7digital Group — FY18 profitability on track

7digital Group — FY18 profitability on track

7digital Group’s FY17 trading update shows that while revenues were short of our forecasts, at the EBITDA level it is well ahead of our expectations, with the group’s restructuring programme delivering ahead of plan. We update our FY17 numbers and incorporate the recent fund-raise, but otherwise leave our forecasts unchanged.

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Written by

7digital Group

FY18 profitability on track

Placing

Media

9 February 2018

Price

4.88p

Market cap

£19m

Net debt (£m) at end June 2017
(pre fund-raise of c £8.0m net)

0.5

Shares in issue

399m

Free float

84%

Code

7DIG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.8)

(17.0)

(33.3)

Rel (local)

2.2

(12.9)

(33.7)

52-week high/low

8.5p

4.6p

Business description

7digital Group provides an end-to-end, white-label digital music platform and access to global music rights that enable its clients, which include businesses in the radio, electronics, social media and telecoms industries around the world, to offer music streaming and download services to their own customers. Its global customer base includes musical.ly, Onkyo, Panasonic, MediaMarktSaturn, Cdiscount, Electric Jukebox, eMusic and i.am +.

Next events

FY17 results

April 2018

Analysts

Bridie Barrett

+44 (0)20 3077 5700

Fiona Orford-Williams

+44 (0)20 3077 5739

7digital Group is a research client of Edison Investment Research Limited

7digital Group’s FY17 trading update shows that while revenues were short of our forecasts, at the EBITDA level it is well ahead of our expectations, with the group’s restructuring programme delivering ahead of plan. We update our FY17 numbers and incorporate the recent fund-raise, but otherwise leave our forecasts unchanged.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/EBITDA
(x)

P/E
(x)

12/16

11.9

(3.5)

(4.7)

(4.1)

0.0

N/A

N/A

12/17e

17.3

(1.0)

(2.1)

(1.3)

0.0

N/A

N/A

12/18e

24.9

3.0

2.1

0.5

0.0

4.0

9.1

12/19e

27.6

4.6

3.8

0.8

0.0

2.5

5.7

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

Trading update; FY18 profitability on track

FY17 revenues are £17.3m, up 52% y-o-y, and H217 increased by 91% on H117 owing to the 24-7 acquisition and the additional work contracted for MediaMarktSaturn (MMS). Importantly, the operational restructuring of the group is on track and EBITDA will be considerably better than consensus (we had negative £1.7m), putting 7digital on track to bring the group to profitability in 2018.

Forecast changes: Update for placing

Revenues are £1.8m below our FY17 forecast of £19.1m. £1.3m of this miss relates to the £6.5m of contracted revenues from MMS for the transition of its platform to 7digital’s. This work has been substantially completed; however, as the platform does not go live until Q118, part of this will be recognised in FY18. At the EBITDA level the group is significantly ahead, suggesting it was profitable in the second half of the year. We update FY17 forecasts for the trading statement, but make no changes at the revenue and EBITDA levels in 2018 and continue to forecast cash flow break-even from H218. As indicated in our December note, the £8.5m fund-raise results in significant dilution at the EPS level, and we reduce FY18 and FY19 forecasts by 55%.

Valuation: 2018 pivotal year

7digital starts 2018 on a much stronger financial footing; the £8.5m raise, while dilutive, strengthens its balance sheet and the 24-7 acquisition last year provides the platform for profitable growth. We expect the deals announced over the course of 2017 to start to convert to revenues during 2018 as services are launched which, together with the restructuring, provides the basis for our forecast profitability in 2018. Almost half the current market cap reflects the value of the cash raised, suggesting the platform and customer and industry relationships are valued at c £12m. Adjusting net debt at end June 2017 for the fund-raise implies an FY18e EV/EBITDA of c 4.0x. We believe this is an attractive valuation for a group well positioned in the rapidly evolving market for music streaming services.

Summary forecast changes

The table below summarises our forecast changes, with full forecasts presented in Exhibit 2.

Exhibit 1: Summary forecast changes

FY17e

FY18e

FY19e

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Revenues

19,110

17,300

(9.5)

24,856

24,856

N/A

27,587

27,587

N/A

EBITDA

(1,747)

(1,000)

42.8

2,965

2,965

N/A

4,646

4,646

N/A

Normalised operating profit

(2,875)

(2,128)

26.0

2,145

2,145

N/A

3,762

3,762

N/A

Reported operating profit

(4,267)

(3,520)

17.5

493

493

N/A

3,762

3,762

N/A

Normalised PBT

(2,875)

(2,128)

26.0

2,145

2,145

N/A

3,762

3,762

N/A

Reported PBT

(4,267)

(3,520)

17.5

493

493

N/A

3,762

3,762

N/A

Normalised net income

(2,875)

(2,128)

26.0

2,145

2,145

N/A

3,386

3,386

N/A

Reported net income

(4,267)

(3,520)

17.5

493

493

N/A

3,386

3,386

N/A

Normalised basic EPS

(1.8)

(1.3)

(29.9)

1.2

0.5

(55.2)

1.9

0.8

(55.3)

Normalised diluted EPS

(1.8)

(1.3)

(29.9)

1.2

0.5

(55.2)

1.9

0.8

(55.3)

Net debt/(cash)

896

(7,577)

N/A

1,617

(7,136)

N/A

(414)

(9,167)

2114.2

Source: Edison Investment Research

Exhibit 2: Financial summary

£'000s

2014

2015

2016

2017e

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

10,212

10,392

11,899

17,300

24,856

27,587

Cost of Sales

(4,882)

(3,308)

(3,451)

(2,451)

(4,853)

(5,100)

Gross Profit

5,330

7,084

8,448

14,849

20,003

22,487

EBITDA

 

 

(3,108)

(2,102)

(3,528)

(1,000)

2,965

4,646

Normalised operating profit

 

 

(3,775)

(2,862)

(4,684)

(2,128)

2,145

3,762

Amortisation of acquired intangibles

0

0

(321)

(552)

(552)

0

Exceptionals

(388)

(128)

(464)

(840)

(1,100)

0

Share-based payments

(340)

(137)

4

0

0

0

Reported operating profit

(4,503)

(3,127)

(5,465)

(3,520)

493

3,762

Net Interest

3

11

(13)

0

0

0

Joint ventures & associates (post tax)

0

0

0

0

0

0

Exceptionals

1,888

(4,767)

0

0

0

0

Profit Before Tax (norm)

 

 

(1,884)

(7,618)

(4,697)

(2,128)

2,145

3,762

Profit Before Tax (reported)

 

 

(2,612)

(7,883)

(5,478)

(3,520)

493

3,762

Reported tax

(17)

(3)

(12)

0

0

(376)

Profit After Tax (norm)

(1,901)

(7,621)

(4,709)

(2,128)

2,145

3,386

Profit After Tax (reported)

(2,629)

(7,886)

(5,490)

(3,520)

493

3,386

Minority interests

0

0

0

0

0

0

Discontinued operations

3,004

0

0

0

0

0

Net income (normalised)

(1,901)

(7,621)

(4,709)

(2,128)

2,145

3,386

Net income (reported)

375

(7,886)

(5,490)

(3,520)

493

3,386

Basic average number of shares outstanding (m)

87

108

114

169

399

399

EPS - basic normalised (p)

 

 

(2.2)

(7.1)

(4.1)

(1.3)

0.5

0.8

EPS - diluted normalised (p)

 

 

(2.2)

(7.1)

(4.1)

(1.3)

0.5

0.8

EPS - basic reported (p)

 

 

0.4

(7.3)

(4.8)

(2.1)

0.1

0.8

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

1.8

14.5

45.4

43.7

11.0

Gross Margin (%)

52.2

68.2

71.0

85.8

80.5

81.5

EBITDA Margin (%)

N/A

N/A

N/A

N/A

11.9

16.8

Normalised Operating Margin

N/A

N/A

N/A

N/A

8.6

13.6

BALANCE SHEET

Fixed Assets

 

 

7,661

1,121

2,778

3,508

2,836

2,673

Intangible Assets

345

417

2,303

3,013

2,541

2,548

Tangible Assets

691

704

475

495

295

125

Investments & other

6,625

0

0

0

0

0

Current Assets

 

 

8,451

6,220

4,590

13,354

14,590

17,110

Stocks

44

62

177

177

177

177

Debtors

3,095

4,502

3,575

4,266

6,129

6,802

Cash & cash equivalents

5,312

1,656

838

8,911

8,285

10,131

Other

0

0

0

0

0

0

Current Liabilities

 

 

(4,984)

(3,975)

(7,193)

(7,942)

(8,198)

(7,354)

Creditors

(4,796)

(3,804)

(6,731)

(7,480)

(7,736)

(6,892)

Tax and social security

0

0

0

0

0

0

Short term borrowings

0

0

0

0

0

0

Other

(188)

(171)

(462)

(462)

(462)

(462)

Long Term Liabilities

 

 

0

0

(1,746)

(1,561)

(1,376)

(1,191)

Long term borrowings

0

0

(1,519)

(1,334)

(1,149)

(964)

Other long term liabilities

0

0

(227)

(227)

(227)

(227)

Net Assets

 

 

11,128

3,366

(1,571)

7,359

7,852

11,238

Minority interests

0

0

0

0

0

0

Shareholders' equity

 

 

11,128

3,366

(1,571)

7,359

7,852

11,238

CASH FLOW

Op Cash Flow before WC and tax

(3,108)

(2,102)

(3,528)

(1,000)

2,965

4,646

Working capital

(2,788)

(2,439)

4,098

58

(1,606)

(1,518)

Exceptional & other

(391)

(150)

(1,024)

(840)

(1,100)

0

Tax

(17)

(3)

(12)

0

0

(376)

Net operating cash flow

 

 

(6,304)

(4,694)

(466)

(1,782)

259

2,751

Capex

(345)

(848)

(447)

(800)

(700)

(720)

Acquisitions/disposals

3,718

1,828

108

0

0

0

Net interest

2

11

(13)

0

0

0

Equity financing

6,952

0

0

10,840

0

0

Dividends

0

0

0

0

0

0

Other

(1)

0

0

0

0

0

Net Cash Flow

4,022

(3,703)

(818)

8,258

(441)

2,031

Opening net debt/(cash)

 

 

(1,290)

(5,312)

(1,656)

681

(7,577)

(7,136)

FX

0

48

0

0

0

0

Other non-cash movements

0

0

(1,519)

0

0

0

Closing net debt/(cash)

 

 

(5,312)

(1,656)

681

(7,577)

(7,136)

(9,167)

Source: 7digital (historicals), Edison Investment Research (forecasts)

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 7digital Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

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New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

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Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 7digital Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

4SC — Steady R&D newsflow

Over the past several months 4SC has reported progress with both its clinical-stage assets – resminostat and 4SC-202. The pivotal trial with resminostat as a maintenance therapy in advanced CTCL passed the first DSMB review and is on track to report data in H119. The Phase Ib/II study with 4SC-202 for melanoma has been initiated, while another Phase II study with 4SC-202 for GI cancer should start in Q118. 4SC-208 completes the core portfolio and is expected to enter the clinic in early 2019. Our valuation is largely unchanged at €347m or €11.3/share (€344m previously).

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