Quarto’s profits are H2 weighted and, in FY15, Q4 proved a particularly strong trading period. At end Q315, the group was on track to meet FY15 expectations; at the year-end update, the indication is that results will be ahead of forecasts, allowing a rise in dividend. Net debt of $59.7m was $21.7m lower than the 2011 peak, reflecting good cash conversion. The share price performed well over H215 (helped by the normalisation of the share register), but has drifted off with the market more recently. The valuation remains at a substantial discount to other smaller international publishers, which trade on 9.4x CY15 P/E and 5.0x EV/EBITDA.
Quarto covers a wide range of markets and imprints and, as with any portfolio, some elements will outperform others. The brief trading statement describes early successes from the initiative to focus its sales and marketing efforts, including the benefit from the sudden fashion for adult colouring books – a trend that the group’s North American publishing imprints picked up at an early stage – which has clearly aided the FY15 outperformance. Ivy Press, bought in Q115 for £1.3m plus £0.2m debt, is also cited as a strong contributor, ahead of planned progress. This successful purchase and integration provides comfort that a sensible acquisition strategy, alongside that for building on organic opportunities, is a practical approach even while the balance sheet is being rebuilt. We will adjust our FY16 numbers with the prelims on 17 March and publish our FY17 initial thoughts.
As the group enters its 40th year of trading, the corporate level distractions have retreated. Despite the heavy Q4 weighting of profits, Quarto has a lengthening record of delivering at least to expectations, which belies market concerns regarding visibility. The notable improvement in profitability and significant reduction in net debt in recent years has been achieved without compromise on investing in pre-publication costs on new titles, which will populate the backlist in future years.
November’s placing (30.9% of the stock, from activist shareholders) substantially increased the free float and removed one of the barriers to re-rating. The valuation remains at a substantial discount to other small international publishers and does not yet reflect the improved commercial prospects, which hail from management actions rather than market improvement.