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Technicolor’s FY21 results were in line with guidance, with strong demand for both Technicolor Creative Studios (TCS) and Connected Home, despite fulfilment of demand being constrained by the effects of the pandemic. The key development is management’s plan to spin off 65% of TCS as a separately listed entity, with an accompanying refinancing. This should result in two coherent, quoted businesses, each with good growth prospects, a clear investment narrative and on a stable financial footing. Existing shareholders are backing the facilitating €300m loan note placing and, if all goes to plan, the new shares will be listed during Q322.
Technicolor |
Creative Studios spin-off plan |
FY21 results |
Media |
28 February 2022 |
Share price performance
Business description
Next events
Analyst
Technicolor is a research client of Edison Investment Research Limited |
Technicolor’s FY21 results were in line with guidance, with strong demand for both Technicolor Creative Studios (TCS) and Connected Home, despite fulfilment of demand being constrained by the effects of the pandemic. The key development is management’s plan to spin off 65% of TCS as a separately listed entity, with an accompanying refinancing. This should result in two coherent, quoted businesses, each with good growth prospects, a clear investment narrative and on a stable financial footing. Existing shareholders are backing the facilitating €300m loan note placing and, if all goes to plan, the new shares will be listed during Q322.
Year end |
Revenue |
EBITDA |
EBITA |
PBT* |
EPS* |
EV/EBITDA |
12/20 |
3,006 |
163 |
(59) |
(46) |
(0.36) |
10.6 |
12/21 |
2,898 |
268 |
95 |
(6) |
(0.11) |
6.4 |
12/22e |
3,036 |
385 |
180 |
88 |
0.31 |
4.5 |
12/23e |
3,180 |
422 |
231 |
135 |
0.47 |
4.1 |
Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Underlying improvements
FY21 results were in line with management guidance and FY22 guidance (adjusted EBITDA: €385m; adjusted EBITA: €180m) is unchanged. TCS revenues were up 37.2% like-for-like on the prior year, with EBITDA margins lifted to 17.9% from 3.6%. Two-thirds of FY22’s pipeline is already committed, and the underlying market remains robust. While Connected Home’s revenues were down 10.0%, underlying demand was ahead of FY20, showing the impact of component shortages and supply chain bottlenecks. The cost reduction programme and close supplier and customer relationships led to a minimal effect at the EBITDA level, moving margins up from 6.0% to 6.7%. DVD Services margins also improved as the benefits of the efficiency moves started to flow through. Our new FY23 forecasts show continuing improvements.
Two from one
Management’s proposal envisages Technicolor ex-TCS (Connected Home and DVD Services) retaining a 35% stake in TCS, to be separately listed on the Paris stock exchange. A €300m mandatory convertible loan note, backed by existing shareholders, converts at €2.60/ on the spin-off, subject to approval by a two-thirds majority at an EGM to be held by 25 May. Management intends to renegotiate the rest of the group debt to put appropriate packages in place for both entities.
Valuation: Underlying value likely higher
The valuation reflects the current complexity of the group and the cost and constraint imposed by the debt. The proposed restructure tackles both issues. Our sum-of-the-parts, based on compiling segmental FY23e earnings-based valuations, variously discounted, derives a value equivalent to €4.95/share, up from €4.49 in our last report, reflecting the shift in year, peer price movements and lower net debt. A group-based DCF, using a WACC of 9.0% and 1% terminal growth, gives a value of €3.94/share. Both valuations are well above the current price.
TCS driving adjusted EBITDA growth
We recently published an Outlook report on Technicolor following the FY21 trading update, released in January. This described each operation in some depth, in terms of operations and financial dynamics. These results bear out the operational experience and financial performance as expected, with adjusted EBITDA of €268m against the indicated level of €270m and free cash flow (before financial results and tax) that came in at negative €2m, against the guided break-even. Adjusted EBITA was actually a little better than guided, at €90m from €60m.
Exhibit 1: FY21 group revenue progression |
Source: Technicolor |
Exhibit 2: FY21 group adjusted EBITDA progression |
Source: Technicolor |
TCS experiencing significant demand
As shown above, the most significant accretion to adjusted EBITDA came from TCS, particularly in the second half of the year as demand from several aspects of the entertainment sector picked up as pandemic restrictions eased. Operational issues centred around the difficulties of staffing in very tight markets for skilled labour globally. TCS succeeded in lifting the number of employees from 7,700 at end December 2020 to 10,560 a year on, which puts it in an advantageous position to cope with continuing strong customer demand.
Ahead of the planned demerger, TCS has been simplified and reorganised into key brands to face its key markets: MPC for film and episodic visual special effects; The Mill for advertising, including branded and immersive experiences; and Mikros Animation and Technicolor Games (again, these were described more fully in our Outlook report).
In FY21, MPC worked on over 30 theatrical films either released in 2021 or scheduled for the current year or beyond, and more than 60 episodic or streaming projects. This is a considerable step up in capacity, aided by the enlarged workforce and improved ability to work from different locations globally. The Mill worked on over 3,000 projects, while Mikros Animation worked on four feature films (with preparation ongoing for three further films) and numerous series and specials. The separation of Technicolor Games signals management’s ambition to make this a significant revenue stream.
Connected Home demand outstrips its ability to supply
The situation on the supply of componentry and the global logistical issues have been very well documented and are common to all suppliers. Overall revenue at constant exchange rates was down 10% on the prior year, having dipped by 18.3% in H221, with North America down 11.0% (24.0% in H221). The (smaller) Latin American market continued to be particularly difficult, but new customers won there should help to reverse the declines in FY22. Figures cited by management show that the group serves 60% of the top 10 global broadband suppliers and has a 14% global market share in home gateways.
Video product was more affected than broadband, which continues to benefit from consumers’ increased needs and expectations for the performance of their domestic broadband provision. Broadband accounted for 64% of the segment’s revenues in the year, up from 61% in FY20.
Connected Home has now shipped over 20m RDK broadband gateways (an open-source software platform that standardises core functions used in broadband devices, set-top boxes and IoT solutions) and continues to win business across Europe and the Americas. Good progress is also being made in Wi-Fi 6/6E in Europe, the Middle East and Africa, and the Americas.
Management’s view is that the supply issues will not be completely resolved before FY23 but that there is already an amelioration that started in Q421. Close relationships with both component suppliers and customers are helping to make sure that Connected Home is not squeezed in the middle.
DVD Services
Volumes continued on their downward trend, but at a much lower rate than historically, with the overall revenue from the segment actually increasing by 1.6% as new distribution and freight revenues in the United States started to make their mark.
Four facility closures, mostly in the United States, along with other cost initiatives and the benefit of the new non-disc business being won, helped lift the adjusted EBITDA margin from 7.5% to 9.5%.
Guidance for FY22 unchanged
Management guidance for FY22 is confirmed with these results:
■
Revenues from existing operations to continue to grow
■
Adjusted EBITDA from continuing operations of €375m
■
Adjusted EBITA from continuing operations of €175m
■
Free cash flow before financial results and tax of €230m.
Our FY22 modelling reflects this guidance.
Management has not issued guidance for FY23 at this stage but has indicated that it will do so at the time of the proposed capital market days for the two newly configured companies in late May/early June. While there are some more forward-looking numbers in the full year results statement, these do not constitute guidance and were included for the purposes of determining the terms of the loan note.
Our preliminary modelling for FY23 is therefore based on our current view of the prospects of the group companies, with the current financing arrangements continuing in place.
The proposed spin-off and refinancing
Sale of Trademark Licensing
Firstly, the group has agreed the sale for €100m cash of the Trademark Licensing business, reported historically under ‘Corporate and Other’. This Corporate and Other segment generated revenues of €23m in FY21 (flat year-on-year) and registered an adjusted EBITDA loss of €14m, although not all will be attributable to Trademark Licensing. Completion is expected in H222.
Elements of the proposed plan
The stabilisation of the business post the significant upheaval of the last few years (again, more detail is in the recent Outlook note) is now allowing management to propose a further set of measures that are intended to set the group on a course to drive growth and value. A deleveraging of each of the businesses should allow the two management teams to develop and pursue opportunities and build on their leading positions in their respective industries. TCS will be a pure-play investment opportunity in VFX, in a market where the demand for content shows no sign of abating. Technicolor ex-TCS will continue to be a global market leader in Connected Home and in DVD Services. With a de-levered balance sheet, it should be more agile and able to take commercial opportunities as they arise. This involves:
■
A spin-off of 65% of TCS through a distribution in kind to Technicolor shareholders.
■
TCS to be separately listed on Euronext.
■
The Technicolor ex-TCS business (ie Connected Home, DVD Services and the remaining 35% holding in TCS) to retain its Euronext quotation.
■
The issue of a €300m mandatory convertible loan note, which will be converted into Technicolor shares at €2.60 on the successful listing of TCS. This has been supported by selected shareholders who have agreed to subscribe for the full amount.
■
A renegotiation of the existing debt on more advantageous terms. This would involve separate debt structures for the two businesses, and it is not clear at this stage how the debt would be apportioned.
■
A sale of the 35% TCS stake, dependent on market conditions.
The first stage of actioning this process is an EGM to approve the mandatory convertible loan note. This requires a two-thirds majority at an EGM. This will be called ‘in early Q2’, with a backstop date of 25 May.
With two independent listed entities as an end result, there will be dis-synergy costs, which are currently estimated at €30–40m, and there are obviously costs and fees associated with the entire process, likely to be in the order of €75m. This is a substantial sum and is broken down as:
■
€30–40m to carry out the refinancing (including make-whole of the current debt),
■
€25–30m relating to the separation, spin-off and TCS share distribution, and
■
€10m miscellaneous related costs.
Management intends to hold two capital markets days, one for TCS and one for Technicolor ex-TCS, at end May/early June, after the scheduled Q122 results on 5 May.
The AGM and a second EGM to approve the spin-off should be held towards the end of June with the listing and distribution pencilled for Q321.
Our modelling will remain based on the group as it is currently configured until any of the proposed events happen.
Exhibit 3: Financial summary
€m |
2019 |
2020 |
2021 |
2022e |
2023e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
3,800 |
3,006 |
2,898 |
3,036 |
3,180 |
Cost of Sales |
(3,375) |
(2,729) |
(2,493) |
(2,579) |
(2,718) |
||
Gross Profit |
425 |
277 |
404 |
457 |
462 |
||
EBITDA |
|
|
325 |
163 |
268 |
385 |
422 |
EBITA |
|
|
42 |
(59) |
95 |
180 |
231 |
Amortisation of acquired intangibles |
(54) |
(41) |
(38) |
(38) |
(38) |
||
Exceptionals |
(79) |
(151) |
(53) |
(11) |
(10) |
||
Reported operating profit |
(121) |
(267) |
30 |
159 |
207 |
||
Net Interest |
(84) |
77 |
(127) |
(120) |
(120) |
||
Joint ventures & associates (post tax) |
(1) |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
155 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(73) |
(46) |
(6) |
88 |
135 |
Profit Before Tax (reported) |
|
|
(206) |
(191) |
(97) |
39 |
87 |
Reported tax |
(3) |
(5) |
(24) |
(5) |
(10) |
||
Profit After Tax (norm) |
(75) |
(51) |
(30) |
83 |
125 |
||
Profit After Tax (reported) |
(208) |
(196) |
(121) |
34 |
77 |
||
Discontinued operations |
(22) |
(15) |
(19) |
0 |
0 |
||
Net income (normalised) |
(75) |
(51) |
(30) |
83 |
125 |
||
Net income (reported) |
(230) |
(210) |
(140) |
34 |
77 |
||
Average Number of Shares Outstanding (m) |
15 |
126 |
241 |
247 |
247 |
||
EPS - normalised (c) |
|
|
(492.18) |
(40.77) |
(12.26) |
33.40 |
50.50 |
EPS - normalised fully diluted (c) |
|
|
(492.18) |
(35.73) |
(11.42) |
31.17 |
47.13 |
Dividend per share (c) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
(5) |
(21) |
(4) |
5 |
5 |
||
Gross Margin (%) |
11.2 |
9.2 |
14.0 |
15.0 |
14.5 |
||
EBITDA Margin (%) |
8.6 |
5.4 |
9.3 |
12.7 |
13.3 |
||
EBITA Margin (%) |
1.1 |
(2.0) |
3.3 |
5.9 |
7.3 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
2,082 |
1,665 |
1,730 |
1,657 |
1,592 |
Intangible Assets |
1,483 |
1,242 |
1,283 |
1,248 |
1,198 |
||
Tangible Assets |
476 |
288 |
305 |
265 |
250 |
||
Investments & other |
40 |
62 |
59 |
59 |
59 |
||
Deferred tax and other |
84 |
72 |
83 |
85 |
85 |
||
Current Assets |
|
|
1,127 |
1,344 |
1,268 |
1,304 |
1,378 |
Stocks |
243 |
195 |
335 |
315 |
321 |
||
Debtors |
507 |
425 |
359 |
339 |
355 |
||
Cash & cash equivalents |
64 |
330 |
196 |
271 |
324 |
||
Other |
312 |
394 |
378 |
379 |
379 |
||
Current Liabilities |
|
|
(1,542) |
(1,379) |
(1,359) |
(1,390) |
(1,403) |
Creditors |
(825) |
(710) |
(671) |
(703) |
(755) |
||
Tax and social security |
(41) |
(21) |
(29) |
(29) |
(29) |
||
Short term borrowings |
(95) |
(72) |
(65) |
(65) |
(65) |
||
Other |
(581) |
(576) |
(594) |
(593) |
(554) |
||
Long Term Liabilities |
|
|
(1,631) |
(1,466) |
(1,505) |
(1,521) |
(1,537) |
Long term borrowings |
(1,203) |
(1,070) |
(1,170) |
(1,186) |
(1,202) |
||
Deferred tax |
(27) |
(15) |
(20) |
(20) |
(20) |
||
Other long term liabilities |
(401) |
(381) |
(315) |
(315) |
(315) |
||
Net Assets |
|
|
37 |
163 |
134 |
50 |
30 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
37 |
163 |
134 |
50 |
30 |
CASH FLOW |
|||||||
Net profit |
(208) |
(196) |
(121) |
34 |
77 |
||
Depreciation and amortisation |
322 |
261 |
222 |
215 |
205 |
||
Working capital |
(69) |
(101) |
(81) |
72 |
31 |
||
Tax and interest |
(76) |
(41) |
(50) |
(105) |
(110) |
||
Exceptional & other |
101 |
(9) |
43 |
0 |
(10) |
||
Operating cash flow |
|
|
70 |
(86) |
14 |
215 |
192 |
Capex |
(169) |
(104) |
(95) |
(140) |
(140) |
||
Acquisitions/disposals |
(2) |
(3) |
27 |
0 |
0 |
||
Equity financing |
1 |
60 |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
3 |
(21) |
(3) |
0 |
0 |
||
Net Cash Flow |
(97) |
(154) |
(57) |
75 |
52 |
||
Opening net debt/(cash) |
|
|
733 |
1,234 |
812 |
1,039 |
980 |
FX |
(16) |
16 |
0 |
0 |
|||
Discontinued |
(35) |
(23) |
(29) |
0 |
0 |
||
Other non-cash movements |
(369) |
615 |
(156) |
(16) |
(16) |
||
Closing net debt/(cash) |
|
|
1,234 |
812 |
1,039 |
980 |
943 |
Source: Technicolor accounts, Edison Investment Research
|
|
Research: Investment Companies
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