FY15 results were ahead of forecasts, with particularly strong performance from Creative Technology (CT) in the US and with CT Europe getting a boost from the European Games in Baku. FY16 should benefit from the UEFA European Championships and Rio Olympics. Growth of corporate revenues and the migration of Presteigne to dry hire only are helping to even out swings between odd and even years, with the ‘odd’ FY15 outperforming previous ‘even’ highs. The Fountain Studio sale will further bolster the balance sheet, supporting investment to grow CT and a progressive dividend.
As was clear from early on, CT traded strongly in FY15, particularly in the key US market, with the benefit of a positive underlying market across a range of verticals. The European Games in Baku were also more valuable for CT than originally anticipated. Losses in Germany have been largely eliminated and the H2 outperformance was broadly attributable to the US, which more than compensated for tough markets for Broadcast Services. Earnings benefited further from an advantageous tax settlement with HMRC on treatment of earlier losses.
The sale of the Fountain Studio site in Wembley, London makes sense from both a financial and a structural perspective. The price is well in excess of the book value, realising a net gain of around £7m in FY16, with an impairment of £1.3m being taken on bespoke broadcast equipment in the FY15 numbers. The group is leasing back the studios until at least the end of the year to meet contractual commitments. The ongoing group will consist of CT in the US, Europe and Asia Pacific, the Full Service business, mclcreate, and Presteigne dry hire, reporting as Broadcast Services. CT is far and away the largest element of the group, accounting for 83% of sales and 90% of trading profits in our model for the current financial year.
The share price has risen 48% from 143.5p at the time of the interims in June and the shares no longer sit at a discount to the historic underlying asset value (180p). The sale proceeds and improving profitability imply an increase in the balance sheet for FY16, underpinning the current price. The shares also trade well below EV/EBIT of other event and hire businesses, closer on P/E and yield, leaving the price well underpinned, with upside potential provided the modelled earnings scenario pans out.