Future — Update 1 August 2016

From a single magazine in 1985, Future has grown to over 200 print titles, apps, websites and events across the key subject verticals of consumer technology, gaming, photography, music, movies, design and country sports. The Imagine Publishing acquisition (currently in progress) adds 19 periodicals and a growing web presence. It also adds content and expertise in knowledge and science. The group derives revenues from a number of streams, of which the largest is magazine sales – over the counter, subscriptions and digital editions, closely followed by advertising. More recently, Future has been working to build its associated revenue streams to leverage the content, in particular through investing in an e-commerce platform that links through from the branded websites and through developing events that draw in exhibitors and delegates. The group’s core demographic is affluent, young males, with strong levels of engagement with the content.

Given the degree of disruption to the business as the portfolio has shifted over recent periods, it is unsurprising that earnings progression has been elusive. On a pre-acquisition basis, the current market valuation is therefore on a greater discount to other smaller media/publishing groups on a sales multiple than on an earnings multiple. Moving to parity on EV/sales implies a share price of 14.5p. We have run a DCF for the existing business under various WACC and terminal growth scenarios. With the former at 10% and the latter at 2%, the model indicates fair value of 14p, broadly in line with the peer-implied sales multiple. On the same assumptions, but without including any benefits of scale, our estimated pro forma numbers (which include the Imagine acquisition for all of FY17e), the DCF indicates an implied share price of 13p, still well ahead of the current level.

As with any consumer business, the health of the economy is a key sensitivity, especially when revenues depend on advertising revenues as well as product sales. Sterling weakness following the Brexit vote implies a boost to translated US dollar earnings, but the impact on UK consumer spend is not yet clear. Management’s success in managing the decline in the print-based business is key to the financial performance, but this has been a feature of the sector for a considerable time. Future has specific IT and platform risks; the risk of systems failure/ downtime and also that of systems security and data protection. Corporate activity inevitably brings implementation risks and the Imagine acquisition is of a greater scale than previous deals. The group’s share register, while containing a strong list of institutional investors for a group of this size, is unusually concentrated.

Future is a media company with market-leading brands in its niche verticals, based in the UK but with significant revenues in the US. It has a growth strategy predicated on leveraging and monetising the content that it creates and curates across its two divisions: Media and Magazines. The former represents its leading global brands, such as TechRadar, PC Gamer, GamesRadar+, T3, The Photography Show and Golden Joysticks. Key themes are around content related to “How to…” and product and service reviews. The Magazine division represents a portfolio of specialist titles, magazines and ‘bookazines’ (more substantial/longer publications designed either to test a market segment or to leverage existing content and with a longer potential shelf life). The magazine revenues include those from both print, online and digital editions, as well as revenues earned for contract publishing for third parties. The split of revenue between the two divisions is shown in Exhibit 2 below.

The group estimates that 25% of revenues are recurring, through subscriptions and other non-contractual reliable repeat revenues, such as those now coming through from e-commerce. Revenues in FY15 were generated predominantly in the UK (see below).

The global online reach of the brands is far broader, with the largest proportion of unique users (c 43%) being in the US and Canada, with around 18% in each of UK and Europe, 13% in Asia and the balance in Australia, New Zealand and Africa.

The group was founded in 1985 but has undergone a substantial programme of transition over the last few years, alongside a number of management changes. Following a period of considerable churn at the top of the organisation from October 2011, the current leadership team of CEO Zillah Byng-Thorne and CFO Penny Ladkin-Brand has now been in place since June 2015; Zillah joined in November 2013 as CFO and was appointed CEO in April 2014. She was previously CFO at Trader Media (the owner of Auto Trader) from 2009-12 and interim CEO there from 2012-13. Before joining Trader Media, Zillah was commercial director and CFO at Fitness First and CFO of Thresher. Penny also has a background in digital media and digital monetisation and was previously commercial director at Auto Trader Group, working alongside Zillah Byng-Thorne. Penny is a chartered accountant.

The business faced the fundamental challenge of many media businesses: how to adapt to a growing digital model while coping with the decline in demand for print and print advertising. The loss-making US operations presented the immediate issue at the time (late 2011), leading to Future taking a substantial impairment charge of £17.1m, then selling the US Music Division in early 2012 for $3.0m. Net debt climbed to £17.9m, with the US operations targeted to return to profit in 2013. A larger disposal was announced in April 2013 – Classic Rock and Metal Hammer for £10.2m (1.2x revenues) – bringing the debt to more manageable levels. By the summer, like-for-like revenues were edging ahead and the programme of cost savings was accelerated.

The progress was undermined by problems in the PC gaming segment, which prompted a profit warning in March 2014, following which the previous CEO stepped down and Zillah Byng-Thorne moved across from the CFO role. Her first moves were targeted at accelerating the digital offer in the US, with a sharp reduction in headcount, with support functions moved across to the UK. In May 2014, the sport and craft titles were sold to Immediate Media for £24m and in July further disposals raised £2.1m. Annualised cost savings from the rationalisation were put at £15m and, by the November interims in 2014, the group was returned to a net cash position (£7.5m).

The group employs 521 staff, including 73 in the US. They are split roughly 80:20 between production and administration. The US operation includes TechRadar (although this is largely managed out of the UK) and localised content for PC Gamer, as well as the PC Gaming Show, again with most of the administration in the UK. There are also some smaller native magazines. The principal US-based function is the sale of localised content to local and national advertisers.

After this series of portfolio changes, the group is focused on the key verticals where it seeks to be the number one or number two ‘voice’. These have now been refined to:

These are all areas that tend to have a greater degree of involvement, engagement and enthusiasm by the participants than other ‘standard’ hobbies.

The business model is firmly centred on content, with the objective of entertaining and informing its consumers. This is around the two key themes of “How to…” and product/service reviews, both of which are targeted to monetise the customer need. Data management is crucial, driving the optimisation of the digital content (optimising natural search rather than necessitating purchase of keywords), driving advertising revenues and in linking to transactions, directly through the group’s proprietary e-commerce platform ‘Hawk’. Hawk is a price comparison engine, which serves up relevant product, based on an algorithm. It ingests in excess of 160m product offerings per day in North America and Western Europe, with pricing updated four times daily. Brands such as TechRadar are typically very close to the point of purchase as people investigate their options and Hawk generated £87.5m of revenues for Future’s e-commerce affiliate partners in the year to March 2016. Future earns commission on these transactions. Hawk has been built in such a way as to make expansion straightforward across multiple brands.

All of the group’s core websites are now on a single platform, developed in house, which again is scalable. A unified content management system has been built and is being rolled out across the group. This investment in IT systems also has the benefit of flexibility and speed to market for new products and new market niches.

Much of Future’s content is targeted at a core demographic, which is particularly hard to reach with traditional media channels. Unique user statistics given in November 2015 show the group’s audience as being around 70:30 male: female, with penetration ahead of market in the 15-24, 25-34 and (less markedly) 35-44 age groups. Reach in unique users with an income of over £50k is also clearly ahead of the curve. The company estimates that its reach in the UK in its targeted core, namely males of 18-34 years in ABC1 categories, is around 62%, making it a very attractive media partner for those trying to sell in this part of the market, particularly given its level of sophistication in data management. The group’s brand names are traffic drivers of themselves and it is well-versed in optimising its web traffic through natural search. The brand positioning within the verticals is also a strong driver of experiential revenue, through shows and conventions. These in turn can generate additional content for the magazines and websites and can also be livestreamed onto platforms such as Twitch, the leading Amazon-owned video platform and community for gamers.

The key underlying objectives of the growth strategy are based around monetisation of the content through:

Recurring revenue falls into both the first and second of these points. Obvious recurring revenues would be achieved through subscription sales, either in digital or in print. It also brings in a growing programme of events, tied in with the group brands and which may be suitable for replication. Perhaps less obvious are the e-commerce revenues, which flow through on a regular and repeating basis and with no associated cost of sales, making these a particularly attractive focus for growth.

The decline in the overall market for print copy sales has been in progress for many years, with print advertising trends following the same path. Leveraging scale in magazine production and distribution should help the group to continue to deliver a healthy return.

While the dynamics of the two reporting divisions are undoubtedly different, the strengths of both are predicated on the quality of their content and its value to their consumers.

The Media division comprises market-leading global digital brands and events, with a monthly reach of 70 million consumers – 47 million unique monthly users, 22 million followers on social media and two million YouTube subscribers, and with 37 thousand event attendees in the year to March 2016.

Its core brands include TechRadar (#1 UK consumer technology site), GamesRadar+ (the fastest growing gaming site), PC Gamer (a leading gaming authority worldwide, now with associated events), The Photography Show (the UK’s largest photography event) and Creative Bloq, which combines content on creative design and technology. PC Gamer has recently won the Best Online Media Property in the Brand (Consumer) category in the Association of Online Publishers Awards.

The division has a number of revenue streams, the largest of which is digital advertising, which we estimate to be running at around 60% of divisional income. There is no paywall in front of the content. Future also earns income from e-commerce commission revenues and from event revenues from exhibitors and delegates. The potential from digital advertising is probably not yet fully realised, either in terms of volume or in yield. The increasing use of more sophisticated data analytics will allow the repositioning of the brands as premium inventory, especially given the demographic targeted, moving the revenues further away from the commodity inventory that populates so much of programmatic buying.

There may be further opportunities for the larger group to exploit in technology B2B markets. The Noble House acquisition (H116) has given Future a step up here, bringing with it a number of B2B events such as the Mobile Choice Awards and Shop Idol (for the mobile phone retail sector). A small acquisition last year also brought in an IT Pro portal that can be expanded and developed.

The division publishes over 100 specialist publications, including core brands such as Digital Camera Magazine (the best-selling photography magazine in the UK), Official PlayStation, T3 and Total Film.

The division has a number of revenue streams, around two-thirds of which could be defined as relating to the content, ie revenue received from consumers such as newsstand print copy sales and subscriptions, and digital edition sales. The balance would be derived from print advertising, contract publishing and licensing, as well as some SaaS income from hosting others’ digital editions.

While print magazines and print advertising have clearly been in decline, there is still good demand for the right content in the right format and individual titles can be closed when they become unsustainable. With good central IT/CMS and strong buying, adding or launching new titles or portfolios comes with little additional cost and will (generally) deliver strong cash flow.

On the face of it, the Media division ought to be the natural recipient of the cash generation from the Magazine division, to invest in fast-growing digital revenue streams. The Imagine Publishing deal will achieve the same goal, but via a more circuitous route and on a greater scale. Imagine is a high-quality proposition, with a strong portfolio of brands, good management disciplines, good operating margins and attractive cash flow. It has a portfolio of 19 magazines and 300 annual bookazines targeted on the technology and knowledge/science markets across print, online and digital formats. It has monthly reach of over five million users. Bookazines provide a particularly efficient way of testing out market demand in particular niches on a lower-risk basis than a full magazine launch. Details of the portfolio are available via its website, www.imagine-publishing.co.uk.

The company (currently privately owned) is being acquired in an agreed all-share deal for 180m new Future shares, which represents a consideration of £17.8m at the current share price (£14.2m at the price before the announcement of the deal at close on 22 June 2016). £14.2m, together with the net debt of £5.3m being taken on, would represent 1.2x Imagine’s revenue to March 2016 and 5.9x EBITDA. Further financial details of the transaction, alongside our preliminary modelling of the combined group on a pro forma basis, are given on page 11. For ease of calculation, our pro forma numbers consolidate the acquisition from the first day of the new financial year (1 October 2016), although the completion is unlikely to be achieved on this time scale. However, as yet, they take no account of any the potential benefits of scale from centralisation of overhead, leaner management or buying synergies.

The UK newstrade market was worth £830m in 2015, according to industry body ABC, down from £911m in 2014, but the pattern of decline is far from uniform, with children’s magazines having shown growth, while women’s celebrity titles fell away sharply (revenues down 16% in July-December 2015). Where the content is more targeted, there is a greater resilience in the sales patterns and it would be easy to overlook the continuing scale of the sector, with magazine media reaching 38 million adults in the UK every month (print 31 million adults) and over 2,500 titles available (source: Magnetic Magazine Market Overview).

Magazines accounted for 4.7% of total 2015 UK adspend according to industry body WARC – a sum of £942m (down 5% year-on-year), of which 30% was spent on digital editions. The amount spent on digital editions is forecast by WARC to rise 3.4% in 2016 to 5.9% in 2017.

The best-selling titles in the UK market tend to be focused on TV listings and women’s fashion and lifestyle, with the ABC figures identifying the highest (paid) circulation for 2015 as TV Choice. The mass-circulation magazines are largely owned by global publishing concerns, the most prominent being Bauer Media (which bought EMAP’s consumer publishing arm in 2008), Hearst Media and Time, Inc. Bauer Media and Hearst Media are privately owned, while Time, Inc. is listed on NYSE and capitalised at US$1.8m. Other leading magazine publishers in the UK include Immediate Media, which owns 70 brands including the Radio Times and other BBC-related UK titles and is reportedly potentially being sold by its PE owner; and Haymarket Publishing, which publishes both consumer and B2B titles.

Future and Imagine’s target markets are based on tighter demographics than the mass-circulation titles. These targeted consumers tend to be more difficult to reach through other traditional media channels such as television. They also often browse content close to the purchase decision making point.

Future is a consumer-facing media business and many of its sensitivities relate to broader markets. In particular, we identify:

Economic backdrop. In the aftermath of the Brexit vote, the importance of consumer confidence has been thrown into relief, with the initial impact on high street spend being negative. It has yet to be established whether this will be an extended phenomenon, moving into recessionary territory; if there is to be a ‘new–normal’ at a lower level; or if the repercussions will be shrugged off and spend will bounce. Whichever scenario plays out will obviously have an effect on transactional commissions and on advertising spend, not necessarily in an aligned cycle.

Shift to digital. This has been a fact of life for media companies for so long now that business models are predicated on falling print copy revenues and on falling print advertising. The sensitivity is more to do with a sharper deviation from trend than has been built into the model, particularly with respect to the alignment of overhead.

Maintaining credibility in niches/competition. Future has brands that are either number one or number two in their verticals. In order to retain this status, the content, relevance and engagement need to stay at the highest levels. IP management is an associated aspect – ensuring that IP created either within the content or within the data that the content is driving – is leveraged to best advantage. In fast-moving consumer markets, maintaining the necessary credibility is crucial, as is reacting and shaping the product to the shifting needs of the market. Some markets may fragment; others may disappear over short time frames.

IT/platform risk, data protection/fraud. The IT risk covers a number of separate potential issues, principally those of platform risk, where some sort of failure affects the ability of the group to function, or of data risk. A number of high-profile incidents of data breaches in other organisations have shown the reputational risk as well as the direct data security risk.

Failure to deliver on acquisition integration. As described above, Future has been through an extensive period of transition, where change has been one of the few constants. There have been small acquisitions, notably that of the Blaze and Noble House assets announced with the interim results, but the majority of corporate actions have related to divestments and downsizing. The purchase of Imagine Publishing is on a different scale to the previous transactions and will have a more complex integration. The realisation of the assumed savings may not be on the timescale or to the extent anticipated in our model.

Failure to capitalise on new business model. New approaches to monetisation, such as the e-commerce income stream, may not continue to build as they have to date, or commission rates may come under pressure. Events revenues may not prove sustainable in face of changed patterns of consumer spend or as competitive events are staged.

Currency. Sterling weakness should be a net benefit to the group, with the translation of overseas earnings on a predominantly UK-based infrastructure, particularly post the transfer of some administrative functions from the US to the UK as described above. Transactions are denominated in local currencies wherever possible and assets and liabilities are matched as far as practicable. Debt is denominated in sterling. As e-commerce revenues build, currency management will become more complex.

Concentration of shares. The company’s shares are concentrated in relatively few hands, with several substantial institutional shareholders (see page 12). These holdings will be diluted with the completion of the Imagine acquisition and post the deal, the vendors will hold 32.8% of the enlarged issued share capital. The largest of these vendors, Disruptive Capital/D Truell, will hold 17.7%, subject to a six-month lock in for 100% of the shares and 12 months for 50% (similar terms for other third-party investors holding 4.1% of the enlarged capital). The Imagine founders are not subject to any lock-in and will hold 9.8%.

We first of all consider the valuation of the Future business ’as is’. We have appraised this in the context of a broad peer group of UK-based media and publishing companies, albeit that none of the quoted sector in the UK has a directly comparable business model. We have adjusted the figures to calendar year on a straight-line basis. As Future’s earnings recover, a P/E comparison is obviously less favourable, but is also less useful given the differing geographical and tax positions of the various companies. The fairer comparison is therefore on ratios of EV to sales and to normalised EBITDA. On EV/sales, the inclusion of Wilmington in the peer group is distortive and excluding it gives a sector multiple of 0.67x, a little ahead of Future’s current level. On EV/EBITDA (and stripping out Ten Alps, which has issues of its own), Future is on a 26% premium for calendar 2016, and a smaller premium of just 2% as the group’s forecast EBITDA moves ahead more strongly than the peers through 2017.

The recent flotation of UK-based media and magazine company, Time Out, on 14 June 2016 raised £90m and valued the group at £190m at the 150p issue price. The price has since fallen to 137p, at which the group is valued on an EV/Sales multiple of 3.4x (on the published 2015 revenue figure and including the placing proceeds). The group has been investing heavily in platforms and systems, as well as sales and marketing functions and has reported operating and pre-tax losses in the last couple of years.

There have also been market reports that private equity house, Exponent, is investigating the sale of Immediate Media for around £300m, which we understand would represent a sales multiple of 2.0x and earnings multiple of 7.5x.

On the basis of our assumptions post the Imagine acquisition (the details of which are given in the Financials section, below), the differential is more pronounced. With the increase in the number of shares, the group’s market capitalisation increases from £34m to £50m at the current share price. Adding in Imagine’s net debt on acquisition (£5.3m) gives a pro-forma EV of £57.3m. This represents a multiple of 5.7x calendar 2017e EBITDA, still comfortably within the peer group range and taking a very conservative view on the financial benefits of any likely synergies within the timescale.

We have modelled the cash flows against various scenarios of cost of capital and of terminal growth rate, giving the results as presented in Exhibit 4, below. On a modest terminal growth rate of 2% and a 10% WACC, for example, our model would point to a valuation in excess of the current price at 14p. This does not necessarily contradict the income-based valuation above as it gives greater weight to the strong cash flow characteristics of the business.

Running the same exercise on our pro forma model including Imagine acquisition (with the proviso that it is based on top-level, rather than detailed financial information) generates the following table:

As would be expected, the attractive cash flow characteristics of the additional magazine business imply an uplift to the derived DCF value, but diluted by the significant increase in the number of shares. On the same inputs as above, the implied value per share is 13p. However, it should be noted that this is calculated without factoring in any of the economies of scale from putting these businesses together, such as overhead reductions or buying synergies, which have not yet been fully quantified. We would expect that including these would derive a value ahead of the ‘as is’ basis.

The last published year-end balance sheet as at end September 2015 showed net assets per share of 9.4p, just ahead of the current share price. On our pro-forma numbers, the dilution of the extra shares implies an end September 2017 forecast figure for net assets per share of 7.4p.

Our financial analysis is for the most part on an ‘as is’ basis, but we have also made an outline attempt at a pro-forma model for the year to September 2017 as if Imagine had been consolidated for the whole period.

The first point to note from the chart above is the falling group revenue over the illustrated period. As has been noted above, the group has been through an extensive reorganisation with some substantial disposals of businesses, which distort the picture on the top line. The underlying dynamics are that the Media business is growing at a good rate – 15% y-o-y in H116, driven by a good performance particularly in TechRadar and the build in e-commerce and events revenues. E-commerce revenues were up 250% in H116, albeit off a low base, while events revenues were 13% ahead. There is a seasonal pattern to revenues that will be exacerbated as the newer revenue streams build within the mix. For example, The Photography Show, one of the more substantial of the group’s events, generating revenues of over £2m with 30,000 visitors, fell into H116, yet a number of the more recently established events are scheduled to take place in H216. For digital advertising, there would generally be spikes in March and September coinciding with the release schedules of new mobile phone models, over a broadly even H1:H2 underlying trading pattern. E-commerce revenues are heavily weighted to Q1 due to the comparative importance of Black Friday, particularly in the US.

In recent presentations, management has highlighted the growth in recurring income (25% in H116), although it should be noted that this is not recurring in the contractual sense, more reliably repeating revenue. The definition, for instance, includes the revenues from e-commerce recurring, as well as more obvious recurring subscriptions. This type of revenue is regarded by management as having a lower risk profile than ‘true’ contractual recurring, as there are no pinch-points where the business may not be renewed or must be renegotiated.

The inflexion in the margins in FY14 is a reflection of the changing composition of the group and the short-term impact of the disruption. The build back in FY15 and the increases that we anticipate for FY16e and for FY17e are predicated on the continuing build of the e-commerce revenue stream and events and associated activities, but also on the increased scale and leverage within the Magazine division from the Blaze/Noble House acquisitions. The accounts do not split out by division below the revenue line. Our model (excluding Imagine acquisition) shows the group building on the 6.0% EBITDA margin achieved in FY15 to 8.0% in FY16e and 11% for FY17e. E-commerce in particular delivers attractive margins (over 75%).

With the realignment of the business, there have been a number of exceptional charges over the years associated with business disposals, severance costs and charges linked to onerous leases. We strip these out of our normalised figures. For FY16, exceptional charges were £0.5m in H1 and we anticipate that the charge will be around £3m for the year as a whole, with £2m in FY17. These charges tend to lag within the cashflow due to the structure of redundancy payments.

Interest on the current borrowing arrangements is at 2.0 to 2.5% over Libor, dependent on the level of bank EBITDA.

On tax, there are substantial losses stored in the US (unprovided deferred assets on losses totalling £16.1m, of which £15.0m arose in the US as at 30 September 2015). In addition to the standard tax on profits, Future also pays taxation in relation to a settlement with HMRC regarding a transaction dating back to 2003. This arrangement continues through to 2018, when a final payment of £2.0m will be payable in June.

Progress in EPS is limited for FY16e by the dilutive effect of additional shares issued in the placing in November 2015, which raised a net £3.1m.

While the purchase of Imagine has now been approved at EGM, the group now has to wait for clearance from the Competition and Markets Authority, following which it can issue a prospectus. Our formal forecasts will not reflect the deal until completion, but we have worked through the available information to give an estimated pro-forma picture of the combined group for FY17e, as if the deal had completed on 1 October 2016 (albeit the deal is likely to complete later in Q4 CY16).

The intention is to pay for the deal through the issue of 179m shares, which will be equivalent to just under one-third of the enlarged issued share capital. There are considerable potential cost synergies to be reaped, principally:

Our guideline figures above are not taking into account any of these synergistic benefits and are for illustrative purposes. In any event, those benefits (and their positive impact on achievable margins) would not be in place for the whole of FY17e and are likely to build over the course of that financial year.

Following the closure of non-profitable titles in FY15, Imagine delivered an EBITA margin of 19% in the year to March 2016, and has good cash conversion characteristics, so is not a business ‘in need of repair’. However, the bulk of its revenues are in copy sales and it has made less progress in taking advantage of online and digital opportunities, which it can now address within the Future infrastructure. Around half of its revenues come from outside the UK.

On the basis of the outline figures, we would expect the deal to deliver up to a 50% uplift at the EPS level, despite the dilutive effect of the additional shares.

Future’s capex is broadly equivalent to web development costs, including the build out of the Hawk e-commerce platform described above, CMS system and the Vanilla platform that will soon be hosting all the websites (many have already been migrated). This is already facilitating the better leverage of content. Salesforce has also been implemented as the CRM platform, meaning that the group now has IT systems that are both appropriate to its needs and scalable. The importance of the last point is illustrated with the addition of the acquired brands within Blaze, Noble House and Imagine. Web development costs are amortised over two years.

Our model shows capex in the current year at £2.0m (H116 spend was £1.0m) and continuing at a similar level.

The cash element of the exceptional charges has an inbuilt lag against the charges to the income statement, with a longer tail on the redundancy programme and the extrication from onerous leases. This is incorporated into our modelling.

In terms of the working capital position, the picture is obscured by a meaningful benefit from the earlier disposals in the H116 figures, which will not have fully unwound before the year end. Overall, we see the group (prior to the Imagine acquisition) as returning to a net operating cash generative position in the current year, FY16e, with a more pronounced positive cash flow in the following year.

As mentioned above, the group placed 33.4m shares in November 2015 at 10p, raising £3.1m. These additional funds were raised to accelerate the investment programme in the new revenue streams, including e-commerce, events and digital advertising, as well as the acquisition of the Noble House and Blaze assets.

Future closed out FY15 with a modest net debt position of £1.8m, which had moved to a small net cash balance of £0.6m at the end of the half year with the benefit of the placing proceeds. (FY14 ended with a net cash position of £7.5m following the sale of the sport and craft titles.) The group had renegotiated its facilities in May 2015 out to December 2017 for a new multi-currency revolving credit and overdraft facility of £5.5m, with a £2m, two-year accordion. The key covenants relate to net debt/EBITDA (<2x to end FY16e, <1.75x thereafter) and interest cover (>4.5x from March 2016). According to our forecasts (excluding Imagine), the net debt/EBITDA ratios will decline from 0.6x and EBITDA/interest expense ratios will improve from 5.1x in FY16 and beyond.

As part of the Imagine acquisition, Imagine’s £5.3m net debt will be taken on and new committed facilities have been put in place with HSBC for £8.5m of senior debt plus a £5.5m working capital facility.

With the move into an operating cash flow-positive position for the year end in September 2016 and building towards positive net cash beyond the modelled period, Future has comfortable financial resources in place to fund growth at the levels we are forecasting. The Imagine acquisition should accelerate the net operating cash generation.