Quarto has had a good start to 2016 with the momentum from FY15 carrying into the first quarter, normally the quietest period of the year. The natural seasonality gives a revenue bias to H2, which management has said will be greater this year, and our full year forecasts are unchanged. Further meaningful progress has been made on debt reduction, consistent with our year-end forecast of $53.5m, achieved without compromise on investment in IP, the lifeblood of the business. The rating continues to trade at a substantial discount to other smaller publishing stocks.
The three publishing divisions generate 80% of group revenues, now weighted c one-third: two-thirds between the half-years, with operating profits even more heavily skewed to the second half. The strong Q116 reported at the AGM, with revenues 17% ahead of prior year, is attributed to the momentum from Q415. Quarto has been producing art instruction books for some time and has benefited from the recent popularity of adult colouring books, particularly in the US. There has been some discrepancy of views in the publishing sector on the VAT treatment of these titles in the UK, but Quarto has been charging the full 20% rate since seeking guidance in 2015.
Quarto continues to build on its core model, through acquisition and internal initiatives. The 2015 Ivy Press acquisition (see our March note) shows there are good, monetisable, niche opportunities available. At April’s London Book Fair, Quarto announced a JV with Kalimat Group for an Arabic imprint, initially in nonfiction but to extend to children’s books. It has also established Quarto Innovation, an initiative designed to leverage the group’s IP, be it content, brands or expertise, across channels beyond the traditional co-edition and publishing activities.
November’s institutional placing cemented Quarto’s market rehabilitation, and the board structure is now also forward-looking, with a new chairman – Peter Read (former chairman of KPMG’s TMT practice) – and additional non-executive director. Debt reduction and strong acquisition performance both reduce earlier potential areas of concern. The possibility of equity issuance to fund purchases may, though, limit full closure of the discount to other smaller publishing companies, trading on an 11.4x FY16e P/E vs 6.3x for Quarto.