artnet — Update 18 April 2016

artnet — Update 18 April 2016

artnet

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

artnet

A brush with success

Final results

Retail

18 April 2016

Price

€2.55

Market cap

€14m

US$0.88/€

Net cash (€m) at 31 December 2015

0.5

Shares in issue

5.6m

Free float

49%

Code

ART

Primary exchange

XETRA

Secondary exchange

FRA

Share price performance

%

1m

3m

12m

Abs

17.4

35.1

27.9

Rel (local)

16.0

28.3

55.6

52-week high/low

€2.5

€1.4

Business description

artnet is an online business offering an integrated range of information and transaction services in the fine art, design and decorative art markets. It has four segments: Price Database, Galleries, Auctions and News.

Next events

Q1 update

13 May 2016

AGM

13 July 2016

Interim results

14 August 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

artnet is a research client of Edison Investment Research Limited

Following a year of investment and reorientation in FY14, artnet had good success in FY15 in turning its Gallery segment back into growth and in building strong web traffic – and hence group advertising revenues – with artnet News. In US dollar terms, FY15 group revenues were up 4% y-o-y, with currency swelling this to a 24% rise in euro terms. This implies a strong Q4, following top-line reported growth of 1% for Q1-Q3. The shift in mix is helping gross margins and with stable operating costs in US dollars, artnet has marched forward into profitability, with further progress forecast for FY16 and FY17.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

13.9

(0.1)

(6.3)

0.0

N/A

N/A

12/15

17.3

0.9

15.7

0.0

16.2

N/A

12/16e

18.4

1.4

18.5

0.0

13.8

N/A

12/17e

19.8

1.9

23.7

0.0

10.8

N/A

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

News drives the top line

The art market had a mixed 2015, with good growth in the US but a sharp downturn in Chinese activity, domestically and internationally. The growth in the use of online resources attracted a number of new auction market entrants and increased competition in the galleries segment. artnet’s FY15 top-line growth reflects the success of artnet News, with the website now attracting 2.1 million monthly average visitors (+35%). These visitors provide an attractive demographic for advertisers and growth of in ad revenues (now reported within underlying segments) narrowed the News segmental operating loss from US$1.3m to US$0.8m. Across the group, control of admin and general costs helped build operating margin and return the group to profit. artnet News will likely be the main driver of FY16 revenues, aided by mobile app launches, with management also confident of stronger progress in Auctions, following from higher buyer and seller registrations in 2015.

Further progress for FY16

Our revised FY16 numbers are consistent with company guidance for revenues of €18-19m and post-tax profits of €0.9-1.2m, based on current exchange rates. The model indicates a further (small) increase in net cash. This scenario assumes little change in the underlying revenues from the Price Database and that Auction House Partnerships and increased advertising will help support gallery segment revenues.

Valuation: Firmly underpinned

Online e-commerce and web content businesses are currently valued at 1.6x trailing 12-month (TTM) EV/revenues and 17x TTM EV/EBITDA. Quoted art segment stocks trade on a slightly higher revenue multiple, but sharply lower EV/EBITDA of 9.3x, reflecting the market’s view on the quality of their earnings. With artnet’s return to profitability, its market valuation, on 11.7x EV/EBITDA, looks firmly underpinned.

Forecast differentials from forex and advertising

The substantial shift in the euro/US dollar exchange rate over 2015 obfuscated the underlying performance of artnet’s operations, with the reported euro figures exaggerating the group’s improved performance at an operating level. The group primarily conducts its business in US dollars, with around 20% of group revenues generated in euros and invoices primarily issued in either US dollars, euros or sterling. The group’s cost base is primarily in US dollars (the main office is in New York). The results are disclosed in both US dollars and in euros, with the detailed segmental breakdown in US dollars. However, with the group registered and listed in Germany, the reporting currency – and therefore used in our model and forecasts – is euros. The average €/US$ exchange rate fell by 19% 2015 against 2014, while the year-end rate shifted by 11%. The table below shows our revised earnings estimates following the release of the FY15 results.

Exhibit 1: Revised forecasts

EPS (c)

PBT (€m)

EBITDA (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2015

3.0

15.7

+423

0.2

0.9

+350

0.4

1.2

+200

2016e

6.5

18.5

+193

0.6

1.4

+133

0.7

1.7

+143

2017e

10.3

23.7

+130

0.9

1.9

+111

1.0

2.2

+120

Source: artnet accounts, Edison Investment Research. Note: 2015 ’Old’ stands for ‘Estimate’, ‘New’ for ‘Actual’.

New segmental progression

The nine-month figures issued in November 2015 showed top-line growth for the group of 1%. The full year figures show revenues up 4%, implying 28% progress in the final quarter (in euros), which is well ahead of our anticipated out-turn. Advertising revenues more than doubled, both year-on-year and on prior quarter. These are now reported within the artnet News (47%) and artnet Galleries (41%) segments, with the balance of 12% falling within Price Database.

Our Outlook note of November went into some detail into the four new reporting segments. The progression in the new format is shown below, with the upturn in Q4 very clear.

Exhibit 2: Revenue by segment (new split) in US dollars

Exhibit 3: Contribution margin by segment (new split) in US dollars

Source: artnet accounts

Source: artnet accounts

Exhibit 2: Revenue by segment (new split) in US dollars

Source: artnet accounts

Exhibit 3: Contribution margin by segment (new split) in US dollars

Source: artnet accounts

Ongoing court proceedings

The publication of the figures was slightly delayed due to ongoing litigation over alleged copyright infringement in the French court system. A provision was made in the 2014 accounts and management’s view is that the amount provided remains sufficient to cover the possible penalty and associated costs.

Exhibit 4: Financial summary

€m

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

12.97

13.91

17.28

18.36

19.83

Cost of Sales

(5.74)

(5.57)

(5.96)

(6.09)

(6.48)

Gross Profit

7.23

8.34

11.32

12.27

13.35

EBITDA

 

 

0.43

0.25

1.19

1.71

2.18

Operating Profit (before amort. and except.)

 

 

0.16

0.06

0.94

1.47

1.94

Intangible Amortisation

(0.15)

(0.65)

(0.23)

(0.23)

(0.23)

Exceptionals

0.00

(1.49)

0.00

0.00

0.00

Other

0.08

0.00

0.00

0.00

0.00

Operating Profit

0.09

(2.08)

0.71

1.24

1.71

Net Interest

(0.05)

(0.12)

(0.04)

(0.02)

(0.00)

Profit Before Tax (norm)

 

 

0.11

(0.06)

0.91

1.44

1.94

Profit Before Tax (IFRS)

 

 

0.05

(2.20)

0.67

1.21

1.71

Tax

(0.00)

(0.84)

(0.03)

(0.40)

(0.60)

Profit After Tax (norm)

0.18

(0.90)

0.87

1.04

1.34

Profit After Tax (FRS 3)

0.04

(3.04)

0.64

0.81

1.11

Average Number of Shares Outstanding (m)

5.55

5.55

5.55

5.63

5.63

EPS - normalised fully diluted (c)

 

 

3.2

(6.3)

15.7

18.5

23.7

EPS - (IFRS) (c)

 

 

0.7

(54.7)

11.5

14.4

19.7

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

56%

60%

66%

67%

67%

EBITDA Margin (%)

3%

2%

7%

9%

11%

Operating Margin (before GW and except.) (%)

1%

0%

5%

8%

10%

BALANCE SHEET

Fixed Assets

 

 

3.58

2.33

2.33

2.23

2.05

Intangible Assets

1.18

0.65

0.51

0.60

0.61

Tangible Assets

2.13

1.36

1.46

1.27

1.08

Investments

0.28

0.32

0.36

0.36

0.36

Current Assets

 

 

2.46

2.29

2.66

2.95

3.78

Stocks

0.00

0.00

0.00

0.00

0.00

Debtors

0.63

0.82

1.27

1.36

1.47

Cash

1.53

1.18

0.99

1.20

1.92

Other

0.30

0.29

0.39

0.39

0.39

Current Liabilities

 

 

(2.85)

(4.30)

(3.90)

(3.89)

(3.92)

Creditors

(2.63)

(3.81)

(3.49)

(3.64)

(3.80)

Short term borrowings

(0.22)

(0.49)

(0.41)

(0.25)

(0.12)

Long Term Liabilities

 

 

(0.98)

(0.56)

(0.39)

(0.39)

(0.39)

Long term borrowings

(0.72)

(0.25)

(0.07)

(0.07)

(0.07)

Other long term liabilities

(0.26)

(0.31)

(0.32)

(0.32)

(0.32)

Net Assets

 

 

2.21

(0.22)

0.69

0.90

1.52

CASH FLOW

Operating Cash Flow

 

 

0.83

(0.05)

0.21

0.81

1.38

Net Interest

(0.05)

(0.05)

(0.01)

(0.02)

(0.00)

Tax

(0.00)

(0.01)

(0.02)

(0.36)

(0.54)

Capex

(0.32)

(0.17)

(0.03)

(0.05)

(0.05)

Acquisitions/disposals

0.00

0.00

0.00

0.00

0.00

Other

(0.00)

(0.10)

0.01

0.00

0.00

Dividends

0.00

0.00

0.00

0.00

0.00

Net Cash Flow

0.46

(0.38)

0.16

0.38

0.79

Opening net debt/(cash)

 

 

(0.16)

(0.59)

(0.45)

(0.50)

(0.88)

HP finance leases initiated

0.00

0.23

0.00

0.00

0.00

Other

(0.03)

0.00

(0.10)

(0.00)

0.06

Closing net debt/(cash)

 

 

(0.59)

(0.45)

(0.50)

(0.88)

(1.73)

Source: artnet accounts, Edison Investment Research

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Creston — Update 18 April 2016

Creston

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