musicMagpie — Weak Technology outright sales

musicMagpie (AIM: MMAG)

Currency in GBP

Last close As at 25/01/2023

GBP0.38

1.10 (2.96%)

Market capitalisation

GBP41m

Research: Consumer

musicMagpie — Weak Technology outright sales

musicMagpie’s (MMAG’s) trading update reporting weaker Technology outright revenue in recent months is consistent with statements from a number of consumer-facing companies that have highlighted a more challenging background. With a more cautious outlook for the remainder of H222, management expects lower revenue and a lower EBITDA contribution, albeit still anticipating y-o-y growth, than at the time of the H122 results. We have reduced our FY22–24 EBITDA estimates by 19–30%. Following the weak share price, the FY22 EV/Sales multiple is 0.1x.

Russell Pointon

Written by

Russell Pointon

Director, Consumer

Consumer

musicMagpie

Weak Technology outright sales

Trading update

Retail

27 September 2022

Price

8.2p

Market cap

£9m

Net debt (£m) at 31 August 2022

7.5m

Shares in issue

107.8m

Free float

45.1%

Code

MMAG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(76.3)

(80.2)

(94.9)

Rel (local)

(74.8)

(79.5)

(94.6)

52-week high/low

175.0p

8.9p

Business description

musicMagpie is a leader of re-commerce in the UK and United States in consumer technology, books and disc media through its proprietary technology platform. It is expanding its offer into rentals of smartphones and other consumer technology, and widening its sourcing infrastructure.

Next events

FY22 trading update

December 2022

FY22 results

March 2023

Analysts

Russell Pointon

+44 (0)20 3077 5700

Sara Welford

+44 (0)20 3077 5700

musicMagpie is a research client of Edison Investment Research Limited

musicMagpie’s (MMAG’s) trading update reporting weaker Technology outright revenue in recent months is consistent with statements from a number of consumer-facing companies that have highlighted a more challenging background. With a more cautious outlook for the remainder of H222, management expects lower revenue and a lower EBITDA contribution, albeit still anticipating y-o-y growth, than at the time of the H122 results. We have reduced our FY22–24 EBITDA estimates by 19–30%. Following the weak share price, the FY22 EV/Sales multiple is 0.1x.

Year end

Revenue (£m)

EBITDA (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/EBITDA
(x)

P/E
(x)

11/20**

153.4

13.9

9.2

10.52

0.0

1.2

0.8

11/21

145.5

12.2

7.9

6.11

0.0

1.3

1.3

11/22e

146.3

6.5

(1.0)

(0.75)

0.0

2.5

N/A

11/23e

156.9

9.2

(0.8)

(0.64)

0.0

1.8

N/A

11/24e

168.7

11.2

1.0

0.73

0.0

1.5

11.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Exceptional COVID-19 impact.

Weaker demand for Technology outright revenue

Management has reported a slower rate of revenue growth during August and September for outright Technology sales due to more cautious consumer behaviour than was anticipated, and continuing margin pressure. Given the deteriorating macroeconomic outlook and pressures on consumer disposable incomes, management now also assumes a more prudent rate of revenue growth through the end of FY22. Q4 is typically a material contributor to full year results. On the positive side, Rentals revenue has benefited from the more difficult economic environment, the launch on Back Market has been positive, and, we infer, Disc Media and Books revenue is in line with expectations. The higher net debt position at the end of August 2022 of £7.5m (£3.3m end-H122 pre IFRS 16 liabilities) reflects the planned investment in the business (Rentals and SMARTDrop kiosks), lower profitability than expected and likely working capital investment ahead of peak trading in Q4.

FY22–24 EBITDA forecasts reduced by 19–30%

We downgrade our EBITDA estimates for FY22 by c 30% to £6.5m (£9.3m previously), FY23 by c 19% to £9.2m (from £11.3m) and FY24 by c 28% to £11.2m (from £15.6m). Our forecasts imply c 3% revenue growth in H222 versus 15% previously, predominantly due to Rentals growth, estimated to be more profitable over the life of a device. The lower EBITDA and ongoing investment in Rentals (capitalisation and amortisation of devices purchased) lead to forecast operating losses for FY22 and FY23, and an estimated net debt position of £18.5m by end- FY24. In July 2022, management negotiated a new £30m revolving credit facility.

Valuation: FY22e EV/sales multiple 0.1x

MMAG’s share price has been very weak due to a combination of downgrades to profit expectations and general stock market weakness. On revised estimates, the prospective EV/Sales multiple for FY22e is 0.1x and EV/EBITDA multiple is 2.5x.

Exhibit 1: Financial summary

30-November

£m

2020

2021

2022e

2023e

2024e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

153.4

145.5

146.3

156.9

168.7

Cost of Sales

(108.6)

(101.2)

(107.1)

(112.4)

(119.2)

Gross Profit

44.8

44.3

39.2

44.4

49.5

EBITDA

 

 

13.9

12.2

6.5

9.2

11.2

Operating profit (before amort. and excepts.)

 

 

11.3

8.5

(0.4)

(0.1)

1.9

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

(1.3)

(4.6)

(0.7)

0.0

0.0

Share-based payments

(0.4)

(17.4)

(0.5)

(1.0)

(1.5)

Reported operating profit

9.6

(13.5)

(1.6)

(1.1)

0.4

Net Interest

(2.1)

(0.6)

(0.6)

(0.8)

(0.9)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

(0.6)

(0.7)

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

9.2

7.9

(1.0)

(0.8)

1.0

Profit Before Tax (reported)

 

 

7.0

(14.8)

(2.1)

(1.8)

(0.5)

Reported tax

1.6

2.7

(0.0)

(0.0)

(0.2)

Profit After Tax (norm)

10.5

6.4

(0.8)

(0.7)

0.8

Profit After Tax (reported)

8.6

(12.1)

(2.1)

(1.8)

(0.7)

Minority interests

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

10.5

6.4

(0.8)

(0.7)

0.8

Net income (reported)

8.6

(12.1)

(2.1)

(1.8)

(0.7)

Average Number of Shares Outstanding (m)

100.0

104.9

107.8

107.8

107.8

EPS - basic normalised (p)

 

 

10.52

6.11

(0.75)

(0.64)

0.73

EPS - normalised fully diluted (p)

 

 

10.52

6.11

(0.75)

(0.64)

0.73

EPS - basic reported (p)

 

 

8.57

(11.56)

(1.99)

(1.71)

(0.66)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

(5.1)

0.5

7.2

7.6

Gross Margin (%)

29.2

30.4

26.8

28.3

29.3

EBITDA Margin (%)

9.0

8.4

4.4

5.9

6.7

Normalised Operating Margin

7.4

5.8

(0.3)

(0.0)

1.1

BALANCE SHEET

Fixed Assets

 

 

13.9

21.1

28.4

31.5

35.7

Intangible Assets

8.4

9.7

11.1

10.3

10.8

Tangible Assets

3.9

6.1

11.8

15.6

19.2

Investments & other

1.7

5.3

5.5

5.7

5.7

Current Assets

 

 

14.5

14.6

16.3

17.6

17.6

Stocks

6.8

8.0

11.1

11.5

11.8

Debtors

2.5

3.7

3.7

4.0

4.3

Cash & cash equivalents

5.1

2.8

1.5

2.1

1.4

Other

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(18.7)

(9.0)

(8.6)

(8.9)

(9.3)

Creditors

(10.9)

(8.4)

(8.0)

(8.3)

(8.6)

Tax and social security

(0.1)

(0.3)

(0.3)

(0.3)

(0.3)

Short term borrowings

(7.0)

0.0

0.0

0.0

0.0

Other

(0.7)

(0.4)

(0.4)

(0.4)

(0.4)

Long Term Liabilities

 

 

(7.3)

(2.4)

(13.4)

(18.4)

(21.4)

Long term borrowings

(4.2)

(0.9)

(11.9)

(16.9)

(19.9)

Other long term liabilities

(3.1)

(1.6)

(1.6)

(1.6)

(1.6)

Net Assets

 

 

2.4

24.3

22.6

21.8

22.6

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

2.4

24.3

22.6

21.8

22.6

CASH FLOW

Operating Cash Flow

13.9

11.8

6.5

9.2

11.2

Working capital

(0.6)

(4.9)

(3.5)

(0.3)

(0.3)

Exceptional & other

(1.3)

(4.2)

(0.6)

(0.2)

(0.0)

Tax

0.0

0.0

0.0

0.0

(0.2)

Net operating cash flow

 

 

12.0

2.6

2.4

8.7

10.7

Capex

(1.9)

(7.2)

(13.6)

(11.6)

(12.9)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Net interest

(2.7)

(2.3)

(0.6)

(0.8)

(0.9)

Equity financing

0.0

14.5

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

(1.1)

(0.7)

(0.6)

(0.6)

(0.6)

Net Cash Flow

6.3

6.9

(12.4)

(4.3)

(3.7)

Opening net debt/(cash)

 

 

12.6

6.3

(1.8)

10.4

14.8

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

(6.4)

(8.2)

12.3

4.3

3.7

Closing net debt/(cash)

 

 

6.3

(1.8)

10.4

14.8

18.5

Source: musicMagpie, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by musicMagpie and prepared and issued by Edison, in consideration of a fee payable by musicMagpie. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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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

1185 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

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

1185 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

General disclaimer and copyright

This report has been commissioned by musicMagpie and prepared and issued by Edison, in consideration of a fee payable by musicMagpie. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 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

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

1185 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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