Quarto Group — Update 25 May 2016

Quarto Group — Update 25 May 2016

Quarto Group

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

Quarto Group

Strong start to FY16

AGM trading update

Media

25 May 2016

Price

232.5p

Market cap

£46m

£1:$1.45

Net debt ($m) at end March 2016

67.6

Shares in issue

19.7m

Free float

75.2%

Code

QRT

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.1)

(3.7)

19.2

Rel (local)

(4.2)

(9.2)

33.1

52-week high/low

267.5p

186.5p

Business description

The Quarto Group is the leading global illustrated book publisher and distribution group.

Next event

Interim results

August 16

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Jane Anscombe

+44 (0)20 3077 5740

Bridie Barrett

+44 (0)20 3077 5700

Quarto Group is a research client of Edison Investment Research Limited

Quarto has had a good start to 2016 with the momentum from FY15 carrying into the first quarter, normally the quietest period of the year. The natural seasonality gives a revenue bias to H2, which management has said will be greater this year, and our full year forecasts are unchanged. Further meaningful progress has been made on debt reduction, consistent with our year-end forecast of $53.5m, achieved without compromise on investment in IP, the lifeblood of the business. The rating continues to trade at a substantial discount to other smaller publishing stocks.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

171.3

11.9

44.1

13.7

7.6

4.1

12/15

182.2

14.1

49.5

14.5

6.8

4.3

12/16e

187.0

15.0

53.1

15.3

6.3

4.5

12/17e

192.5

15.8

55.4

15.8

6.1

4.7

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

Second-half weighting

The three publishing divisions generate 80% of group revenues, now weighted c one-third: two-thirds between the half-years, with operating profits even more heavily skewed to the second half. The strong Q116 reported at the AGM, with revenues 17% ahead of prior year, is attributed to the momentum from Q415. Quarto has been producing art instruction books for some time and has benefited from the recent popularity of adult colouring books, particularly in the US. There has been some discrepancy of views in the publishing sector on the VAT treatment of these titles in the UK, but Quarto has been charging the full 20% rate since seeking guidance in 2015.

Seeking opportunities

Quarto continues to build on its core model, through acquisition and internal initiatives. The 2015 Ivy Press acquisition (see our March note) shows there are good, monetisable, niche opportunities available. At April’s London Book Fair, Quarto announced a JV with Kalimat Group for an Arabic imprint, initially in non-fiction but to extend to children’s books. It has also established Quarto Innovation, an initiative designed to leverage the group’s IP, be it content, brands or expertise, across channels beyond the traditional co-edition and publishing activities.

Valuation: Discount persists

November’s institutional placing cemented Quarto’s market rehabilitation, and the board structure is now also forward-looking, with a new chairman – Peter Read (former chairman of KPMG’s TMT practice) – and additional non-executive director. Debt reduction and strong acquisition performance both reduce earlier potential areas of concern. The possibility of equity issuance to fund purchases may, though, limit full closure of the discount to other smaller publishing companies, trading on an 11.4x FY16e P/E vs 6.3x for Quarto.

Exhibit 1: Financial summary

Year end 31 December

 

US$000s

2014

2015

2016e

2017e

Accounting basis

 

 

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

Revenue

 

 

171,339

182,165

187,000

192,477

Cost of sales

(116,326)

(122,803)

(126,038)

(129,730)

Gross profit

 

 

55,013

59,362

60,962

62,748

EBITDA

 

 

17,025

18,395

19,174

19,704

Operating profit (before GW and except)

 

15,919

17,206

17,984

18,514

Amortisation of intangibles

 

 

(503)

(724)

(724)

(724)

Exceptionals

 

 

566

(445)

0

0

Amortisation of pre-production costs

 

 

(30,933)

(33,258)

(34,128)

(35,127)

Operating profit

 

 

(14,951)

(17,221)

(16,867)

(17,337)

Net interest

 

 

(3,977)

(3,098)

(2,984)

(2,714)

Profit before tax (norm)

 

 

11,942

14,108

15,000

15,800

Profit before tax IFRS

 

 

12,005

12,939

14,276

15,076

Tax

 

 

(2,922)

(3,685)

(4,150)

(4,480)

Adjustment to tax for normalised earnings

 

 

(16)

(645)

0

0

Minority charge

 

 

(310)

(388)

(375)

(388)

Profit after tax (norm.)

 

 

8,696

9,778

10,475

10,932

Profit after tax (FRS3)

 

 

8,773

8,866

9,751

10,208

 

 

 

 

 

 

 

Average number of shares outstanding (m)

 

 

19.7

19.7

19.7

19.7

EPS - normalised fully diluted (c)

 

 

44.1

49.5

53.1

55.4

EPS - IFRS (c)

 

 

44.5

45.0

49.5

51.8

Dividend per share (c)

13.7

14.5

15.3

15.8

 

 

 

 

 

 

 

EBITDA margin (%)

 

 

10%

10%

10%

10%

Operating margin (before GW and except) (%)

 

9%

9%

10%

10%

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

Fixed assets

 

 

102,416

104,433

105,148

105,174

Intangible assets

 

 

42,025

41,622

41,648

41,674

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

110,521

115,026

Intangible assets: pre-publication costs

 

 

0

0

0

0

Stocks

 

 

24,851

26,147

26,841

27,627

Debtors

 

 

51,741

57,163

58,680

60,399

Cash

 

 

23,110

25,059

25,000

27,000

Current liabilities

 

 

(144,919)

(70,635)

(73,534)

(78,699)

Creditors

 

 

(55,769)

(65,635)

(68,025)

(70,690)

Short-term borrowings

 

 

(89,150)

(5,000)

(5,509)

(8,009)

Long-term liabilities

 

 

(6,875)

(87,127)

(78,100)

(70,100)

Long-term borrowings

 

 

0

(79,562)

(73,000)

(65,000)

Other long-term liabilities

 

 

(6,875)

(7,565)

(5,100)

(5,100)

Net assets

 

 

50,324

55,040

64,036

71,401

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

Operating cash flow

 

 

47,529

52,941

53,430

53,600

Net interest

 

 

(3,310)

(2,749)

(3,152)

(2,882)

Tax

 

 

(759)

(1,981)

(3,801)

(4,233)

Capex

 

 

(33,018)

(36,882)

(36,000)

(36,000)

Acquisitions/disposals

 

 

(2,008)

(1,614)

(1,626)

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

5,994

7,500

Opening net debt/(cash)

 

 

71,015

66,040

59,503

53,509

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

53,509

46,009

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, Sydney and Wellington. 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 2016 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 2016. “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

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Metals & Mining

Silver Wheaton — Update 25 May 2016

Silver Wheaton

Continue Reading

Subscribe to Edison

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

Sign up for free