Hier die Analyse komplett :
Edel: 2000 Results
Sales were DM 1.18bn vs. DM 451m in 1999 and a forecast DM 1.15bn.
Both EBITDA and EBIT were reported as adjusted for DM 27.1m of one-off items, of
which FX was DM 3.5m. These adjustments compare to the DM 18.2m forecast last
December, of which DM 7.9m was FX. On this basis adjusted EBITDA was DM 63.5m
(forecast DM 57.5m) and adjusted EBIT was DM 29.6m (DM 23.5m). Stripping out the
increase in the adjustment implies a Q4 underlying result a touch lower than forecast.
We discuss the 2000 numbers and the outlook for 2001 and 2002 in more detail below. In
many respects these are less important than the outlook for 2001 and 2002. After two
successive Q3 profits warnings edel have clearly decided to adopt a conservative approach to
forecasting, at least for this year. For 2002 much more depends on creative success.
In 2001 forecast organic sales growth is just 5%. This reflects the balance of a
difficult comparison base in the US after a rip-roaring year last year (the Baha Men and
RED Distribution) and hoped-for better performance in Germany after a dire 2000. This
could be conservative e.g. Baha Men sales are forecast at 700,000 units, of which 400,000
have already been sold, with a further album due in Q3 2001. For 2002 an improved A&R
performance is expected to drive organic sales growth of 13.5%.
EBIT growth in 2001 is forecast at 25%. Annualised cost savings of DM 12.5m have been
identified of which DM 5.5m will be realised this year. The latter represents 75% of the
forecast EBIT increment i.e. a recovery in 2001 is less dependent on creative success. In
2002 creativity is much more important. Ultimately, of course this is true of any music
company and edel’s track record is relatively good.
A third area of conservatism is financial expenses. edel have penciled in a significant
increase in costs here based on year-end debt levels but assuming 200bp higher interest
rates. However, in the conference call they indicated that they were in discussions with a
potential financial investor who would take on some sort of convertible instrument. News on
this was possible in the next three months, as is a possible divestment of the company’s
stake in Viva and Eagle Vision.
Recommendation
The outlook should have cheered the market, although clearly the forecast is from a far
lower base than we originally anticipated. This time last year, for example, the company
was forecasting 2001 EBITDA of DM 163m vs. the current expectation of DM 72m.
Because of the latter the company still has to prove the credibility of its forecasts.
However, for 2001 there is the comfort that much of the EBIT growth is related to cost
side improvements over which the company has greater control.
The 2002 forecast (EBITDA of DM 119m) is by no means unachievable. On this basis
edel trades on 8.0x 2002 EV/EBITDA or a 2002 PE (excluding amortisation) of 9.7x.
This is cheap but the company has to deliver during 2001 to get re-rated. Short term,
however, there may be some positive momentum from news flow regarding a new financial
investor (News Corp, BMG ?) and asset disposals.
We retain our BUY recommendation.
The Numbers in Detail
After the Q3 profits warning these numbers will have come as something of a relief.
FY sales more than doubled to DM 1.2bn. This reflects the full year consolidation of
1999 acquisitions, most notably RED Distribution, PIAS and Eagle Rock. However, organic
growth was also very healthy, with a 38% increase for the full year after 20% for the first
nine months i.e. the Q4 top line was very good. The stars of the show were the Baha Men
who shifted 2.7m albums in the US.
For 2001 edel expect to make few, if any, acquisitions. This reflects the stretched balance
sheet (see below). In addition, the success of the Baha Men last year makes for a difficult
comparison base this year. As a result the company is forecasting just 5.2% sales growth in
2001. This is probably conservative. For example, it assumes 700,000 more Baha Men albums
for the year when 400,000 have already been sold – a second album due in Q3 should drive
further sales of their first release. In addition, there will be new albums from 2000 successes
like Orange Blue, Marque and Craig David as well as releases from Jennifer Paige, 2be3 and
Blumchen whose previous albums have done quite well.
In 2002 recent years’ investment in A&R is expected to drive sales growth to 13%.
Reported EBITDA (DM 36.5m) and EBIT (DM 2.5m) were well down on the forecast
from this time last year. This reflects the problems that came to light in Q4 that led to
the profits warning. Specifically, operating costs at the “old” edel businesses – edel records
Europe and edel media & entertainment – shot up as these units spent heavily on marketing
to support poorly performing releases (see table below). In addition, PIAS and the
operations in the US and Argentina did badly. The company also lost DM 3.6m due to
currency movements. As a result edel took DM 23.6m of one-off costs through the P&L,
most notably DM 10m in the US and DM 4.1m in Argentina. Management consultancy costs
were DM 4.3m.
edel: Divisional Sales and EBITDA (2000, DM m)
Sales EBITDA % Margin
edel records Europe 455.9 0.5 0.1%
edel North America 400.4 27.1 6.8%
edel Services 116.8 32.2 27.6%
edel media & entertainment 61.8 3.1 4.9%
edel publishing 5.1 -1.6 -31.9%
PIAS 318.6 5.9 1.8%
Total 1,358.6 67.1 4.9%
The management consultants have identified DM 12.5m of annual cost savings of which
edel expect to realise DM 5.5m this year. This DM 5.5m represents 75% of the expected
EBIT improvement (against the adjusted EBIT number) this year and 15% of the increase for
2002. The balance of 2002 EBIT growth reflects sales growth and a higher proportion of own
product in the sale mix.
Financial expenses rose sharply in 2000 from DM 0.4m to DM 18.4m. This reflects the
full year funding of 1999 acquisitions. For 2001 edel are conservatively forecasting a near
doubling of net interest costs and a flat number for 2002. One element of this
conservatism is the assumption that interest rates will be 200 bp higher than they are
currently.
In the conference call the CFO indicated that edel was talking to a potential financial
investor who would be willing to take on some of the company’s debt in return for an equity
stake. News was expected on this over the next three months. Who the investor might be is
obviously the key question. Two admittedly speculative possibilities are News Corp and
BMG. James Murdoch sits on edel’s Supervisory Board and he also runs News Corp’s Music
Group, edel’s strategic partner in Internet projects. The two companies already have a
licensing agreement. Given News Corp’s aspiration to build up a global music business a link with
Europe’s largest independent would be a significant step, one cheaper than buying EMI
(something that News Corp apparently looked into). Increasing global market share may also
interest BMG in edel assuming that a deal with EMI founders. Both companies know each other
well, being German, the new management financial control systems that went in after the Q3
profits warning are also used at BMG, and many edel managers, including the CFO, spent time at
the company.
The credibility of the forecast. This is obviously a key issue following on from two
successive Q4 profits warnings. As we discuss above we believe that management have
adopted a conservative approach to their forecasting. It was clear from the conference
call that there had been a great deal of internal discussion about this and that the CFO had
insisted on such a policy. Given his time as CFO of BMG’s German-speaking territories he
clearly has the knowledge and experience for the job and, from what we can see, the
influence within the company to get his way in financial matters.
edel give the impression of been desperately keen to avoid disappointing the market again.
The company’s key shareholder, CEO Michael Haentjes, will have seen his own personal net
worth severely dented by the weakness in the price. Moreover, the independent music sector
continues to consolidate and a stronger share price based on an improved operating
performance would allow the company to hit the acquisition trail again.
On balance, therefore, after a difficult 2000 we are more comfortable with edel’s medium
term prospects.
