A good H116 from Creative Technology, particularly in the US, underpins our maintained profit forecast for the full year. Avesco’s FY14 restructuring is clearly delivering on the promise to smooth results between odd and even years, while the recent sale of Fountain Studios has realised cash to pay down debt and increase targeted investment in equipment. With a progressive dividend, a discount to net assets and a very modest multiple, the group is an attractive and coherent investment proposition.
First half revenues were up by 11% to £73m (H116:H115), partly due to favourable currency, but trading profits were down 16%, reflecting pricing pressures and the impact of timing of overhead increases in Creative Technology (CT) in the US. H216 covers the Rio Olympics and Paralympics and the imminent UEFA European Championships, already factored into our profit forecasts, which are unchanged on these figures. The key element of the results, though, is the completion of the previously announced sale of Fountain Studios’ land and buildings, which has realised a pre-tax profit of £9.8m (£7.7m net). This has enabled the group to pay down net debt to just £3.2m (from £17.5m at September 2015) and lifted NAV per share from 180p at the year end to 230p. It is also enabling accelerated, targeted capital spend, which should help to offset some of the gross margin pressure.
FY17 has fewer major events (with the exception of the London IAAF World Championships), being an ‘odd’ year. Nevertheless, we are expecting some benefit from the capital spend in H216 and a steady recovery in operating margins. This reflects overhead recovery in CT, improving performance at mclcreate (the full service business) after a difficult H116 and reducing trading losses at Presteigne, the dry hire business, post the realignment of its cost base. Fountain Studios are leased back for The X Factor prior to Christmas, before closing in early 2017.
Avesco’s share price has remained in a range of 200-250p for the last 12 months. However, this is at a clear discount to other media and events stocks. Avesco is currently trading on an EV/EBIT of 5.9x in FY16e and 5.2x in FY17e, compared with 13.7x and 11.7x respectively for peers (EV/EBIT being a more relevant metric given the structurally higher depreciation on hire equipment). The share price is also now back at a discount to published 230p NAV per share post the Fountain sale.