Edel — Pressing ahead

Edel (DB: EDL)

Last close As at 21/11/2024

5.00

−0.10 (−1.96%)

Market capitalisation

114m

More on this equity

Research: TMT

Edel — Pressing ahead

Edel’s H118 results to March showed good top-line progress (+8%) and an uplift in EBITDA margins from 9.3% to 9.8% as digital activities gained in importance. While revenue was marginally behind expectations, an unchanged full-year forecast assumes a stronger H2 than usual, reflecting the good momentum. The investment programme is starting to pay back, with a full year’s impact in FY19e, when forecast margins have edged up. Edel has changed its status to a partnership limited by shares, reflecting the importance of the founding family’s interests (64% shareholding). The shares trade at a substantial discount to global entertainment content and publishing stocks, partly explained by the limited market liquidity.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Edel

Pressing ahead

Media

Scale research report - Update

4 July 2018

Price

€3.36

Market cap

€76m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt as at March 2018

€59.8m

Business description

Edel is one of Europe’s leading independent media groups. It is both a publisher and a producer. Edel offers the music, film and book industry a unique full-service model, covering marketing and production as well as the distribution of audio content, video content and books.

Bull

Diversity of revenue streams.

Full-service, third-party offering.

Resurgence of vinyl.

Bear

Small free float.

Lack of comparators for valuation.

Spotify dominance in streaming.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Neil Shah

+44 (0)20 3077 5700

Edel’s H118 results to March showed good top-line progress (+8%) and an uplift in EBITDA margins from 9.3% to 9.8% as digital activities gained in importance. While revenue was marginally behind expectations, an unchanged full-year forecast assumes a stronger H2 than usual, reflecting the good momentum. The investment programme is starting to pay back, with a full year’s impact in FY19e, when forecast margins have edged up. Edel has changed its status to a partnership limited by shares, reflecting the importance of the founding family’s interests (64% shareholding). The shares trade at a substantial discount to global entertainment content and publishing stocks, partly explained by the limited market liquidity.

Feet in the digital and physical camps

Industry figures (IFPI) show revenues from streaming having outstripped those from physical music sales globally in 2017 for the first time. The latter, at $5.2bn, were down 5% year-on-year, while the former were up 41% at $6.6bn. While production of CDs and DVDs is obviously in decline, the resurgence of vinyl continues. optimal media (60% group revenues) is a leading partner to the major music groups in global markets. It has been investing in print and print finishing production, and has further plans to increase capacity in vinyl, where it is a leading global player. Kontor New Media (18% of group revenues in H118) has significant expertise in licensing and content management, and is well placed in music streaming, distributing content on platforms such as iTunes, Amazon and Spotify.

Scaling up and improving margins

Edel’s investment case rests on being in a strong position to take advantage of opportunities as a full-service provider to the rapidly shifting music, publishing and film markets. The capital spend across the group has been sizeable – €20.4m in FY17 and a forecast €26.5m in FY18. This is already starting to show through in improving EBITDA margins. FY17’s refinancing has reduced the interest cost, boosting EPS despite a rising tax charge.

Valuation: Discount to content, publishing

We have maintained the same valuation approach as in our previous notes, comparing the rating of the company with the global media subsectors of entertainment content and publishing. Edel’s shares trade at a significant discount on EV/Sales, most likely reflecting the manufacturing contribution. On forward EV/EBITDA, the discount is 29%. On a P/E basis, the multiple is 12.4x vs 19.3x.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

Adjusted EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/16

180.2

6.0

0.15

0.10

22.4

3.0

09/17

198.1

6.8

0.19

0.11

17.7

3.3

09/18e

203.2

8.6

0.27

0.11

12.4

3.3

09/19e

210.4

9.9

0.32

0.14

10.5

4.2

Source: Edel accounts, broker estimates (Montega)

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials

Exhibit 1: Half year to 31 March 2018 vs prior half year

€000s

2018

2017

% change

Year end 30 September

HGB/German GAAP

HGB/German GAAP

Income statement

Revenue

106,104

98,570

+8

EBITDA

10,400

9,148

+14

EBITDA margin (%)

9.8

9.3

Profit before tax (as reported)

5,607

4,617

+21

Net income (as reported)

3,649

3,005

+21

Source: Edel accounts

Revised consensus forecasts are for EBITDA growth of 16.1% in FY18 and 8.0% for the year after, predicated on top-line growth of 2.5%, with 3.5% revenue growth forecast for FY19, showing the efficiency gains from the capital investment programme starting to come through. Progress at the pre-tax level shows the benefits of the new financing arrangement put in place in H117, with H118 interest costs of €0.8m from €1.3m in the comparative period. The revised broker forecast indicates the EBITDA margin rising from 8.1% for FY17 to 9.2% in FY18 (was 8.9%) and to 9.9% for FY19 (up from 9.0%).

The capital investment programme has continued in H118, with a spend of €11.5m (of which €2m was funded by subsidies) on buildings and equipment to increase capacity and capability in vinyl pressing, printing and book-binding. Earlier investrnent has upgraded the distribution and logistics capabilities. Broker forecasts indicate a spend for the full year of €26.5m (FY17: €20.4m), before reverting to a maintenance level of €6m for FY19e and in subsequent years. The planned investment spend at optimal media (60% group revenues) includes nine new presses, which will increase capacity from the current year 25m records to 28m. The investment programme has also allowed expansion at Kontor New Media, which has helped to increase its attraction as a one-stop-shop partner for the major global rights owners.

Net debt at the half-year was €59.8m, with market forecasts indicating that it reaches €69.2m by the year-end, before starting to fall away as operating cash flow continues to improve.

Valuation

Our valuation framework for Edel is unchanged from our previous commentary. Analysis is complicated by the range of the company’s activities, from pressing CDs for third parties through children’s animated TV, to being the market-leading publisher of cookery books, and handling logistics and services for the world’s largest music publishers. Any peer group comparison is therefore inevitably flawed. Given these constraints, rather than picking out a set of inadequate peers, we have looked globally across the key subsectors in which Edel operates, particularly entertainment content and publishing, at key valuation metrics. We have stripped out the unprofitable companies from the EV/EBITDA and P/E calculations, as well as any obvious distortive outliers.

Exhibit 2: Sectoral valuations for related activities

P/E (x)

EV/Sales (x)

EV/EBITDA (x)

Last

FY 1

FY 2

Last

FY 1

FY 2

Last

FY 1

FY 2

Publishing

24.3

21.0

15.8

3.4

3.0

2.6

11.7

9.4

8.3

Broadcast & Entertainment

21.5

17.7

15.5

2.0

1.9

1.8

12.0

9.7

8.8

Edel

17.7

12.4

10.5

0.6

0.6

0.6

7.9

6.8

6.3

Source: Bloomberg, Edison Investment Research. Note: Prices as at 29 June 2018.

It would be expected that the multiple to sales would be lower than the comparator groups due to the large volumes of third-party revenues, which will also distort margin comparisons.

The change in corporate structure, to a partnership limited with shares, increases the influence of the founding Haentjes family as management shifts to the younger generation. This ensures stability but diminishes the potential sway of the minority shareholders.

This will have an impact on the potential valuation. Nevertheless, Edel’s share price looks to be well below the global market on both P/E and EV/EBITDA multiples, partly reflecting its comparatively modest size and limited liquidity. The current rating, on a 36% discount on current year P/E (29% discount on EV/EBITDA), does not reflect the higher rate of earnings growth.

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
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG 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 Ltd (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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Edel

View All

Latest from the TMT sector

View All TMT content

Petro Matad — Low-cost, high-impact onshore oil exploration

Petro Matad offers investors exposure to a fully funded exploration campaign targeting near-field, low-risk prospects as well as basin opening, high-impact potential. The 2018 two-well programme in blocks IV and V will test the yet to be drilled Baatsagaan and Taats basins in the heart of Mongolia, targeting 570mmbo of mid-case prospective resource. In Block XX, close to existing production, two low-cost wells will test extensions of proven plays in H218. In 2019 drilling returns to the Tugrug Basin to test a 200mmbo prospect, close to live oil shows and mapped on 3D seismic, as well as a 48mmbo target on Block XX analogous to producing fields to the north east. Attractive fiscal terms and the scalability of developments enable relatively small oil discoveries to be commercialised in the current oil price environment. Our risked valuation post assumed farm-out value dilution is 30.8p/share at 70$/bbl Brent long term. Valuation remains highly sensitive to oil price assumptions and exploration outcomes.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free