Mixed media

Edel 7 February 2019 Update
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Edel

Mixed media

Media

Scale research report - Update

7 February 2019

Price

€2.41

Market cap

€55m

Share price graph

Share details

Code

EDL

Listing

Deutsche Börse Scale

Shares in issue

22.73m

Last reported net debt as at Sept 2018

€56.3m

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 (30%).

Lack of comparators for valuation.

Spotify dominance in streaming.

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5757

Edel’s FY18 results showed a 6% sales increase and 7% improvement in EBITDA as it benefited from continued demand for vinyl and subsidiary Kontor New Media’s strong positioning in digital music. H2 was markedly tougher, as foreshadowed in the November trading update, reflecting pressure on the book publishing, one-off issues at Pandastorm Pictures and a write-down at Edel Italy. Guidance for FY19 indicates broadly stable revenues but significantly improved profitability, benefiting from the major investment programme completed in FY18. The shares trade at a clear discount to global entertainment content and publishing stocks, partly explained by the limited market liquidity.

Media services and content marketing

Edel is unusual in having its feet strongly planted in both physical and digital media camps. The capital investment programme – €20.4m in FY17 and a €19.3m in FY18 – has given the group state-of-the-art manufacturing facilities for vinyl pressing and book printing and publishing. These give the group competitive advantages in terms of speed, quality and cost in markets where margins can be tight. The German printing market is dominated by small firms unable to scale up volume or investment. Edel is one of the largest independent music companies in Europe and its digital music operation, Kontor New Media, has been selected as one of three Preferred Plus partners by Apple. In CD and DVD markets, reducing demand is putting pressure on all suppliers, but Edel has the advantages of efficient production and distribution, which places it well for market share gains.

Net income to rebuild FY19

The guided FY19 sales figure of €207.5m reflects an element of caution on some of the underlying markets. EBITDA margins should strengthen with the efficiency benefits of the investment programme, but depreciation will also step up. FY19 net income is guided to €4.7m, up from €4.0m in FY18 (FY16: €4.5m).

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 38%. On a P/E basis, the multiple is 11.5x vs 17.8x.

Consensus estimates*

Year
end

Revenue
(€m)

PBT
(€m)

Adjusted EPS (€)

DPS
(€)

P/E
(x)

Yield
(%)

09/17

198.1

6.8

0.19

0.10

12.7

4.1

09/18

209.2

6.6

0.16

0.10

15.1

4.1

09/19e

207.5

7.8

0.21

0.10

11.5

4.1

Source: Edel accounts, * Note: company guidance

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 and full year progression to 30 September 2018

€000s

H118

% change

H218

FY18

% change

Year end 30 September

HGB/German GAAP

HGB/German GAAP

HGB/German GAAP

Income statement

Revenue

106,104

+8

103,077

+4

209,181

+6

EBITDA

10,400

+14

6,898

-1

17,298

+7

EBITDA margin (%)

9.8

6.7

8.3

Profit before tax (as reported)

5,607

+21

985

-55

6,592

-3

Net income (as reported)

3,649

+21

335

-77

3,984

-11

Source: Edel accounts

Splitting out the H1 from the H2 performance above shows the deterioration more clearly. The November trading update pointed out that some of this was due to weaker earnings in the book publishing operations of Edel Germany and ZS Verlag and some attributable to one-off effects at Pandastorm Pictures (75% owned) and the partial write-down in the equity holding in Edel Italy as the group refocused on its core DACH markets. These latter two were not separately quantified.

The small reduction in FY19 guided sales to €207.5m will be a function of the mix. Working backwards from the company guided net income of €4.7m suggests to us an EBITDA in the €18.5–19.5m range (we do not model the company financially in full and there are no broker forecasts). This implies recovery in EBITDA margin to back over 9%.

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

16.5

17.1

15.2

2.1

2.0

1.9

10.8

9.2

8.3

Broadcast & Entertainment

21.5

18.5

15.3

2.8

2.6

2.5

9.4

9.3

7.9

Edel

15.1

11.5

-

0.5

0.5

-

6.4

5.7

-

Source: Refinitiv, Edison Investment Research. Note: Prices as at 4 February 2019.

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

The corporate structure will be changing (anticipated in Q2) to a partnership limited with shares, with a strong influence of the younger generation of the founding Haentjes family. Their 64% shareholding has 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 is at a 35% discount on current year P/E (38% discount on EV/EBITDA).

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General disclaimer and copyright

This report has been prepared and issued by Edison. 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 Edison analyst 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

1,185 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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