Future is building and widening its revenue streams based on strong global brands and on a scalable delivery platform. Growth of revenues in categories such as eCommerce, events and digital advertising resulted in broadly maintained group FY16 revenues, while the margin has started to build, helped by operating leverage. The Imagine purchase, post year-end, brings further scale and efficiency. The lengthening record of delivery against expectations and the premium projected earnings growth are making the multiple increasingly attractive.
Key brands within the Media division (41% group), such as techradar.com and PC Gamer, helped drive segmental revenues up 14%, with the US now representing 44%. Data drawn from online traffic is used to inform and optimise advertising and content, with the eCommerce and events building rapidly. Future has set up a media services operation to drive monetisation of IP in the business, providing content and through licensing, franchising and syndication. Magazine revenues reduced 10% (59% of group), outperforming the UK market in magazines for leisure interests (ABC Market Summary Report). Acquisitions, including Imagine, have made a step-change to the scale of the business and added new verticals.
FY16 EBITDA margin grew from 6.0% to 8.0%, meeting the internal KPI and our model indicates significant further improvement through FY17 and FY18, to 17.0%. This reflects the change in the mix of revenues and the growth of new streams such as eCommerce, as well as the operational leverage from the increase in scale of the Magazines division. Recurring revenues (which Future defines as including repeatable eCommerce) represented 25% of group top line, although there will be an element of dilution in FY17 with Imagine coming on board. Very strong cash conversion in the year (138%) meant the group ended FY16 with a small net cash position, prior to the Imagine acquisition. Post the deal, group debt stood at £7.4m.
Future’s market valuation is at a small discount against a broad set of peers of around 4% on EV/sales. On EV/EBITDA, the shares are rated around par with the sector; on a discount to those with larger digital assets. Our DCF indicates a price around 14p (from 13p) on 10% WACC and 2% terminal growth rate assumptions, based on conservative estimates on the realisation of synergistic gains. As the full benefits of the acquisition come through, this valuation gap should close.