The Quarto Group, Inc.: New COO Signals Generational Change

Quarto (QRT.L) is undergoing a gentle and managed process of "generational change." With the Q1 trading update in April, the group announced the appointment of Marcus Leaver as COO and CEO-designate. He has an extensive background in publishing in the US and the UK and understands Quarto’s business model well. This is unlikely to be a seismic change in approach; more an evolution of style that should bring through the inherent strengths of the business. We make no changes to our forecasts ahead of the August interims but do reiterate how undervalued the shares are.

Generational change
Co-founder Robert Morley, creative director, stepped down from the board in May and Laurence Orbach, chairman and CEO, has announced his intention to relinquish the CEO role after February 2013, subject to the satisfactory appointment of a successor. Marcus Leaver has now joined in the newly-created role of COO, relocating to the UK from the US, where he ran the publishing interests of Barnes & Noble (BKS) (including Sterling Publishing). Two shareholders holding 19.2% in aggregate have meanwhile called a special meeting to remove Laurence Orbach (who is Quarto’s co-founder and the largest shareholder, in addition to being Chairman and CEO) from the board and elect Tim Chadwick, for whom no details have been provided. The timing of this meeting has yet to be determined.

Diversified risk
Leaver’s initial appraisal of Quarto categorises the group into asset-backed operations, such as UK and US publishing, and cash-generating operations, such as the Australian and New Zealand display marketing businesses, giving diversified risk combined with the reassurance of the extensive backlist sales. He sees medium-term potential for improving publishing margins, further geographical expansion and possible development of the children’s offering.

Valuation: Remains deeply discounted
Our arguments on valuation are well rehearsed. The refinancing announced with the prelims should reassure the market that the debt is not such a burden as to limit operational management. The balance sheet is conservatively stated and does not reflect the full value of the backlist, which generated 64% of book publishing sales in FY11. The dividend was increased at the prelims, indicating that management is confident with trading, giving a covered, and premium, yield.