2016 |
Share price performance
Business description
Next events
Analysts
The Quarto Group is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||||||
Quarto’s $9.8m acquisition of the becker&mayer publishing assets is in line with its strategy of expanding in the US and in children’s publishing and should be usefully earnings enhancing in 2017e. Interim results showed positive progress, with revenue up by 8%. We have increased our revenue and profit forecasts to reflect the acquisition (2017e EPS up 4%). The balance sheet continues to strengthen, with H116 net debt reduced by US$8.5m to $72.5m. Despite a strong relative share price performance over the past 12 months, the 2016e P/E is still undemanding at 6.5x.
Year |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
171.3 |
11.9 |
44.1 |
13.7 |
7.8 |
4.0 |
12/15 |
182.2 |
14.1 |
49.5 |
14.5 |
6.9 |
4.3 |
12/16e |
195.0 |
15.5 |
52.3 |
15.3 |
6.5 |
4.5 |
12/17e |
212.5 |
17.1 |
57.4 |
15.8 |
6.0 |
4.6 |
Note: *PBT and diluted EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Good interims, business increasingly H2 weighted
The highlight of the H116 results was the strong progress in US publishing (revenue up 17%, normalised operating profit by 39%). As usual, there were some ups and downs elsewhere: the core publishing normalised operating profit increased by $1.2m, but a disappointing result from Books & Gifts Direct contributed to a $0.3m overall decline (to $0.4m). Quarto is heavily second-half weighted, especially at the profits level; with trading reported to be on track and a high level of order book visibility our underlying forecasts (before becker&mayer) are unchanged.
becker&mayer forms new US creative hub
becker&mayer is an excellent strategic fit, increasing Quarto’s US revenues by c 25% (to 45% of 2017e revenues) and its children’s revenues by almost 30%. There is scope to expand it internationally by pushing its titles out through Quarto’s sales and distribution platform. We expect a $0.5m profits contribution in 2016, rising to $1.5m (on $20m of revenues) for the full year 2017. We include the $9.8m consideration loan note in our December 2016e net debt (now $63.6m), but from a cash flow standpoint the payment is spread over two years and Quarto’s underlying business remains on target to pay down debt by c $5-7m a year.
Valuation: Low for a global publishing business
Quarto’s 2016e P/E is only 6.5x (EV/EBITDA 5.9x). This does not seem to adequately reflect its low-risk publishing business model, earnings and dividend progression, debt reduction and valuable backlist. The Capital Markets Day on 13 October will focus in part on recent internal changes made to facilitate driving commercial opportunities (including a new COO and chief creative officer) and should be a positive catalyst for the shares.
Acquisition of becker&mayer and forecast changes
becker&mayer was founded in the 1980s and creates and publishes both adult and children’s titles. Headquartered in Bellevue, WA it will become Quarto’s fifth US creative hub (and is conveniently close to Amazon and Costco’s Seattle offices). Its 2015 revenues were $19.4m, split between book publishing and SmartLab, a book-plus1 and toy business. About 50% of revenues come from children’s titles, a key strategic area of expansion for Quarto (18% of 2015 revenue and up 36% in H116). becker&mayer represents a step change in scale for Quarto’s US operations and we have added $20m to our 2017 Quarto USA revenue forecast (from $76m to $96m).
A book-plus is a book containing special features, packaging or additional products, eg crayon sets.
becker&mayer’s book publishing business made $1.5m of EBITDA in 2015, but SmartLab lost $1.1m because of costs associated with its plastic toys business (ie overall EBITDA was $0.3m). Quarto has discontinued the plastic toys activity immediately. We thus expect a $0.5m overall contribution to profits in 2016 (the seasonally stronger five months) and $1.5m in 2017, when the full benefits of SmartLab loss-elimination should flow through. We expect Quarto to achieve both cost synergies (buying better) and revenue gains (repackaging becker&mayer’s products for more effective international penetration through Quarto’s global network).
Terms of the acquisition
becker&mayer has been acquired for $9.8m plus a working capital adjustment of up to $1.0m. Based on our forecasts, this implies 2016e EV/EBITDA of 6.5x. The $9.8m is being satisfied by an initial $2.3m cash plus $7.5m of non-interest bearing loan notes (repayable in three equal instalments in January and August 2017 and August 2018). There is also deferred contingent cash consideration of up to $1.25m depending on the profitability of SmartLab in 2018 and 2019. The transaction is being financed out of Quarto’s existing $90m multi-currency debt facility (and from becker&mayer cash flows over the next two years).
Changes to forecasts
We have left our underlying full year forecasts unchanged (last published normalised PBT $15.0m). The group’s seasonal bias means that all our forecast PBT arises in the second half. The H116 normalised PBT was a loss of $1.1m (up from H115’s loss of $0.8m) partly due to the disappointing result at Books & Gifts Direct (where a $0.7m profit swung to a $0.4m loss). However, management reports that “trading remains on track, with healthy order book visibility”. For example, based on its current order book, Co-Edition has already achieved 87% of management’s full year revenue plan, and Books & Gifts Direct has a similar percentage under its belt.
Bringing in becker&mayer adds $8.0m to our 2016 revenue estimate (taking it to $195.0m) and $20.0m in 2017 (to $212.5m). Given the staging of the consideration payments and assuming an interest rate of 2.7% (Libor plus 2.6%) means that most of our forecast operating profits increase largely flows through to normalised PBT, up 8.3% in 2017 (the first full year). We have slightly increased our forecast diluted share capital (now 20.7m), which explains a minor reduction in our 2016 EPS estimate, but our estimated 2017 EPS increase is 3.6%.
Exhibit 1: Changes to forecasts
EBIT* |
PBT* |
EPS (diluted)* |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
FY16e |
17.98 |
18.48 |
+2.9 |
15.00 |
15.48 |
+3.2 |
53.1 |
52.3 |
-1.5 |
FY17e |
18.51 |
20.01 |
+8.1 |
15.80 |
17.11 |
+8.3 |
55.4 |
57.4 |
+3.6 |
Source: Edison Investment Research. Note: *Normalised.
Exhibit 2: 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) |
|
15,919 |
17,206 |
18,484 |
20,014 |
|
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 |
|
|
(14,951) |
(17,221) |
(18,227) |
(19,687) |
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) (%) |
|
9% |
9% |
9% |
9% |
|
|
|
|
|
|
|
|
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 |
114,180 |
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 |
25,000 |
27,000 |
Current liabilities |
|
|
(144,919) |
(70,635) |
(86,581) |
(96,136) |
Creditors |
|
|
(55,769) |
(65,635) |
(70,935) |
(78,036) |
Short-term borrowings |
|
|
(89,150) |
(5,000) |
(15,646) |
(18,100) |
Long-term liabilities |
|
|
(6,875) |
(87,127) |
(78,100) |
(70,100) |
Long-term borrowings |
|
|
0 |
(79,562) |
(73,000) |
(65,000) |
Other long-term liabilities |
|
|
(6,875) |
(7,565) |
(5,100) |
(5,100) |
Net assets |
|
|
50,324 |
55,040 |
74,447 |
82,711 |
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
Operating cash flow |
|
|
47,529 |
52,941 |
53,030 |
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) |
(11,363) |
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 |
(4,143) |
7,546 |
Opening net debt/(cash) |
|
|
71,015 |
66,040 |
59,503 |
63,646 |
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 |
63,646 |
56,100 |
Source: Company accounts, Edison Investment Research
|
|