At the start of its 41st year of operations, Quarto delivered a strong FY15 performance, as indicated by January’s pre-close update. Revenue and margin were both ahead, there was notable progress on debt reduction and a step-up in the dividend. With the activists off the share register as of November 2015 (their shares placed with a spread of institutional funds), the board structure is also now being normalised, with two independent non-executive appointments (one to take the chair). Investment in content, talent, sales and marketing and systems underpin the growth now coming through, with acquisitions likely to supplement organic progress.
The group is effectively a portfolio of portfolios and there is an inevitable divergence between performances of the underlying elements. Children’s books were identified as a particular target for investment by CEO Marcus Leaver, who joined the group in 2012. This has been paying off handsomely, with the children’s offer now making up 22% of publishing revenues. The FY15 numbers also benefited from the fashion for colouring books for adults, which the group’s North American imprints latched on to at an early stage, building on its position in art instruction. The main drag on performance was Books and Gifts Direct, the distribution business in Australia and New Zealand, which suffered from the weakness in the local economy and earlier overstocking by the master franchisers, exacerbated by currency translation.
Quarto has a clear emphasis on producing high-quality books, which then sell over an extended period, giving much higher levels of backlist sales than industry norms – 61.4% in FY15, down slightly from 66.6% in FY14 but ahead in absolute terms. Furthermore, 28% of backlist sales in FY15 were of titles over three years old. The focus on backlist sales has rather overshadowed the scale of the investment in developing new titles ($34.9m in FY15), spread over a very large number of titles and not dependent on any particular imprint, genre or author.
November’s institutional placing cemented Quarto’s market rehabilitation, which has seen the share price climb by 49% in a year. Achievements in reducing absolute debt levels and the strong performance of acquisitions both reduce earlier potential areas of concern. The possibility of equity issuance for fund purchases may limit full closure of the discount to other smaller publishing companies, trading on an 11.2x FY16e P/E vs 7.0x for Quarto.