Quarto Group Inc. (The) — Update 31 January 2017

Quarto Group Inc. (The) — Update 31 January 2017

Quarto Group Inc. (The)

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

The Quarto Group

Publishing performance in line

Year-end trading update

Media

31 January 2017

Price

317.5p

Market cap

£65m

£1:$1.25

Net debt ($m) at 31 December 2016

62.2

Shares in issue

20.4m

Free float

75.0%

Code

QRT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.3

9.5

46.0

Rel (local)

5.5

7.4

26.0

52-week high/low

322.5p

217.5p

Business description

The Quarto Group is the leading global illustrated-book publisher and distribution group. It sells books across 45 countries and in 35 languages. Founded in 1976, Quarto employs over 400 people.

Next events

Prelims

22 March 2017

AGM

16 May 2017

Interim results

8 August 2017

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

Quarto Group is a research client of Edison Investment Research Limited

Quarto’s year-end update indicates that the publishing operations have delivered the performance as expected, despite challenges in the UK retail market and the tailing off of the colouring book trend. 2016’s acquisitions have done notably well and our forecasts are unchanged. A buyer has been found for Australian/New Zealand distributor, Books and Gifts Direct (BGD), which will allow greater focus on opportunities for the core publishing business. Net debt of $62.2m was ahead of end FY15 due to working capital timing and weaker trading at BGD. Quarto has an attractive yield and continues to trade at an overlarge discount to peers.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

171.3

11.9

44.1

13.7

9.0

3.5

12/15

182.2

14.1

49.5

14.5

8.0

3.7

12/16e

195.0

15.5

52.3

15.3

7.6

3.9

12/17e

212.5

17.1

57.4

15.8

6.9

4.0

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

Focus on publishing; Value in IP

The intended disposal of BGD removes a drag on financial performance and on management time. Completion should be before preliminary results on 22 March 2017 and its figures classed as discontinued business. The indicated price of A$5.75m (being A$1.0m in cash and $4.75m in interest-bearing loan notes) implies a write-down of c $11.0m. BGD accounted for 12% of FY15 group revenues and 13% of group EBITDA, with profits second-half weighted. The update contains a reference to a revised methodology for recognising the (long) useful lives of the backlist titles. This should more accurately reflect the underlying value of the IP contained within the group but not currently recognised on the balance sheet. We have historically estimated this ‘missing’ value through trade transaction values per backlist title and welcome the formalisation.

Debt reduction temporarily slowed

Working capital swings relate to retailer payments over the Christmas period, along with the mix effect of a greater proportion of revenues generated from publishing rather than co-edition publishing (where a proportion of cash is received in advance). With weak trading at BGD, the FY16 balance sheet shows net debt higher than the prior year. Edison’s $69.1m end-FY16e net debt includes $7.5m of outstanding loan notes from August 2016’s becker&mayer acquisition. Quarto’s indicated figure of $62.2m is equivalent to our $61.6m. The underlying trend remains in the right direction, signalled by the intention to raise the final dividend.

Valuation: Overlarge discount

Quarto’s share price has performed well over the last year, gaining over 30%, as the market has started to recognise the underlying value of the business and its IP. However, its 2017e P/E is still just 6.9x (EV/EBITDA 6.5x) and it carries a premium yield of 4.0% on our assumed payout. This fails to reflect its earnings and dividend progression, underlying trend of debt reduction and valuable backlist. Other smaller publishing companies currently trade on a 12.5x FY17e P/E.

Exhibit 1: Financial summary

Year end 31 December

 

US$'000s

2014

2015

2016e

2017e

Accounting basis

 

 

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Revenue

 

 

171,338

182,165

195,000

212,477

Cost of sales

(116,325)

(122,803)

(131,430)

(143,210)

Gross profit

 

 

55,013

59,362

63,570

69,268

EBITDA

 

 

17,025

18,395

19,674

21,204

Operating profit (before GW and except)

 

46,852

50,464

54,072

58,791

Amortisation of intangibles

 

 

(503)

(724)

(924)

(924)

Exceptionals

 

 

566

(445)

(200)

0

Amortisation of pre-production costs

 

 

(30,933)

(33,258)

(35,588)

(38,777)

Operating profit

 

 

15,982

16,037

17,360

19,090

Net interest

 

 

(3,977)

(3,098)

(3,008)

(2,904)

Profit before tax (norm)

 

 

11,942

14,108

15,476

17,110

Profit before tax IFRS

 

 

12,005

12,939

14,352

16,186

Tax

 

 

(2,922)

(3,685)

(4,055)

(4,620)

Adjustment to tax for normalised earnings

 

 

(16)

(645)

(231)

(236)

Minority charge

 

 

(310)

(388)

(375)

(388)

Profit after tax (norm.)

 

 

8,696

9,778

10,815

11,866

Profit after tax (FRS3)

 

 

8,773

8,866

9,922

11,178

 

 

 

 

 

 

 

Average number of shares outstanding (m)

 

 

19.7

19.7

20.7

20.7

EPS - normalised fully diluted (c)

 

 

44.1

49.5

52.3

57.4

EPS - IFRS (c)

 

 

44.5

45.0

50.4

56.8

Dividend per share (c)

13.7

14.5

15.3

15.8

 

 

 

 

 

 

 

EBITDA margin (%)

 

 

10%

10%

10%

10%

Operating margin (before GW and except) (%)

 

27%

28%

28%

28%

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

Fixed assets

 

 

102,416

104,433

124,948

124,774

Intangible assets

 

 

42,025

41,622

61,448

61,274

Tangible assets

 

 

2,857

3,368

4,500

4,500

Investment in associates

 

 

57,534

59,443

59,000

59,000

Current assets

 

 

99,702

108,369

108,180

124,173

Intangible assets: pre-publication costs

 

 

0

0

0

0

Stocks

 

 

24,851

26,147

27,989

30,498

Debtors

 

 

51,741

57,163

61,191

66,675

Cash

 

 

23,110

25,059

19,000

27,000

Current liabilities

 

 

(144,919)

(70,635)

(81,300)

(101,602)

Creditors

 

 

(55,769)

(65,635)

(70,935)

(78,036)

Short-term borrowings

 

 

(89,150)

(5,000)

(10,365)

(23,566)

Long-term liabilities

 

 

(6,875)

(87,127)

(82,847)

(70,100)

Long-term borrowings

 

 

0

(79,562)

(77,747)

(65,000)

Other long-term liabilities

 

 

(6,875)

(7,565)

(5,100)

(5,100)

Net assets

 

 

50,324

55,040

68,981

77,245

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

Operating cash flow

 

 

47,529

52,941

47,530

53,800

Net interest

 

 

(3,310)

(2,749)

(3,176)

(3,072)

Tax

 

 

(759)

(1,981)

(3,777)

(4,196)

Capex

 

 

(33,018)

(36,882)

(36,000)

(36,000)

Acquisitions/disposals

 

 

(2,008)

(1,614)

(11,329)

0

Financing

 

 

0

0

0

0

Dividends

 

 

(2,739)

(2,346)

(2,857)

(3,004)

Other

 

 

0

0

0

19

Net cash flow

 

 

5,695

7,369

(9,609)

7,546

Opening net debt/(cash)

 

 

71,015

66,040

59,503

69,112

HP finance leases initiated

 

 

0

0

0

0

Loans acquired with acquisitions

 

 

0

0

0

0

Translation differences

 

 

(720)

(832)

0

0

Closing net debt/(cash)

 

 

66,040

59,503

69,112

61,566

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Quarto 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Quarto 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Research: Investment Companies

Deutsche Beteiligungs — Update 31 January 2017

Deutsche Beteiligungs

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