Technicolor — Portfolio focus

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Research: TMT

Technicolor — Portfolio focus

Technicolor has announced the disposal of the post-production house of Production Services for €30m, for completion in H121. This leaves the segment focused on VFX (visual special effects) and animation, where growth and margin prospects are higher. FY21 has a good project pipeline, with around two-thirds of the year’s expected film and episodic VFX sales in place. No group level update was given, although Connected Home recently passed the milestone of shipping 20m DOCSIS 3.1 boxes. We have made a precautionary trim of 3% to our FY21e revenue to reflect the continuing COVID impact, reducing EBITA by €7m to €97m. CEO Richard Moat purchased €1.1m of shares in December, as agreed at the restructure.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Technicolor

Portfolio focus

Intended disposal

Media

21 January 2021

Price

€1.92

Market cap

€453m

Net debt (€m) at end September 2020, IFRS

955

Shares in issue

235.8m

Free float

100%

Code

TCH

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.8

62.7

(89.4)

Rel (local)

3.6

42.4

(88.7)

52-week high/low

€18.50

€1.16

Business description

Technicolor is a worldwide technology leader operating in the media and entertainment industry. Its activities fall into three business segments: Production Services, DVD Services and Connected Home.

Next events

FY20 results

11 March 2021

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Dan Gardiner

+44 (0)20 3077 5700

Technicolor is a research client of Edison Investment Research Limited

Technicolor has announced the disposal of the post-production house of Production Services for €30m, for completion in H121. This leaves the segment focused on VFX (visual special effects) and animation, where growth and margin prospects are higher. FY21 has a good project pipeline, with around two-thirds of the year’s expected film and episodic VFX sales in place. No group level update was given, although Connected Home recently passed the milestone of shipping 20m DOCSIS 3.1 boxes. We have made a precautionary trim of 3% to our FY21e revenue to reflect the continuing COVID impact, reducing EBITA by €7m to €97m. CEO Richard Moat purchased €1.1m of shares in December, as agreed at the restructure.

Year end

Revenue (€m)

EBITDA
(€m)

EBITA
(
m)

PBT*
(€m)

EPS*
(€)

EV/EBITDA
(x)

12/18

3,988

266

98

7

(3.07)

5.3

12/19

3,800

325

42

(73)

(4.92)

4.3

12/20e

3,100

169

(64)

10

(0.08)

8.3

12/21e

3,350

329

97

(28)

(0.21)

4.3

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

Growing production pipeline

While the scale of the post-production operation in revenue and profit terms is not disclosed, this area is fairly commoditised and competitive. Technicolor is keen to put its resource (financial and people) into the higher growth and higher potential margin areas of VFX and animation. The group’s expertise in CGI crosses both these areas, with applications beyond film and episodic TV through advertising, gaming and live events. Management confirms that Production Services is slated to work in FY21 on Disney’s live action remakes of The Little Mermaid and Pinocchio and the prequel to The Lion King. In animation, Technicolor’s in-house pre-school property, Gus – The Itsy Bitsy Knight, is scheduled for broadcast globally in FY21, with an initial run of 52x11-minute episodes. It has been licensed to Mattel to produce Fischer-Price toys.

DOCSIS 3.1 gains further ground

Connected Home will dominate the FY20 figures (62% of our modelled revenue, with Production Services at 14% and DVD Services at 23%), given the impact of COVID-19 on film and TV production. The requirement for reliable broadband in the home, from home-working, streaming and gaming, continues to stimulate demand for the group’s DOCSIS 3.1 gateways (see our July Outlook note). This trend should continue through FY21 with upgrades to WiFi-6. Demand from South and Central America is likely to remain fairly subdued however, as a result of both the continuing pandemic and the weak currencies rendering imports more expensive.

Valuation: Steady build from lows

The share price bottomed out at €1.16 in late of September, with completion of the financial reconstruction. It has since climbed 63%, increasingly reflecting improving underlying trading prospects, albeit that the equity remains dominated by the value of the debt. The significant investment by the CEO underlines management’s confidence in the prospects.

Exhibit 1: Financial summary

€m

2018

2019

2020e

2021e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

3,988

3,800

3,100

3,350

Cost of Sales

(3,521)

(3,375)

(2,841)

(2,941)

Gross Profit

467

425

259

409

EBITDA

 

 

266

325

169

329

EBITA

 

 

98

42

(64)

97

Amortisation of acquired intangibles

(81)

(54)

(59)

(59)

Exceptionals

(127)

(79)

(145)

(20)

Reported operating profit

(119)

(121)

(268)

18

Net Interest

(51)

(84)

(90)

(125)

Joint ventures & associates (post tax)

0

(1)

0

0

Exceptionals

0

0

164

0

Profit Before Tax (norm)

 

 

7

(73)

10

(28)

Profit Before Tax (reported)

 

 

(170)

(206)

(194)

(107)

Reported tax

(54)

(3)

(20)

(20)

Profit After Tax (norm)

(47)

(75)

(10)

(48)

Profit After Tax (reported)

(224)

(208)

(214)

(127)

Minority interests

(1)

0

0

0

Discontinued operations

157

(22)

(20)

0

Net income (normalised)

(48)

(75)

(10)

(48)

Net income (reported)

(68)

(230)

(234)

(127)

Average Number of Shares Outstanding (m)

15

15

120

230

EPS - normalised (c)

 

 

(306.94)

(492.18)

(8.41)

(20.73)

EPS - normalised fully diluted (c)

 

 

(306.94)

(492.18)

(7.33)

(19.25)

Dividend per share (c)

0.00

0.00

0.00

0.00

Revenue growth (%)

(6)

(5)

(18)

8

Gross Margin (%)

11.7

11.2

8.4

12.2

EBITDA Margin (%)

6.7

8.6

5.4

9.8

EBITA Margin (%)

2.5

1.1

(2.1)

2.9

BALANCE SHEET

Fixed Assets

 

 

2,101

2,082

1,761

1,625

Intangible Assets

1,591

1,483

1,274

1,140

Tangible Assets

233

476

364

362

Investments & other

26

40

40

40

Deferred tax and other

251

84

84

84

Current Assets

 

 

1,659

1,126

1,365

1,439

Stocks

268

243

208

225

Debtors

677

507

558

573

Cash & cash equivalents

291

64

286

329

Other

423

312

312

312

Current Liabilities

 

 

(1,909)

(1,542)

(1,343)

(1,344)

Creditors

(1,135)

(825)

(694)

(695)

Tax and social security

(34)

(41)

(41)

(41)

Short term borrowings

(20)

(95)

(81)

(81)

Other

(720)

(581)

(527)

(527)

Long Term Liabilities

 

 

(1,385)

(1,604)

(1,532)

(1,578)

Long term borrowings

(1,004)

(1,203)

(1,131)

(1,177)

Deferred tax

(193)

(27)

(27)

(27)

Other long-term liabilities

(381)

(401)

(401)

(401)

Net Assets

 

 

466

62

251

142

Minority interests

1

0

0

0

Shareholders' equity

 

 

467

62

251

142

CASH FLOW

Net profit

(224)

(208)

(214)

(127)

Depreciation and amortisation

234

322

292

281

Working capital

2

(69)

(202)

(30)

Tax and interest

(53)

(76)

(90)

(81)

Exceptional & other

159

101

21

145

Operating cash flow

 

 

118

70

(193)

188

Capex

(113)

(169)

(110)

(145)

Acquisitions/disposals

1

(2)

0

0

Equity financing

0

1

60

0

Dividends

0

0

0

0

Other

28

3

(40)

0

Net Cash Flow

34

(97)

(283)

43

Opening net debt/(cash)

 

 

778

733

1,234

926

FX

1

(10)

0

Discontinued

105

(35)

(20)

0

Other non-cash movements

(95)

(369)

621

(46)

Closing net debt/(cash)

 

 

733

1,234

926

929

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Technicolor and prepared and issued by Edison, in consideration of a fee payable by Technicolor. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

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1185 Avenue of the Americas

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United States of America

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Technicolor and prepared and issued by Edison, in consideration of a fee payable by Technicolor. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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