Future’s year-end trading update outlines the good progress made in driving the new revenue streams, leveraging the strong portfolio of global brands. FY16 results are in line with management expectations, with cash flow better than anticipated, resulting in a small net cash position at the year end. Future has now been informed that the CMA has no objection to it completing the acquisition of Imagine Publishing, subject to the ring-fencing of one title out of the 22 in the portfolio. Our FY17 pro forma estimates now assume the acquisition is included as of 1 November 2016. The shares remain at a substantial discount, which should close as the benefits of the deal come through.
The changes implemented by management over the last couple of years are now starting to be reflected in the numbers coming through, with margins scaling up and a more robust business model. New income streams, such as those generated from e-commerce and events will allow the group to drive returns on the investment from the brand portfolio. The reorganisation of the magazine division is facilitating more efficient operation, which will be leveraged further with the additional titles from the Imagine portfolio. More detail will be given with the full year results towards the end of November. Cash flow in H216 has evidently been better than we had modelled. Our forecast was for a year-end net debt position of £2.7m, whereas the company’s update refers to a small net cash balance. Our model will be fully updated on the full year results.
When we initiated coverage in August (see note), we included the Imagine acquisition pro forma for the whole of FY17, to demonstrate the scale of the transformation and particularly the uplift in earnings per share. However, we did not then include, and have not now, any of the benefits of scale that should come from centralisation of overhead, leaner management or buying synergies.
Future’s market valuation (pro forma) is at a discount against a broad set of peers of around 20% on EV/sales. On EV/EBITDA, the shares are rated around par with the more print-oriented stocks in the sector, but on a discount to those with larger digital assets. Our DCF analysis indicates a price around 13p on 10% WACC and 2% terminal growth rate assumptions, based on conservative pro forma estimates. As the full benefits of the acquisition come through, this valuation gap should close.