Reaching out
Quarto’s (LONDON:QRT) final results show it is re-energised and focused on top-line growth via expansion of channel, territory and format, while generating cash to reduce debt. The group has launched a new visual identity and stronger brand focus in illustrated and children’s publishing. The rating has started to rebuild as the market finally starts to look beyond the balance sheet and appreciate the opportunities in a sector that is regaining some momentum, particularly in children’s books. Yet the shares remain at a heavy discount and carry a premium yield on an increased dividend.
Momentum into 2015
Good performance from International Co-edition book publishing and from book publishing in the UK was buoyed in H2 by US recovery post the H1 distribution issues. Revenues from underlying operations were up 2%, with lower interest charges driving a 19% increase in underlying EPS in US dollar terms (sterling: +12%). Children’s Publishing was 13% of group FY14 revenues (FY13: 11%), up 17% as investment was made in new imprints and content. The focus on growing income from foreign rights is also starting to deliver returns and we expect further deals, such as the JV with Grupo Nobel in Brazil, to be added. A central knowledge hub and transactional platform is scheduled for launch in Q2. The scale of backlist sales remains a key differentiator; 70% of US Publishing; 54% of UK Publishing and 68% of International Co-edition revenues. Profits are structurally H2 weighted.
Reducing debt, new facility
Quarto successfully renegotiated its banking arrangements, signing in February a US$95m multi-currency revolving credit and term loan facility with four members of its existing bank syndicate, on improved terms. The new facility matures on 30 April 2019, replacing a previous facility that had been due to expire at end April 2015, removing any short-term uncertainty. There has since been a small acquisition, of Ivy Press (which will sit in International Co-edition Publishing), but the focus remains firmly on debt reduction while continuing to invest in growth. Our model indicates net debt continuing to fall from the $66m at end FY14 to $60m end FY15.
Valuation: Remains at a substantial discount
The share price has recovered to levels of a year ago after the disappointment that the interims contained one-off setbacks. With the prospect of a rising top line and reducing debt (and lower interest charge), the share price should continue on its positive trajectory. A share price of around 228p would be a nearer reflection of the market, with the current share price backed by the published assets.
To Read the Entire Report Please Click on the pdf File Below