Avesco’s trading update outlines continued strong trading over the summer at Creative Technology in the US and at the Rio Olympics and Paralympics. FY16 results (to end September) will be “comfortably” ahead of previous expectations. Positive momentum continues into FY17, when a good schedule of sporting and commercial events, along with currency benefit, will buoy what would normally have been a weaker, odd-numbered year. With a rising dividend and asset backing, the valuation multiple remains very modest, despite the increase in the share price on this news.
Our earlier forecasts had a built-in contingency on profits attributable to Creative Technology (CT) London from Rio, given the degree of negative media attention ahead of the Games. With the main Olympics having been successfully delivered, and with continued good performance of CT’s US commercial operations, our FY16 revenue forecast is raised £2m, adding £1m to EBIT and to PBT. With a heavier US weighting, the tax rate will rise, but our forecast EPS nevertheless increases by 9% to 24.6p. This increase is despite a slower-than-hoped turnaround in the Full Service business (8% of FY16e revenues), which should return to profit in FY17. Growing visibility of events scheduled in FY17 and more advantageous exchange rates give us the confidence to lift our revenue number by £12m to £150m and our EBIT forecast by £1.3m to £9.5m. FY17e EPS increases by 16% to 27.3p, again on a slightly higher tax charge.
We have made small adjustments to timing on capital investment and net debt, but these are insignificant against the sale of our Fountain Studios’ land and buildings for £16m earlier in the year (see notes in January, June). CT has recently added to its capabilities with a small acquisition of a wireless specialist event service business and with a partnership delivering video adjudication for sporting events.
Avesco’s share price has traded in a range of 200-230p since March 2016, before breaking out on this positive news. However, the valuation remains at a clear discount to other media and events stocks. Avesco is currently trading on an EV/EBIT of 6.1x in FY16e and 5.5x in FY17e, compared with 13.7x and 11.2x respectively for peers (EV/EBIT being a more relevant metric given the structurally higher depreciation on hire equipment). This discount persists despite Avesco’s moves to deliver a more consistent trading model and which give a clearer investment story.
