Technicolor — Tracking for FY22 guidance

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Technicolor — Tracking for FY22 guidance

Technicolor’s FY20 results show it is on track to meet FY22 guidance, now adjusted for forex and the disposal of the post-production business. FY21 trading prospects are improved, with 75% of Production Services’ pipeline in place. Strong domestic broadband demand continues to buoy Connected Home, although the FY21 result may be dampened by delays from semiconductor shortages. Our forecasts align with guidance, which is for a marked margin uplift as revenues rebuild and the cost saving programme benefits kick in. FY20’s financial restructuring, coupled with the anticipated business improvements, should support cash flow generation and may act as a catalyst for an equity re-rating.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Technicolor

Tracking for FY22 guidance

Final results

Media

16 March 2021

Price

€2.40

Market cap

€566m

US$1.20/€

Net debt (IFRS, including leases) at end December 2020 (€m)

812

Shares in issue

235.8m

Free float

100%

Code

TCH

Primary exchange

Euronext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.5

45.8

(54.7)

Rel (local)

10.4

34.2

(69.0)

52-week high/low

€6.45

€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

Q1 trading update

11 May 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’s FY20 results show it is on track to meet FY22 guidance, now adjusted for forex and the disposal of the post-production business. FY21 trading prospects are improved, with 75% of Production Services’ pipeline in place. Strong domestic broadband demand continues to buoy Connected Home, although the FY21 result may be dampened by delays from semiconductor shortages. Our forecasts align with guidance, which is for a marked margin uplift as revenues rebuild and the cost saving programme benefits kick in. FY20’s financial restructuring, coupled with the anticipated business improvements, should support cash flow generation and may act as a catalyst for an equity re-rating.

Year end

Revenue (€m)

EBITDA
(€m)

EBITA
(
m)

PBT*
(€m)

EPS*
(€)

EV/EBITDA
(x)

12/19

3,800

325

42

(73)

(4.92)

4.7

12/20

3,006

167

(56)

(43)

(0.38)

9.1

12/21e

2,933

270

60

(3)

(0.03)

5.6

12/22e

3,255

385

180

117

0.46

4.0

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

Routes to improving profitability

FY20 trading was as expected, with the strength of the Connected Home business boosted by high levels of demand for reliable home broadband and Wi-Fi, particularly in North America. Margins are beginning to show the benefits of earlier cost cutting and we expect this effect to be more pronounced in FY21. The knock-on effects of semiconductor shortages may lead to disruption in H121, but strong relationships with both suppliers and customers should help mitigate the impact. Production Services was heavily affected in FY20 by the extensive lockdowns putting paid to live action shoots. Better prospects here are underwritten by a strong pipeline in film and episodic special effects (VFX), as well as an increased focus on animation and gaming, which is a particularly promising market. DVD Services margin progress is predicated on new contracts and cost optimisation.

Adjustments for disposal, currency

Management guidance for FY21 and FY22 has been adjusted to take account of the disposal of the post-production business and revised forex assumptions. For FY21, this reduces adjusted EBITDA by €18m to €270m and adjusted EBITA by €28m to €60m. For FY22, adjusted EBITDA lowers €40m to €385m and adjusted EBITA by €23m to €180m. By FY22, management expects €325m run rate cost saving, €25m more than earlier indications. Free cash flow, before interest and tax, is now expected at around break-even for the current year (negative in H121, positive in H221, in the normal trading pattern) and c €230m for FY22 (128% expected EBITA).

Valuation: Confidence building

Since the completion of the financial restructuring in September 2020, the shares have risen from €1.16. The valuation is now starting to reflect the improving underlying trading, albeit that the equity remains dominated by the value of the debt (although no longer dwarfed). As confidence grows that guidance on profitability and cash generation can be achieved, we expect the rating to improve further.

Successful navigation of turbulent FY20

FY20 was a crucial year for Technicolor and the successful conclusion of the financial restructuring has given it the future not necessarily previously assured. As well as having to navigate the complexities of the balance sheet reconstruction, and the implementation of the cost reduction programmes, management has also had to deal with the impacts on the operation of the business of the COVID-19 pandemic. These were particularly severe for the Production Services segment as the film and TV industry shuttered productions. Overall group FY20 revenues were 21% behind the prior year at €3,006m from €3,800m in FY19, with adjusted EBITDA down 48% at €167m. The most severe impact was in the Production Services operation, where live action filming was suspended for most of the year. The segmental performances are discussed below.

Exhibit 1: Segmental progress

€m

2019

2020

2021e

2022e

Revenue

Production Services

893

513

503

854

DVD Services

882

706

618

588

Connected Home

1,983

1,764

1,789

1,789

Corporate & other

43

23

24

24

Total

3,800

3,006

2,933

3,255

EBITDA

Production Services

164

18

107

215

DVD Services

81

54

65

63

Connected Home

79

110

106

106

Corporate & other

1

(14)

-8

0

Total

325

167

270

385

EBITDA margin

Production services

18.4%

3.5%

21.2%

25.2%

DVD services

9.2%

7.6%

10.6%

10.8%

Connected Home

4.0%

6.2%

5.9%

5.9%

Corporate & other

2.3%

-59.7%

0.0%

0.0%

Total

8.6%

5.6%

9.5%

11.8%

Adjusted EBITA

42

(56)

60

180

Adjusted EBITA margin

1.1%

-1.9%

2.1%

5.5%

Source: Technicolor accounts, Edison Investment Research

Connected Home: 59% FY20 revenue, 60% adjusted EBITDA

The pandemic has increased demand for Connected Home’s high-end broadband products, particularly in the US. Consumers, either seeking to work from home or improve their entertainment experience in lockdown, have looked to boost their in-home and broadband connectivity. Trading remained difficult in Latin America, though, with weak currencies affecting affordability of US dollar-priced product on markets also undermined by the impact of COVID-19 on their economies. There is no obvious short-term resolution to these circumstances, but Connected Home should be in a good position to retain market share as and when the markets swing back. Across the Americas, management cites market share of 24%.

Underlying demand is expected to stay robust in FY21 with home working, education, streaming and gaming all continuing to stimulate growth in DOCSIS 3.1 gateways and with upgrades to Wi-Fi-6 also set to roll out. Technicolor has been selected by Comcast for the latest iteration of the XPA box and expects to retain its high market share.

However, the global issues surrounding the availability and pricing of semiconductors look like they will have an impact on Technicolor’s FY21. Normally a strong quarter seasonally, Q420 sales were down sequentially and, judging by disclosed H2 constant currency revenue growth figure (-3% y-o-y), there was a sharp slowdown in year-on-year constant currency trends from a Q3, when constant currency revenues grew 10.6% y-o-y. The semiconductor shortfall could result in some product delays and rising bill of material costs. Management believes it should be able to pass some of the cost increases on to customers, but high prices may affect demand. The company has baked this effect into the financial guidance described below.

Adjusted EBITDA margins are showing the early benefits of the ongoing cost-cutting programme. Across the last four reported half year periods they were: 2.6%, 5.2%, 6.4% and 6.0%. Progress obviously would be beyond that built into our modelling were it not for the semiconductor situation. According to our modelling, around $30m of further cost savings are yet to come through.

Production Services: 17% FY20 revenue, 10% adjusted EBITDA

H120 revenues were down 35% (but included a broadly unaffected Q1); H220 revenues were half those of the prior year. EBITDA was a little over break-even in H1, with EBITDA margins recovering to 7% in the second half as animation picked up and advertising was more stable.

FY21 should see a stronger pick-up in activity levels in H2 (pandemic dependent) as delayed projects resume, with FY22 looking likely to be very busy as content pipelines come through. While Technicolor cut back its staffing levels sharply to reflect reduced demand, much of the industry works on a freelance basis. Key talent has been retained and the recruitment environment is more favourable, given the difficulties of some other providers. The internal Technicolor Academy is also able to train to meet demand. Management is particularly enthusiastic about prospects in the fast-growing games sector, where it sizes the addressable market at around three times that of tentpole movies.

Our segmental breakdown (only group totals are guided by management) shows a small dip in current year revenues, reflecting the post-production disposal, followed by a substantial increase in FY22, with a good recovery in EBITDA margin. This is partly a consequence of greater scalability in production, to be driven by newly appointed operational management. The pandemic has prompted new, more flexible production methodologies that are improving collaboration and efficiency.

DVD Services: 24% FY20 revenue, 30% adjusted EBITDA

Considering the consequences of the pandemic on the theatrical release schedule for movies in FY20, a 23% reduction in volume sales (19% by value at constant currency) is actually a relatively good result. It is attributed to resilient demand for the back catalogue as people looked to entertain themselves in lockdown.

The new volume-based studio contracts are helping mitigate the downside risk, while the physical estate is undergoing further optimisation. Management is appraising various diversification opportunities that would also help with overhead recovery and potentially building a more sustainable business operation.

Revisions to forecasts

The management guidance has been restated for the effect of adverse currency movements, principally the US$/€ rate, and the impact of the disposal of the post-production business (see January update note). The relevant currency moves have been meaningful, with the US$/€ rate falling from 1:0.893 for FY19 to 1:0.877 for FY20. The rate to date in FY21 is averaging 1:0.826.

For the time being, our forecasts continue to follow management guidance, as business visibility remains relatively low given the uncertainty over the timing and speed of the recovery post the pandemic.

Exhibit 2: Adjustments to forecasts

Revenue (€m)

EBITDA (€m)

EBITA (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2020

3,100

3,006

-3

169

167

-1

(64)

(56)

N/A

2021e

3,350

2,933

-12

329

270

-18

97

60

-38

2022e

-

3,255

N/A

-

385

N/A

-

180

N/A

Source: Technicolor accounts, Edison Investment Research

Management indications are that these factors together have decreased FY22 adjusted EBITDA by €40m and adjusted EBITA by €23m. In normal circumstances, we would have expected the post-production business to be reasonably stable.

Balance sheet substantially sounder

IFRS net financial debt at the year-end stood at €812m, including lease liabilities of €178m (€164m of operating lease and €16m of capital leases). Following the complex restructuring, at the close of the year the group had cash in hand of €330m, along with a committed credit facility from Wells Fargo of €102m ($125m). If required, €50m of uncommitted funds may also be drawn down. The covenant leverage ratio of net debt to EBITDA (based on nominal net debt of €897m) was 5.4x at 31 December, with management indicating a level below 4.0x at end FY21. Our model suggests an IFRS net debt to EBITDA ratio comfortably below at 3.1x in FY21 versus 4.9x in FY20.

Exhibit 3: Financial summary

€'m

2018

2019

2020

2021e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

3,988

3,800

3,006

2,933

3,255

Cost of Sales

(3,521)

(3,375)

(2,725)

(2,575)

(2,830)

Gross Profit

467

425

281

358

425

EBITDA

 

 

266

325

167

270

385

EBITA

 

 

98

42

(56)

60

180

Amortisation of acquired intangibles

(81)

(54)

(41)

(41)

(41)

Exceptionals

(127)

(79)

(151)

(10)

(10)

Reported operating profit

(119)

(121)

(264)

27

147

Net Interest

(51)

(84)

77

(81)

(81)

Joint ventures & associates (post tax)

0

(1)

0

0

0

Exceptionals

0

0

155

0

0

Profit Before Tax (norm)

 

 

7

(73)

(43)

(3)

117

Profit Before Tax (reported)

 

 

(170)

(206)

(188)

(54)

66

Reported tax

(54)

(3)

(5)

(5)

(5)

Profit After Tax (norm)

(47)

(75)

(48)

(8)

112

Profit After Tax (reported), from continuing operations

(224)

(208)

(193)

(59)

61

Minority interests

(1)

0

0

0

0

Discontinued operations

157

(22)

(15)

0

0

Net income (normalised)

(48)

(75)

(48)

(8)

113

Net income (reported)

(68)

(230)

(207)

(59)

61

Average Number of Shares Outstanding (m)

15

15

126

241

247

EPS - normalised (c)

 

 

(306.94)

(492.18)

(38.38)

(3.18)

45.73

EPS - normalised fully diluted (c)

 

 

(306.94)

(492.18)

(33.64)

(2.97)

42.67

Dividend per share (c)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(6)

(5)

(21)

(2)

11

Gross Margin (%)

11.7

11.2

9.4

12.2

13.1

EBITDA Margin (%)

6.7

8.6

5.6

9.2

11.8

EBITA Margin (%)

2.5

1.1

(1.9)

2.1

5.5

BALANCE SHEET

Fixed Assets

 

 

2,101

2,082

1,674

1,606

1,538

Intangible Assets

1,591

1,483

1,251

1,185

1,119

Tangible Assets

233

476

288

286

284

Investments & other

26

40

62

62

62

Deferred tax and other

251

84

72

72

72

Current Assets

 

 

1,659

1,127

1,344

1,319

1,549

Stocks

268

243

195

190

211

Debtors

677

507

425

415

460

Cash & cash equivalents

291

64

330

321

484

Other

423

312

394

394

394

Current Liabilities

 

 

(1,909)

(1,542)

(1,379)

(1,326)

(1,406)

Creditors

(1,135)

(825)

(710)

(657)

(737)

Tax and social security

(34)

(41)

(21)

(21)

(21)

Short term borrowings

(20)

(95)

(72)

(72)

(72)

Other

(720)

(581)

(576)

(576)

(576)

Long Term Liabilities

 

 

(1,578)

(1,631)

(1,466)

(1,482)

(1,498)

Long term borrowings

(1,004)

(1,203)

(1,070)

(1,086)

(1,102)

Deferred tax

(193)

(27)

(15)

(15)

(15)

Other long term liabilities

(381)

(401)

(381)

(381)

(381)

Net Assets

 

 

273

37

172

118

183

Minority interests

1

0

0

0

0

Shareholders' equity

 

 

274

37

172

118

183

CASH FLOW

Net profit

(224)

(208)

(193)

(59)

61

Depreciation and amortisation

234

322

263

213

213

Working capital

2

(69)

(101)

(38)

15

Tax and interest

(53)

(76)

(41)

(66)

(66)

Exceptional & other

159

101

(9)

56

86

Operating cash flow

 

 

118

70

(81)

106

309

Capex

(113)

(169)

(138)

(145)

(145)

Acquisitions/disposals

1

(2)

0

30

0

Equity financing

0

1

60

0

0

Dividends

0

0

0

0

0

Other

28

3

5

0

0

Net Cash Flow

34

(97)

(154)

(9)

164

Opening net debt/(cash)

 

 

778

733

1,234

812

837

FX

1

(16)

0

0

Discontinued

105

(35)

(23)

0

0

Other non-cash movements

(95)

(369)

615

(16)

(16)

Closing net debt/(cash)

 

 

733

1,234

812

837

690

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.

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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

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