Future — Update 24 November 2016

Future

Leveraging brands and data

Annual results

Media

24 November 2016

Price	8.81p
Market cap	£48m

Net cash (£m) at end September 2016		0.5

Shares in issue	548.4m
Free float	67%
Code	FUTR

Primary exchange	LSE
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	3.4	(0.1)	(19.2)
Rel (local)	6.2	0.8	(24.7)

52-week high/low

11.4p

7.9p

Business description

Future is an international media group and leading digital publisher. It operates two separately managed brand-led divisions: Media and Magazine.

Next events

AGM	February 2017

Analysts

Fiona Orford-Williams	+44 (0)20 3077 5739
Bridie Barrett	+44 (0)20 3077 5700

media@edisongroup.com

Edison profile page

Future is a research client of Edison Investment Research Limited

Future is building and widening its revenue streams based on strong global brands and on a scalable delivery platform. Growth of revenues in categories such as eCommerce, events and digital advertising resulted in broadly maintained group FY16 revenues, while the margin has started to build, helped by operating leverage. The Imagine purchase, post year-end, brings further scale and efficiency. The lengthening record of delivery against expectations and the premium projected earnings growth are making the multiple increasingly attractive.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
09/15	59.8	0.2	0.2	0.0	44.0	0.0
09/16	59.0	1.6	0.4	0.0	22.0	0.0
09/17e	70.0	4.6	0.7	0.0	12.6	0.0
09/18e	73.0	8.6	1.2	0.0	7.3	0.0

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

Media growth counters print decline

Key brands within the Media division (41% group), such as techradar.com and PC Gamer, helped drive segmental revenues up 14%, with the US now representing 44%. Data drawn from online traffic is used to inform and optimise advertising and content, with the eCommerce and events building rapidly. Future has set up a media services operation to drive monetisation of IP in the business, providing content and through licensing, franchising and syndication. Magazine revenues reduced 10% (59% of group), outperforming the UK market in magazines for leisure interests (ABC Market Summary Report). Acquisitions, including Imagine, have made a step-change to the scale of the business and added new verticals.

Mix and operational leverage drive margin

FY16 EBITDA margin grew from 6.0% to 8.0%, meeting the internal KPI and our model indicates significant further improvement through FY17 and FY18, to 17.0%. This reflects the change in the mix of revenues and the growth of new streams such as eCommerce, as well as the operational leverage from the increase in scale of the Magazines division. Recurring revenues (which Future defines as including repeatable eCommerce) represented 25% of group top line, although there will be an element of dilution in FY17 with Imagine coming on board. Very strong cash conversion in the year (138%) meant the group ended FY16 with a small net cash position, prior to the Imagine acquisition. Post the deal, group debt stood at £7.4m.

Valuation: Yet to reflect earnings growth profile

Future’s market valuation is at a small discount against a broad set of peers of around 4% on EV/sales. On EV/EBITDA, the shares are rated around par with the sector; on a discount to those with larger digital assets. Our DCF indicates a price around 14p (from 13p) on 10% WACC and 2% terminal growth rate assumptions, based on conservative estimates on the realisation of synergistic gains. As the full benefits of the acquisition come through, this valuation gap should close.

Results and forecasts

Results for FY16 were slightly ahead of our modelled EBITDA numbers, but our forecasts for FY17 are unchanged over our previous pro-forma calculations. FY16 progress in EBITDA reflected a reduction in magazine-related costs from the restructuring phase, which took £1.9m out of the cost base (headcount reduced from 521 to 449 employees). Exceptional costs in FY16 totalled £3.5m, which also included £2.3m of costs relating to the Imagine acquisition, partially offset by a £0.5m property-related credit. The group also took a £13.0m impairment (non-cash) against the UK business to better align the assets away from print and with a greater bias to the US.

We are publishing our provisional thoughts for FY18 for the first time. What is very clear from the forecasts is the impact of the scaling up of the business through the acquisitions further helped by the more efficient platform, plus the progress on margin through the changing mix of revenues being generated. The company has forecast synergies of £3.0 post the Imagine deal, which is being quickly integrated. Imagine management is now leading the Magazines division.

Exhibit 1: Summary results and forecasts

	EPS (p)			PBT (£m)			EBITDA (£m)
	Old	New	% chg.	Old	New	% chg.	Old	New	% chg.
2016	0.3	0.4	+33	0.8	1.6	+100	4.6	4.7	+2
2017e	0.7	0.7	u/c	4.6	4.6	u/c	9.0	9.0	u/c
2018e	-	1.2	N/A	-	8.6	N/A	-	12.4	N/A

Source: Company accounts, Edison Investment Research. Note: FY16 ‘New’ = actual.

Driving the IP engine

Future now defines itself less in terms of its products, but rather as “a global media platform with data at its heart”. While websites and magazines are currently the dominant physical expressions of this, they are part of a broader content-led strategy. To drive additional revenue streams, it is crucial for the brands to be supported through strong editorial curation that will sustain their positioning within their verticals. Content on its own, though, is not enough to build high-margin revenues and the active use of data to maximise returns for both Future itself and for its advertisers and strategic partners is a core element of the corporate strategy.

Media division (41% FY16 revenues)

UK revenues increased by 8%, while the US grew 24% off a smaller base, giving divisional top line growth of 14%. Advertising revenues within the segment are predominantly digital, with CPMs boosted by sophisticated data-driven segmentation. While advertising will continue to represent the bulk of the mix, other sources of income are being successfully developed, with events and eCommerce already having a notable impact. The event portfolio is growing, with five new events launched in the year, leveraging the brand portfolio. As an industry norm, events typically start to generate strong returns from their third iteration, so the scaling up of this activity should start to generate better returns towards the end of our forecast period. The growth rate from eCommerce, which uses the group’s proprietary e-commerce platform ‘Hawk’, has been spectacular at +187%, albeit off a low base. We estimate that this generated a little over £4m of revenue for the group in FY16. Other revenue opportunities are being developed, such as eLearning, which are helping to give greater flexibility in the pricing options for subscribers and continue the push to growing average revenue per user.

With these results, management has identified two elements to the Media business: brands and services, each with their own MD and with the latter representing around 10% of group. While the Media brands have been focusing on monetisation opportunities, as described above, there is further scope to drive margin through selling the IP contained within the group to third parties. This can be through content publishing, working with brands such as ebay, Odeon and EE, but also through licensing, franchising and syndication of content to other countries and brand owners. This is already the case for several of the magazine brands, but has not been fully exploited for the group’s digital brands. It should boost the proportion of recurring revenues, as well as opening up opportunities to work with strategic partners in new geographies, such as the licensing arrangement of techradar with the Times of India.

Magazine division (59% FY16 revenues)

The investment case for the Magazine division revolves around scale and efficiency, but also around using data to maximise the opportunities. It is important to note that print advertising now represents less than 10% of group revenues (c 17% of divisional revenues). ABC industry figures show the newstrade magazine market down 7.7% in value and 8.6% in copy sale in the first half of this calendar year, in continuation of a long-standing trend. Future’s circulation has actually increased in some of its categories where the match of audience and content has married well. It tends to be either the number one or two title within its vertical.

Future’s focus has been on building its recurring subscription revenues, which were 30% (FY15: 29%) of division. The portfolio has also been extended through the acquisitions of Imagine and of the assets of Blaze Publishing earlier in the year. The Imagine deal was covered in our notes in august and October. It particularly brings scale to the group, slotting onto the existing infrastructure which has been put together by the Future management team over the last couple of years. It should also generate heathy quantities of cash, which can be used to fuel the faster-growing elements of the group’s offer.

Exhibit 2: Financial summary

	£'m	2013	2014	2015	2016	2017e	2018e
30 September		IFRS	IFRS	IFRS	IFRS	IRFS	IRFS
INCOME STATEMENT
Revenue		82.6	66.0	59.8	59.0	70.0	73.0
Cost of Sales		(58.5)	(50.6)	(40.6)	(37.2)	(44.1)	(45.3)
Gross Profit		24.1	15.4	19.2	21.8	25.9	27.7
EBITDA		(0.6)	(7.0)	3.6	4.7	9.0	12.4
Normalised operating profit		(3.4)	(10.3)	0.8	2.3	6.1	9.5
Amortisation of acquired intangibles		(2.0)	(2.3)	(2.3)	(0.9)	(3.7)	(3.7)
Exceptionals		2.6	(24.3)	(2.5)	(16.5)	(2.0)	(1.0)
Share-based payments		(0.3)	(0.1)	0.0	0.0	0.0	0.0
Reported operating profit		(3.1)	(37.0)	(4.0)	(15.1)	0.4	4.8
Net Interest		(1.4)	(0.8)	(0.6)	(0.7)	(1.5)	(1.0)
Joint ventures & associates (post tax)		0.0	0.0	0.0	0.0	0.0	0.0
Profit before tax (norm)		(4.8)	(11.1)	0.2	1.6	4.6	8.6
Profit before tax (reported)		(4.2)	(35.4)	(2.3)	(14.9)	(1.1)	3.9
Reported tax		(0.1)	0.5	0.3	0.5	0.2	(2.0)
Profit after tax (norm)		(4.9)	(10.6)	0.5	2.1	3.6	6.7
Profit after tax (reported)		(4.3)	(34.9)	(2.0)	(14.4)	(0.9)	1.9
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0
Discontinued operations		0.0	0.0	0.7	0.2	0.0	0.0
Net income (normalised)		(4.9)	(10.6)	0.6	1.4	3.6	6.7
Net income (reported)		(4.3)	(34.9)	(1.3)	(14.2)	(0.9)	1.9

Basic average number of shares outstanding (m)		332	332	333	362	542	561
EPS - basic normalised (p)		(1.5)	(3.2)	0.2	0.4	0.7	1.2
EPS - normalised fully diluted (p)		(1.4)	(3.2)	0.2	0.4	0.7	1.2
EPS - basic reported (p)		(1.3)	(10.5)	(0.4)	(3.9)	(0.2)	0.3
Dividend (p)		0.0	0.0	0.0	0.0	0.0	1.0

Revenue growth (%)		N/A	(20.1)	(9.4)	(1.3)	0.2	0.0
Gross margin (%)		29.2	23.3	32.1	37.0	37.0	38.0
EBITDA margin (%)		(0.7)	(10.6)	6.0	8.0	12.9	17.0
Normalised operating margin (%)		(4.1)	(15.6)	1.3	3.9	8.7	13.0

BALANCE SHEET
Fixed assets		92.7	45.9	44.9	38.6	51.9	51.3
Intangible assets		89.8	44.4	43.8	33.2	46.1	45.5
Tangible assets		2.5	1.0	0.6	3.0	3.4	3.4
Investments & other		0.4	0.5	0.5	2.4	2.4	2.4
Current assets		28.3	22.9	19.5	15.8	17.4	25.7
Stocks		1.9	0.6	0.5	0.4	0.3	0.3
Debtors		21.4	12.8	15.3	12.4	14.7	14.4
Cash & cash equivalents		4.6	7.5	2.5	2.9	2.3	10.8
Other		0.4	2.0	1.2	0.1	0.1	0.1
Current liabilities		(44.2)	(27.1)	(25.9)	(25.1)	(31.1)	(33.8)
Creditors		(31.6)	(25.9)	(20.7)	(21.4)	(25.4)	(28.1)
Tax and social security		(0.9)	(1.2)	(0.9)	(1.4)	(1.4)	(1.4)
Short-term borrowings		(11.5)	0.0	(4.3)	(2.3)	(4.3)	(4.3)
Other		(0.2)	0.0	0.0	0.0	0.0	0.0
Long-term liabilities		(9.4)	(9.1)	(7.1)	(5.6)	(10.2)	(10.1)
Long-term borrowings		0.0	0.0	0.0	(0.1)	(4.7)	(4.6)
Other long-term liabilities		(9.4)	(9.1)	(7.1)	(5.5)	(5.5)	(5.5)
Net assets		67.4	32.6	31.4	23.7	28.0	33.1
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0
Shareholders' equity		67.4	32.6	31.4	23.7	28.0	33.1

CASH FLOW
Operating cash flow before WC and tax		0.6	(31.6)	0.8	1.5	7.1	12.9
Working capital		(0.7)	7.7	(8.0)	1.6	(1.8)	(2.1)
Exceptional & other		(2.4)	22.4	(0.4)	(0.3)	(2.5)	(1.0)
Tax		1.5	(1.5)	(0.5)	(0.8)	(1.2)	(3.2)
Net operating cash flow		(1.0)	(3.0)	(8.1)	2.0	1.6	6.6
Capex		(2.9)	(2.6)	(2.0)	(2.5)	(2.0)	(2.0)
Acquisitions/disposals		9.2	21.3	1.3	(0.3)	(20.0)	0.0
Net interest		(1.4)	(0.8)	(0.6)	(0.4)	(1.5)	(1.0)
Equity financing		0.0	0.0	0.0	3.1	14.2	0.0
Dividends		0.0	(0.7)	0.0	0.0	0.0	0.0
Other		(0.1)	0.0	0.0	0.2	0.0	0.3
Net cash flow		3.8	14.2	(9.4)	2.1	(7.7)	4.0
Opening net debt/(cash)		10.6	6.9	(7.5)	1.8	(0.5)	7.2
FX		(0.1)	0.2	0.1	0.2	0.0	0.0
Other non-cash movements		0.0	0.0	0.0	0.0	0.0	0.2
Closing net debt/(cash)		6.9	(7.5)	1.8	(0.5)	7.2	3.0

Source: Company accounts, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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Germany

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