Technicolor — Towards the next phase

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Research: TMT

Technicolor — Towards the next phase

Technicolor’s H120 results are consistent with management’s base level guidance given ahead of the EGM to approve the refinancing. Our model reflects this scenario. The proposed rights issue and debt-to-equity swap are now set to proceed, launching in August, closing in September. The share price has been rebounding towards the €2.98 rights price for equity shareholders, underwritten by the debt holders, who will pay €3.58/share. With firm steps now taken along the route to a much-strengthened balance sheet, the focus can shift towards rebuilding profitability; leveraging Technicolor’s leading market positions across its three operations.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Technicolor

Towards the next phase

Half-year results

Media

5 August 2020

Price

€2.68

Market cap

€41m

US$1.16/€

IFRS net debt (€bn) as at 30 June 2020

1.6

Shares in issue

15.4m

Free float

100%

Code

TCH

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.1)

(52.0)

(87.6)

Rel (local)

2.1

(57.0)

(86.4)

52-week high/low

€23.79

€2.27

Business description

Technicolor is a worldwide technology leader operating in the media and entertainment industry. Its activities fall in three business segments: Production Services, DVD Services and Connected Home.

Next events

Q320 results

28 October 2020

FY20 results

3 March 2021

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Dan Gardiner

+44 (0)20 3077 5700

Technicolor is a research client of Edison Investment Research Limited

Technicolor’s H120 results are consistent with management’s base level guidance given ahead of the EGM to approve the refinancing. Our model reflects this scenario. The proposed rights issue and debt-to-equity swap are now set to proceed, launching in August, closing in September. The share price has been rebounding towards the €2.98 rights price for equity shareholders, underwritten by the debt holders, who will pay €3.58/share. With firm steps now taken along the route to a much-strengthened balance sheet, the focus can shift towards rebuilding profitability; leveraging Technicolor’s leading market positions across its three operations.

Year end

Revenue (€m)

EBITA
(
m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

12/18

3,988

98

7

(3.07)

0.0

N/A

12/19

3,800

42

(73)

(4.92)

0.0

N/A

12/20e

3,100

(64)

(142)

(1.39)

0.0

N/A

12/21e

3,460

104

37

0.08

0.0

35.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Mixed H120 performances but no surprises

As had been clearly flagged, Connected Home posted the more resilient H120 performance. There was strong demand in North America as high-quality domestic broadband and Wi-Fi, both from home working and entertainment, increased in importance in lockdown. Other territories were less robust, either due to stricter lockdowns or, in the case of Latin America, disadvantageous currency movements. Production Services suffered from the impact of lockdown on live action filming, hitting the Film & Episodic Visual Effects activities, although animation and games has continued throughout via homeworking. DVD Services was negatively affected by the lack of major studio releases in the period, although the back catalogue performed well. This is all as outlined in our recent Outlook note, which describes the activities (and the restructuring) in detail.

Refinancing progressing to plan

Our numbers are unchanged (bar a little reconfiguration at the segmental level) and are set to match management’s base case guidance given ahead of July’s EGM. The first tranche of €240m new money has been received and the €110m bridge loan, due at the end of July, repaid. Post the recent approval of the arrangements in the Commercial Court in Paris, the balance of €180m is due in August. The next element is the rights issue and debt-to equity swap, again covered in detail in our recent note. To date, €67m of cost savings have been logged, on track to meet the €160m target for the year. Confidence among suppliers and customers should now start to rebuild, with management in a position to focus on restoring growth.

Valuation: Waiting for restructuring to complete

Given the current liquidity situation, traditional valuation metrics such as peer comparison and DCF are of little use. If the proposed refinancing continues to go to plan, it should result in a much stronger balance sheet and improved visibility. It does, however, lead to significant equity dilution to existing shareholders. We will revisit our valuation following the completion of refinancing.

Next stage of the financial reconstruction

The financial restructuring has involved several steps, with more yet to come. On 22 June, the group opened an SFA arrangement (procedure de sauvegarde financière accélérée), to give the space needed to obtain the required approvals for implementing the proposed scheme. The draft proposals were approved by the creditor’s committee on 5 July and by equity shareholders on 20 July. The Commercial Court in Paris then approved the plan on 28 July.

The next stages are:

4 August: Expected approval of the Autorité des Marchés Financiers of the supplement to the prospectus.

Mid August: Opening of the rights subscription.

Late August: Second tranche of new money received (€180m).

Early September: Closure of rights subscription period.

Late September: Settlement and delivery of the capital increases and delivery of the warrants.

Structure of next stage

As a reminder, and as set out in our recent Outlook, the proposed debt reduction of both the term loan and the RCF is through partial equitisation of the gross debt. This has two elements:

A €330m rights issue backstopped by the term loan and RCF creditors.

A €330m reserved capital increase to term loan and RCF creditors.

Terms of the remaining term loan and RCF extended, with a bullet repayment in December 2024.

The separate $125m Wells Fargo facility now has a maturity date of December 2023.

Details of the rights issue and dilution

The proposed rights issue is at a subscription price of €2.98 per share, in which shareholders have a right to participate.

Bpifrance has committed to subscribe pro rata to its existing equity shareholding of 7.5%.

Proceeds will be used to pay down the term loan and RCF pro rata at par.

The reserved capital increase is reserved to the term loan and RCF lenders and is at a subscription price of €3.58, to be subscribed by way of set-off of their claims at par on their debt repayments.

Free warrants are to be allocated to

New money lenders, with a three-month maturity and giving access to 7.5% of the post-rights share capital.

Existing shareholders, with a four-year maturity and a strike price of €3.58, giving access to 5% of the post-rights equity.

The effect of the take-up of rights and of the exercise of warrants is shown in the exhibit below. According to the company, if existing shareholders do not take up any of their rights and no warrants are exercised, they will end up with 6.5% of the equity, the term loan and RCF lenders would hold 86.0% and Bpifrance 7.5%.

Exhibit 1: Dilution scenarios

Excluding shareholders warrants

Pro forma shareholders warrants

% subscription to the rights issue

0%

50%

100%

0%

50%

100%

Cash subscription to the rights issue

0

€165m

€330m

0

€165m

€330m

Existing shareholders, existing shares

6.5%

6.5%

6.5%

6.2%

6.2%

6.2%

Existing shareholders rights issue subscription

0.0%

23.5%

46.9%

0.0%

22.3%

44.6%

Existing shareholders exercise of warrants

5.0%

5.0%

5.0%

Existing shareholders % equity

6.5%

30.0%

53.4%

11.2%

33.5%

55.8%

Term loan/RCF % through rights issue

46.9%

23.5%

0.0%

44.6%

22.3%

0.0%

Term loan/RCF through reserved capital increase

39.1%

39.1%

39.1%

37.1%

37.1%

37.1%

Term loan/RCF % equity

86.0%

62.6%

39.1%

81.7%

59.4%

37.1%

Equity attached to new money

7.5%

7.5%

7.5%

7.1%

7.1%

7.1%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Source: Technicolor

At the other end of the scale, should existing shareholders take up their rights in full and subsequently exercise the warrants that they were allotted, they would end up holding 55.8% of the enlarged equity, the term loan and RCF lenders would hold 37.1% and Bpifrance 7.1%.

H1 performance

At a group level, H120 revenues were down 19% on H119, with adjusted EBITDA down 49.2% at constant currency. The adjusted EBITA loss, management’s preferred metric, dipped from €44m to €67m, benefiting from reduced depreciation and amortisation and risk, litigation and warranty reserves. Net interest charges of €40m, up from €32m in H119, reflect the higher rates incurred on the bridge loan, now repaid. The company also incurred other financial charges of €28m in relation to the debt restructuring process.

As flagged, free cash flow after net interest (generally weaker in the first half) was negative, at €286m, from negative €262m in H119.

A €68m impairment charge was taken, mostly against the DVD Services segment, based on the changed market conditions in light of the COVID-19 pandemic.

Restructuring costs of €41m were incurred, largely in Production Services and DVD Services. According to the company, the costs savings achieved to date (end June) are running at €67m, on track to meet the second Panorama plan target of €300m by 2022.

At the end of H120, the company had gross debt of €1,664m (inclusive of €281m in lease liabilities) and cash of €63m, implying a net debt position of €1,601m.

The dynamics of the three operating segments are quite different. These are discussed in more detail below.

Connected Home (59% H120 revenues)

Exhibit 2: H120 vs H119 Connected Home performance

€m

2019

2020

% change

% change at constant currency

Revenue

953

839

(12.0)

(12.3)

Adjusted EBITDA

24

54

Adjusted EBITDA margin

2.5%

6.4%

D&A & reserves*

(40)

(34)

Adjusted EBITA

(17)

20

PPA amortisation

(18)

(13)

Non-recurring EBIT

(2)

(10)

EBIT

(37)

(2)

Source: Technicolor accounts. Note: *Risk, litigation and warranty reserves.

The North American market has been the main reason for the relative resilience of the performance, with revenues ahead by 14.6% as lockdown highlighted the need for high quality and robust domestic broadband. The upturn in demand is described by management as ‘significant’. In other territories, it was tougher going. In Latin America, where revenues were down 26.0%, the problem was largely one of weak oil-based currencies versus the US dollar making equipment more expensive. For Europe, the Middle East and Africa, more severe lockdowns restricted physical installations, reflected in revenues down by 42.0%.

The improving profitability and margins reflect the benefits of the profit improvement plan implemented two years ago, which are starting to come through.

The group’s restructuring, being played out on a particularly public stage, had a detrimental impact on supplier payment terms as suppliers struggled to put insurance on receivables in place. With the continuing progress on the implementation of the plan, payment terms should start to normalise. Its strong market position makes Technicolor a very important customer.

DVD Services (21% H120 revenues)

Exhibit 3: H120 vs H119 DVD Services performance

€m

2019

2020

% change

% change at constant currency

Revenue

374

302

(19.3)

(20.3)

Adjusted EBITDA

9

1

Adjusted EBITDA margin

2.5%

0.5%

D&A & reserves*

(40)

(30)

Adjusted EBITA

(31)

(29)

PPA amortisation

(5)

(4)

Non-recurring EBIT

(4)

(86)

EBIT

(40)

(120)

Source: Technicolor accounts. Note: *Risk, litigation and warranty reserves.

The lockdown and closure of cinemas led to studios pulling or postponing new releases from Q220, exacerbating the rate of revenue decline from its structural retrenchment. The back catalogue performed better than had been anticipated at the start of lockdown. Overall volumes were down by 26.8%, so the reduction in revenue at 20.3% (at constant currency) is a better performance, which may reflect in part mix but may also be an early indication of the benefit of contract negotiations to incorporate volume-based pricing with key studio customers. Three of the five largest contracts have now been renegotiated, with a fourth in progress.

Non-recurring items shown in Exhibit 3 will include the impairment charge as mentioned above. €15m of restructuring charges relating to the optimisation of distribution sites was also incurred in the period.

Production Services (19% H120 revenues)

Exhibit 4: H120 vs H119 Production Services performance

€m

2019

2020

% change

% change at constant currency

Revenue

428

279

(34.8)

(35.3)

Adjusted EBITDA

81

2

Adjusted EBITDA margin

18.8%

0.8%

D&A & reserves*

(62)

(53)

Adjusted EBITA

19

(51)

PPA amortisation

(4)

(4)

Non-recurring EBIT

(9)

(5)

EBIT

4

(61)

Source: Technicolor accounts. Note: *Risk, litigation and warranty reserves.

Production Services has been the segment most severely affected by the repercussions of COVID-19, felt mostly within Film & Episodic Visual Effects. The sudden cessation of live action filming came on the tail of disruption at a major studio post corporate activity that led to a hiatus in the production schedule. The division nevertheless worked on around 20 theatrical films for the major studios and over 30 episodic productions and projects for streaming platforms. There will be an inevitable lag between the scaling up of live action filming globally and work flowing through to Technicolor’s studios and management is not anticipating much benefit in the current year. The group has made moves to resize its workforce appropriately but is mindful of the need to retain access to talent. €17m of restructuring cost was taken in H120.

Advertising was affected by the same constraints but had had a strong start to the year. Animation and Games grew revenues in double digits, being much more suited to the transition to working from home. The ability to do this in India, though, is compromised by the lack of robust infrastructure.

Unchanged outlook

Given the prevailing market uncertainty, our model at present is set to match management guidance, as drawn up ahead of the EGM and as described in our recent Outlook note. We have made slight adjustments to the internal segmental balance to reflect the H120 figures.

Adjusted EBITDA of €169m is expected for FY20, with an adjusted EBITA loss of €64m. Management quantifies the H120 impact of COVID-19 at €15m, which will mostly have been within Production Services. Guidance for free cash flow is for an outflow of between €115m to €150m in FY20. We have set our model to the lower end.

By FY22, the business plan points to adjusted EBITDA of €425m and adjusted EBITA of €202m. Free cash flow by this year is indicated to improve to €259m.

Exhibit 5: Financial summary

€m

2017

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

4,253

3,988

3,800

3,100

3,460

Cost of Sales

(3,651)

(3,521)

(3,375)

(2,841)

(3,042)

Gross Profit

602

467

425

259

418

EBITDA

 

 

345

266

325

169

338

EBITA

 

 

151

98

42

(64)

104

Amortisation of acquired intangibles

(9)

(81)

(54)

(59)

(59)

Exceptionals

(54)

(127)

(79)

(138)

(20)

Reported operating profit

40

(119)

(121)

(261)

25

Net Interest

(96)

(51)

(84)

(78)

(68)

Joint ventures & associates (post tax)

1

0

(1)

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

47

7

(73)

(142)

37

Profit Before Tax (reported)

 

 

(55)

(170)

(206)

(339)

(42)

Reported tax

(112)

(54)

(3)

(20)

(20)

Profit After Tax (norm)

(65)

(47)

(75)

(162)

17

Profit After Tax (reported)

(167)

(224)

(208)

(359)

(62)

Minority interests

0

(1)

0

0

0

Discontinued operations

(5)

157

(22)

0

0

Net income (normalised)

(65)

(48)

(75)

(162)

17

Net income (reported)

(172)

(68)

(230)

(359)

(62)

Average Number of Shares Outstanding (m)

15

15

15

117

218

EPS - normalised (c)

 

 

(425.23)

(306.94)

(492.18)

(138.61)

7.61

EPS - normalised fully diluted (c)

 

 

(425.23)

(306.94)

(492.18)

(138.61)

7.61

Dividend per share (c)

0.06

0.00

0.00

0.00

0.00

Revenue growth (%)

(6)

(5)

(18)

12

Gross Margin (%)

14.2

11.7

11.2

8.4

12.1

EBITDA Margin (%)

8.1

6.7

8.6

5.4

9.8

EBITA Margin (%)

3.6

2.5

1.1

(2.1)

3.0

BALANCE SHEET

Fixed Assets

 

 

2,161

2,101

2,082

1,900

1,764

Intangible Assets

1,567

1,591

1,483

1,349

1,215

Tangible Assets

243

233

476

428

426

Investments & other

38

26

40

40

40

Deferred tax and other

313

251

84

84

84

Current Assets

 

 

1,551

1,659

1,126

1,108

1,220

Stocks

238

268

243

198

221

Debtors

684

677

507

447

523

Cash & cash equivalents

319

291

64

151

163

Other

310

423

312

312

312

Current Liabilities

 

 

(1,669)

(1,909)

(1,542)

(1,248)

(1,287)

Creditors

(947)

(1,135)

(825)

(626)

(665)

Tax and social security

(33)

(34)

(41)

(41)

(41)

Short term borrowings

(20)

(20)

(95)

0

0

Other

(669)

(720)

(581)

(581)

(581)

Long Term Liabilities

 

 

(1,514)

(1,385)

(1,604)

(1,364)

(1,364)

Long term borrowings

(1,077)

(1,004)

(1,203)

(963)

(963)

Deferred tax

(193)

(193)

(27)

(27)

(27)

Other long term liabilities

(437)

(381)

(401)

(401)

(401)

Net Assets

 

 

529

466

62

395

333

Minority interests

3

1

0

0

0

Shareholders' equity

 

 

532

467

62

395

333

CASH FLOW

Net profit

(167)

(224)

(208)

(359)

(62)

Depreciation and amortisation

240

234

322

292

281

Working capital

71

2

(69)

(94)

(61)

Tax and interest

(57)

(53)

(76)

(88)

(78)

Exceptional & other

168

159

101

120

78

Net operating cash flow

 

 

255

118

70

(128)

158

Capex

(145)

(113)

(169)

(110)

(145)

Acquisitions/disposals

(25)

1

(2)

0

0

Equity financing

1

0

1

660

0

Dividends

(25)

0

0

0

0

Other

(13)

28

3

0

0

Net Cash Flow

48

34

(97)

422

13

Opening net debt/(cash)

 

 

679

778

733

1,234

812

FX

(39)

1

0

0

Discontinued

(88)

105

0

0

0

Other non-cash movements

(20)

(95)

(404)

0

0

Closing net debt/(cash), excluding IFRS 16 leases

 

778

733

1,234

812

800

Source: Company accounts, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Riber’s order book at the end of June shows that potential customers are taking their time to place orders. While management is confident that customers will place orders for MBE systems during the second half, it is not clear that these will close in time for delivery during FY20. We therefore cut our FY20 revenue estimate by 16% to €29.6m and our PBT estimate by 88% to €0.3m. We leave our FY21 estimates unchanged.

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