Quercus Interim results
Still in bud Media
Quercus is very much in the growth development stage, investing in the physical and 17 October 2012 human infrastructure to support a more substantial and sustainable business, so Price 82.5p results from any one financial reporting period are unlikely to be a linear progression. Market cap £17m We reduced our FY12 forecasts post the interim figures and statement and our FY13 numbers are under review. Concentrating on content generation and broader delivery, including the US, where the new distribution agreement gives far greater leverage, Shares in issue 20.5m presents Quercus with good opportunities to drive sales of new titles, but also gives Free float 35.7% firm bedrock for future backlist sales. The share price has yet to reflect the potential. Code QUPP
Primary exchange PLUS Year end Revenue PBT* EPS* DPS P/E Yield (£m) (£m) (p) (p) (x) (%) 12/10 31.8 7.5 26.7 5.0 3.1 6.1 Share price performance 12/11 24.8 5.9 22.0 5.3 3.8 6.4 12/12e 24.8 5.0 17.5 5.5 4.7 6.7 Note: *PBT and EPS (fully-diluted) are normalised, excluding intangible amortisation and exceptional items. Preparing the ground The group has continued to invest in building up the team and facilities to support a considerably larger business, with the announcement of a distribution partnership with Random House for the key North American market a further step up. Over the last % 1m 3m 12m year, Quercus has recruited experienced editors and is running imprints across a Abs (8.3) (17.5) (30.2) number of key market segments including crime, children’s, science fiction and Rel (local) (7.6) (21.0) (38.0) erotica, giving a broad spread of exposure. With the addition of Colin Adams (ex- 52-week high/low 124p 80p Bloomsbury) as COO/CFO, the management team has greater depth and is clearly intent on building a meaningful market presence. Given the ongoing upheaval in book Business description retailing, Quercus is taking a neutral position on its preferred distribution channels, but Quercus Publishing is a trade and contract is also building (in-house) the capability for direct-to-consumer sales. publisher of physical books and eBooks, with fiction and non-fiction imprints. H112 – accelerated Larsson predicted scale down Interim figures showed a more marked falling off in revenues from the Stieg Larsson Millennium Trilogy than we had anticipated, with the ‘heat’ in the market firmly moving on to the Fifty Shades… series. While the broader portfolio of books published have Next events been performing well, with several authors (including Peter May, Alice Peterson and Trading update February 2013 Katie Piper) reaching into various sales charts, it has not been sufficient to make up Prelims Early-April 2013 the shortfall in the trading period. With a more normal seasonal bias, profits will be Analysts more heavily weighted to H2. We have revisited our current full-year numbers and will Fiona Orford-Williams +44(0)20 3077 5739 reinstate FY13 forecasts when the trading picture clarifies. Derek Terrington +44(0)20 3077 5700 Valuation: Early days Jane Anscombe +44(0)20 3077 5740
Quercus, with its PLUS listing, limited liquidity and with Larsson revenues retrenching, Edison profile page is valued at a considerable discount to Bloomsbury, the larger of its independent peers (11.0x Feb 13 P/E). With disappointment over current year results, Quercus will need to clearly demonstrate that it has broadened its base and will make an acceptable return on the considerable investments made over the last year before we anticipate a major step up in the rating.
Quercus is a research client of Edison Investment Research Limited
Quercus | 17 October 2012
Investment summary
Company description: Blossoming independent publishing house In publishing terms, Quercus is very much a newcomer to the scene, having been established in 2004. Achieving initial success in contract publishing with non-fiction titles and then in signing good quality authors, with the debut novel by Stef Penney, The Tenderness of Wolves, winning the Costa Award, the group’s fortunes were then propelled into a different orbit with the publication of the English translation of the Millennium Trilogy by Stieg Larsson. This gave Quercus a substantial fillip in terms of industry recognition and has enabled it to attract editors and authors of a calibre that might not otherwise have been possible. It has also given the group a cash legacy with which to build a much more substantial and sustainable business. With Larsson revenues now scaling down to a long-term annuity level, the strength of the rest of the lists being built can be more easily evaluated. As a start-up, the group has been able to build a publishing house better suited to the digital age than many of its peers, with digital rights negotiated from the outset, a concentration on assembling attractive content that can be delivered across any of a wide variety of platforms and a positive approach to ongoing engagement with readers and bloggers.
Valuation: Still early days Although the group’s trajectory in terms of titles published has built smoothly, the disproportionate success of the Larsson books has brought an issue of its own. Quercus has been quoted on PLUS since its early days and has limited liquidity in the shares. There is a very small quoted sector across all markets, not just the UK, with the obvious peers being Bloomsbury Publishing and the Quarto Group. The former has a premium rating reflecting its success at broadening and strengthening its business, after achieving considerable success with JK Rowling, while the latter trades at a deep discount. Quercus, with its limited liquidity and the Larsson benefit falling away, is valued similarly to Quarto, at a considerable discount to Bloomsbury. Upside should follow when it has clearly demonstrated that it has invested the Larsson legacy wisely to achieve a more broad-based and sustainable business.
Financials: Still early days Quercus is still in the development phase and the financial results in any one reporting period are unlikely to be linear in progression. There is doubtless disappointment that this year will not live up to earlier expectations and there is not yet a sufficiently clear picture for us to model FY13 with any degree of confidence. There has been considerable investment in the physical and human infrastructure of the business over the last year, however, and it would be reasonable to expect this to start producing a return in FY13. On a steady-state basis, this should be a cash-generative business, particularly as revenues from the backlist start to build. The group had cash of £2.3m (there is no debt) at the half year and we would expect a similar figure at the year end, allowing scope to take advantage of further opportunities such as the opening of the New York sales office, bringing on board further imprints or signing more recognised authors, all of which should help improve the longer-term prospects for the business.
2
Quercus | 17 October 2012
Company description: Emerging book publisher
Independent publisher of fiction, non-fiction and children’s books Quercus is a publishing house established in May 2004 by Mark Smith (CEO) and Wayne Davies (now Executive Director, Digital), who had worked together at Orion Publishing, part of Lagadère. The group has been built up as both a contract and a trade publisher, recruiting experienced editors to develop imprints across different market segments to build a broadly-based portfolio. Its development rapidly changed trajectory when the books of Stieg Larsson, in English-language translation from the Swedish originals, caught the public imagination and sold in almost unprecedented numbers.
Trade publishing at the core The Quercus imprint is at the heart of the business and is a general trade publisher. It aims to publish popular books including crime and thrillers as well as general and literary fiction. It also publishes in some non-fiction areas, with specialisms in biography, sport, history and popular science. MacLehose Press is the imprint covering translated literature and crime fiction, including Stieg Larsson. Jo Fletcher Books is a more recently-established imprint in the fields of science fiction, fantasy and horror. Quercus Children’s is focused on fiction for the 9+ age group, while Heron Books is creating a small and varied list, concentrating on “finding exceptional storytellers in both fiction and non-fiction”. Cookery is being added to the non-fiction lists – an important category in the pre-Christmas selling period.
In the earliest years of its development, Quercus (of necessity) was mostly seeking out new and unpublished authors and therefore carrying a more considerable risk. The ethos of developing new authors, and supporting their subsequent work, continues to be very important in the business. With the benefit of the Larsson legacy cash and with its enhanced industry profile, it is also now on the radar of more established authors, with proven sales. Naturally, they and their agents expect more in the way of advances, tying up greater quantities of working capital.
Exhibit 1: New titles
300 250 200 150 100 Number 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013e
Source: Company data, Edison
The recruitment of experienced and specialist publishers is key to growing and broadening the range that Quercus is able to offer in its lists, diversifying the risk by building a wide-ranging portfolio. While it is hoped that every title published will be both critically and commercially successful, the reality is that striking literary gold is a rare experience. Quercus has a good record of recognition in the various prizes, bestseller lists and book club recommendations. The book retail market overall is broadly flat, with strong growth in eBooks offsetting the decline in print books. Standing out in a dull market, with
3
Quercus | 17 October 2012
no immediate signs of upturn, is crucial. While new titles are the lifeblood, they ultimately swell the backlist, sales of which are important in the mix and obviously achieve a higher margin. Recent successes have included Things get Better by Katie Piper, Born Fearless by Phil Campion, The Lewis Man by Peter May and Monday to Friday Man by Alice Petersen, which was top of the bestseller list at Amazon as an eBook over the summer. In the latest Top 50 from The Bookseller, Prague Fatale by Philip Kerr has entered at number 42. Dorothy Koomson’s romantic fiction is also selling very well.
Again, attention tends to focus on fiction, but Quercus is also extending its non-fiction product, particularly important in the crucial pre-Christmas market. This year, the offer includes a major David Attenborough BBC One television tie-in, Africa: Eye to Eye with the Unknown.
Extending geographic reach
Exhibit 2: Geographic sales mix 2011
Canada Other 4% 3%
USA 26%
UK 67%
Source: Company accounts
Quercus’ ambitions are centred on building a successful English-language publisher, not simply one successful in its own domestic market. The big potential prize is North America. The recently- announced distribution deal in the US with Random House (part of the major Bertelsmann publishing empire) could therefore be a significant scale-up in international sales. Again, it is unlikely that this would have been possible, or at least on as good terms (not disclosed) without the industry air-time that the success of Stieg Larsson achieved. An earlier attempt to gain scale in the US market via an arrangement with Sterling Publishing, a subsidiary of Barnes & Noble, was unwound when the former was (unsuccessfully) put up for sale. This new arrangement, launched at the start of this year’s Frankfurt Book Fair, entails the opening of a small New York sales office to support a multi-year sales and distribution partnership with Random House Publisher Services (RHPS).
Cracking the US market would be transformational in terms of scale. The exercise is being started on a relatively small scale, with an initial offering of 40 titles from genres across the offer.
Digital – rights, delivery and outreach
The growth in popularity of eReaders has been dramatic. Figures from the US (see Exhibit 3 below) show particularly strong growth in 2011, when penetration climbed from 5.4% to 14%. Growth projections from eMarketer show this pace slowing, but that is a function of cannibalisation from the broader tablet market. The purchase of eBooks on tablets is surprisingly high; a survey for the Online Publishers Association in March 2012 showed that 35% of US tablet owners had used it to buy a book – ahead of the number buying films and TV shows or newspaper or magazine subscriptions. Bowker Market Research’s 2012 Survey on eBook readership showed 23% of all female online adults had bought at least one eBook; 19% of males.
4
Quercus | 17 October 2012
Exhibit 3: US penetration of eReaders
60 25.0%
50 20.0% 40 15.0% 30 % 10.0% 20 millions 10 5.0% 0 0.0% 2009 2010 2011 2012e 2013e 2014e 2015e
eReader installed base (m) % population
Source: eMarketer
Quercus is unsurprisingly experiencing similar increases in eBook sales, with H112 digital revenues more than doubling as a percentage of sales year-on-year to 25.6%. As well as in-house authors who have been signed for all formats, the group has a growing list of eBook-only publications, where digital rights from established authors have been separately acquired. 100 titles are already in the catalogue and this is a targeted area for growth over the next 12 months. The group is endeavouring to be as platform-agnostic as possible, preparing editions for a variety of formats including the NOOK, iPad and Kindle Fire. After much prevarication, the Barnes & Noble-developed NOOK is expected to be launched imminently in the UK market, selling through retailers such as PC World and Currys.
Additionally, Quercus is developing the functionality to sell directly to the consumer through both its own imprints’ websites and through the generic themed websites set up for specific fan communities in sectors such as science fiction. This is being carried out in-house by the team under Wayne Davies, Executive Director, Digital. With the traditional routes to market – the bricks and mortar bookshops – still unclear how to reinvent themselves for the new reality, one of the biggest issues for publishers is discoverability, ie how to reach potential readers/purchasers when browsing opportunities are rare. By engaging with communities of bloggers and online enthusiasts, Quercus is working harder than most to drive demand from the bottom up. The integrated CRM function allows the capture of data from participating individuals, building a valuable (and potentially monetisable) resource.
Management team all with high-trade recognition All of the Quercus management team has extensive industry experience gained at many industry majors. The addition of Colin Adams as CFO and COO has obvious resonance from his previous experience at Bloomsbury, a UK independent publishing house dealing with the repercussions of having a remarkably successful series of trade books. At Bloomsbury he was CFO, joining the group pre-IPO and overseeing considerable expansion both organic and by acquisition. He joins the team after a brief period at Huntsworth plc, before which he had been with Bloomsbury since 1994 and before that with Larousse (part of the Lagadère Group).
Before setting up Quercus, Mark Smith and Wayne Davies spent their careers at larger publishers, building up the experience necessary to run their own business. They worked together at Orion (also part of the Lagadère Group) as managing director and publishing director, respectively and had previously both worked at Letts, but not at the same time. The MD of the Trade Division, David North, has over 30 years’ experience in the sector, most recently as MD of Pan MacMillan. The individual imprints are headed by well-known industry figures (see page 4). The Executive Team is completed by Sales Director Caroline Proud, who oversees the sales and marketing operations, and by Editor-in-
5
Quercus | 17 October 2012
Chief Jon Riley. Caroline was peviously MD of Conran Octopus (Lagadère), Sales Director of Profile Books (an independent publisher of titles, including books under The Economist imprint) and UK Group Sales Director at Simon & Schuster (CBS). Jon Riley is responsible for the trade fiction list, covering both fiction and non-fiction. He was formerly editor-in-chief at Faber and Faber, where he worked with a number of well-known and successful authors.
Non-executive Chairman David Potter brings extensive experience within the quoted arena, having worked in the finance sector for 35 years in senior executive positions including Investec Bank UK, where he was deputy chairman, Guinness Mahon as group CEO and previously at CSFB, Samuel Montagu and Midland Bank. He is also the non-executive chairman of AIM-listed Spark Ventures and a non-executive director of Otus VCT. Pentland Group, which backed the group at an early stage and still has a 47% holding in the equity, is represented on the board by Barry Mosheim.
Quercus’ rapid success was widely recognised in the industry with awards including Publisher of the Year at the Bookseller Awards in May 2011. Quercus was awarded PLUS Company of the Year and won the PLUS markets category at last year’s Growth Company Awards.
Publishers relatively stable; retailers in flux
Publishing ownership in few hands While there are a huge number of imprints available to the retail market, their ownership has concentrated significantly such that the bulk of the market is now in the hands of six large and broad media-owning organisations. The majority of the ultimate parent companies are quoted, with the exception of Georg von Holtzbrinck, a private family-owned German group. While there are still plenty of independent publishing houses, only a handful have regular entrants in the best-seller charts, with Bloomsbury, Quarto and Quercus among the most prominent names in the UK; Phoenix (and its associated children’s imprint Pickwick Press) one of the very few in the US.
Exhibit 4: Imprint ownership by major publishers
Bertelsmann Pearson Lagadère Holtzbrinck News Corp CBS Random House Ebury Press Transworld Publishing Arrow BBC Books "Expert" Berkley Hachette Macmillan Avon Free Press Black Lace Ebury Anchor Dorling Headline Pan Blue Door Pocket Books Kindersley Bodley Head Rider Bantam Hamish Hamilton Hodder Picador Fourth Estate Scribner Century Time Out Black Swan Ladybird John Murray Harper Collins Simon & Shuster Chatto & Windus Vermillion Channel 4 Michael Joseph Little, Brown Voyager Touchstone Everyman Virgin Corgi Penguin Octopus Fodor Doubleday Puffin Orion Hutchinson Putnam Piatkus Jonathan Cape Viking Sceptre Nexus Sphere Vintage Virago Windmill Weidenfeld & Nicholson Source: Companies’ websites
In The Bookseller Top 50 chart for the week ending 29 September 2012, there were 26 imprints represented. Those belonging to Bertlesmann accounted for 15 of the top 50, Lagadère imprints took
6
Quercus | 17 October 2012
nine slots, Pearson and News Corp seven each. Independent publishers were responsible for just six bestselling titles, three of which were by Suzanne Collins for US independent, Scholastic. In terms of revenues generated from the top 5,000 titles, Pearson took top slot with £2.9m, followed by Hachette (£2.3m), then Bertelsmann and News Corp both selling in the order of £1.7m. The big six (see Exhibit 4 above) generated 96% of the revenues earned by those 5,000 titles.
Pricing structures undermined The Recommended Retail Price printed on a physical book is rarely more than just that – recommended. Achieved prices for bestselling titles are, on average, 56% of the recommended level. This is partly due to high jacket prices to enhance perceived value, partly the result of a market that has got used to discounting such as three for two offers.
Adding to this already dynamic pricing structure is e-book pricing – also in a state of flux. The recent launch of a few potential best sellers priced at 20p is causing understandable consternation in the retail book trade, already under a huge amount of pressure from the rapid shift of the market towards digital. Generally, there is already considerable confusion in the consumer market about the cost of eBooks due to the lack of understanding of the costs of bringing a book to market, with the further complication of eBooks being subject to VAT, where print books are not.
The hiatus over the agency distribution model continues, with Harper Collins, Simon & Schuster and Hachette all now renegotiating their terms with retailers in the aftermath of the Department of Justice judgement in the US, which declared the agency arrangements originally reached by several publishers with Apple as illegal.
Sensitivities
For any publisher, the key metric of success is sales of books to readers (not just to retailers, who can return them), both in physical and digital form. Even if success is achieved with one title, there is no guarantee it can be repeated. For some smaller publishers, achieving a high-selling hit can be an issue in itself, in that it places difficult-to-better-targets for future periods. For Bloomsbury, this stemmed from the runaway hit status of the Harry Potter books. Quercus has looked to see what it can learn from its experience in the run down from the Millennium Trilogy. Overall patterns of book sales and forecast totals are therefore a very poor indicator of the likely outturn.
The book retail sector has had an extremely bumpy ride over the last few years, with few having been willing to face up to the shift in distribution patterns at an early enough stage to make effective adjustments to their business models. The land-grab by Amazon, with its ability to carry extensive backlists, highlighted the difficulties in the traditional bricks-and-mortar specialists, who resorted to discounting on hit titles to bring in trade, bringing them into direct competition with the multiple grocers. The resulting fallout has yet to fully work through, although we are moving towards the end game. It has also served to accentuate the necessity of driving demand through alternative channels: sponsored book clubs, winning prizes and harnessing social media. So far, Quercus has been among the most proactive in the industry in addressing these opportunities.
As Quercus grows its business, geographical base and number of imprints, the day-to-day administration of the group increases in complexity. However, members of the management team all have experience of working at larger publishers and are familiar with the issues that arise, including the inevitable competing claims for resourcing. With mostly debut or comparatively recently-published authors, expectations for advances and agents’ fees are, for now, at the lower end of the scale. As
7
Quercus | 17 October 2012
authors become more established (and as more established authors are attracted to Quercus), advances are inevitably increasing.
With a large proportion of international content and sales, it is necessary to manage currency exposure, with US, Canadian and Australian dollars all meaningful. The group does not currently hedge its exposure.
Valuation
Quercus is quoted on PLUS Markets. It listed in 2006, at an early stage of its corporate development, and the level of investor recognition and understanding of the business model is lower than if it were listed on a more senior market. The lack of liquidity, due to the large holdings by Pentland (47%), which provided much of the original investment funding, together with the directors (17%), also inhibit the current potential for re-rating.
Peer comparison most relevant for valuation With forecasting at this stage of the group’s corporate development an inexact art at best, we have made relatively conservative modelling assumptions about the speed of growth of the business, such as the number of new titles scheduled for launch (see Exhibit 1). However, the success or otherwise of titles with the public can defy the input of the most skilled commissioners and editors.
Exhibit 5: Peer comparisons
Price Mkt Cap EV/Sales1 EV/EBITDA1 P/E P/E1 P/E2 Yield Disc 1 Bloomsbury 136p £103m 0.83 6.3 10.5 11.2 10.5 3.7% 9.4% Quarto 154p £31m 0.52 2.6 3.4 3.6 3.3 5.0% (31.2%) Quercus 83p £17m 0.59 2.9 3.8 4.7 6.4% (8.7%) Haynes 187p £31m 0.87 3.4 7.0 8.4% 22.7% Average 0.70 3.8 6.1 6.5 6.9 5.9% (1.9%) Source: Edison Investment Research, company accounts, Thomson Reuters. Note: Prices as at 16 October 2012.
The performance of most of the competitors is masked by the fact that they are subsumed within larger organisations with wider media interests, as shown in Exhibit 4 above. Market ratings are more heavily influenced by other factors such as the advertising cycle and the progress in transition to online, rather than by the book-buying habits of the public and therefore they do not make for sensible comparisons. What is clear from the peer comparisons is that the market is nervous of an industry where the route to market and pricing mechanisms are undergoing such upheaval and where the end game may still be a way off.
The contrast between the ratings of the two other listed UK independent publishers is stark. We have included Haynes Publishing, but have used historic data as no market forecasts are available. Its valuation reflects the lack of liquidity in the shares and the historic rather inward-looking communications strategy. Bloomsbury provides a clear example of how a publishing business can move beyond a phenomenal one- (or seven-) off success, but also has a business model that incorporates a growing proportion of professional- and business-orientated output, including contracted subscription income. Quarto has a successful contract publishing business, with a high proportion of backlist-generated income and is more exposed to the US than the UK. Its rating is overshadowed by its apparent financial gearing, exaggerated by a balance sheet not fully reflecting the value of its backlist. Quercus’s rating reflects the comparative brevity of its financial record and the
8
Quercus | 17 October 2012
delayed returns, PLUS Market quotation and the lack of liquidity in the shares, all of which should be resolved over time.
Financials
In light of the interim figures and accompanying statement, we have made the following adjustments to our current year forecasts and, for now, have withdrawn our provisional thoughts on the following year. We would expect to reinstate these when the recently-arrived CFO and COO Colin Adams has had sufficient opportunity to review and consider the internal budgeting procedures. However, there has been a considerable scaling-up in the investment made over end-2011/H112 in editors, authors, technology and support such as marketing for the various imprints. Much also depends on the timing of the ramp-up of the distribution into the North American market.
It is not unreasonable that we expect to see this investment programme start to pay back in 2013.
Exhibit 6: Changes to forecasts
EPS PBT EBITDA Old New % change Old New % change Old New % change 2012e 25 17.5 -30% 7 5.0 -29% 7.1 5.1 -28% Source: Edison Investment Research
Replacing Larsson earnings The extraordinary success of the Larsson franchise has left the group with a challenging task of showing steady progress in the revenue line. Even if one could strip out these revenues, it would not give a true picture of the development of the business. Its success has facilitated the growth of the remainder of the group in ways that would not otherwise have been possible, such as providing the market presence in which to recruit publishers, agents and authors who might otherwise have been reluctant to join such a young and unproven house.
Exhibit 7: Revenue by segment
£35m £30m £25m £20m
Revenue £15m £10m £5m £m 2008 2009 2010 2011 2012e
Trade Publishing e-books Rights and contract publishing
Source: Company data, Edison Investment Research
We expect the overall level of FY12 revenue to be broadly comparable with the previous year, but we expect the level of e-book sales to have increased. With the retention of rights for the US business, there has been a step change in the level of rights sales over the last couple of years. At the interim stage, revenues were £2.72m below the previous year, of which management stated that around £2m reflects fewer sales of Larsson books. This is in part due to the impact of the latest publishing phenomenon, the Fifty Shades... series, which has taken a high market share (particularly among
9
Quercus | 17 October 2012
women, who purchase the majority of books) in an overall dull market over the summer months. With the Larsson sales now reaching annuity-type levels, this step down is a one-off effect, although we would expect to see a degree of uplift in sales with the release of any subsequent films. Royalty receipts from the US were also down, due to various editions being rested ahead of any future films, although this was not quantified.
The investment in additional overhead, such as moving into a fit-for-purpose office, is evident in achieving an operating margin that has more than halved, from 23.8% to 10.8%, with administrative expenses climbing 46% year-on-year in the H112 figures. With the bulk of profit naturally falling in the second half, our full-year estimate shows this bouncing back up to just over 20% for the full year. With a resumption of top line growth, the operating leverage should allow margins to be restored.
Prospects for FY13 depend greatly on the phasing of further investment and the timing of the return of investments made in the new imprints, editors, authors, CRM systems and online communities over the last year. We expect to be in a position to model this shortly.
Cash flow also in investment phase The group has little natural requirement for capital expenditure, nor does it need to carry significant levels of stock, although it does have a need to invest continuously in new titles and authors. As authors within the various imprints become more established, they and their agents demand higher advances and fees and this is becoming a more meaningful item within the budget. The working capital requirement of the group has therefore increased and it would be likely that this position would continue. In a ‘normal’ year, though, we would still expect the group to be inherently cash generative.
The Larsson benefit was shared with shareholders by means of a special dividend of 7p, paid alongside the final dividend for FY10 when Quercus joined the dividend list. The group pays a final dividend only, increased by 5% for FY11.
Still cash resource on balance sheet Despite the particular circumstances of the current year, there was cash on the balance sheet of £2.27m at the half year and our model shows this figure being at around the same level at the end of the calendar year. The group carries no debt. The shift to a greater proportion of digital sales has a positive effect on the balance sheet as there is no associated requirement to hold physical stock. The positive cash position allows scope to pursue additional opportunities that may crop up, as well as investing in author advances.
10
Quercus | 17 October 2012
Exhibit 8: Financial summary £'000s 2010 2011 2012e Year end 31 December IFRS IFRS IFRS PROFIT & LOSS Revenue 31,784 24,759 24,800 Cost of Sales (15,870) (9,558) (9,920) Gross Profit 15,914 15,201 14,880 EBITDA 7,728 6,041 5,130 Operating Profit (before amort and except) 7,636 5,898 5,005 Intangible Amortisation 0 0 0 Exceptionals 0 0 0 Other 0 0 0 Operating Profit 7,636 5,898 5,005 Net Interest (151) (22) (5) Profit Before Tax (norm) 7,485 5,876 5,000 Profit Before Tax (FRS 3) 7,485 5,876 5,000 Tax (2,074) (1,506) (1,350) Profit After Tax (norm) 5,410 4,370 3,650 Profit After Tax (FRS 3) 5,410 4,370 3,650 Average Number of Shares Outstanding (m) 17.6 19.6 20.5 EPS - normalised (p) 31.1 22.3 17.8 EPS - normalised fully diluted (p) 26.7 22.0 17.5 EPS - (IFRS) (p) 30.8 22.3 17.8 Dividend per share (p) 5.0 5.3 5.5 Gross Margin (%) 50.1 61.4 60.0 EBITDA Margin (%) 24.3 24.4 20.7 Operating Margin (before GW and except) (%) 24.0 23.8 20.2 BALANCE SHEET Fixed Assets 156 588 613 Intangible Assets 0 0 0 Tangible Assets 156 588 613 Investments 0 0 0 Current Assets 19,894 18,657 21,024 Stocks 2,726 2,841 2,760 Debtors 11,700 11,525 15,048 Cash 5,468 4,291 3,216 Other 0 0 0 Current Liabilities (10,126) (6,060) (6,070) Creditors (9,004) (6,060) (6,070) Short term borrowings (1,122) 0 0 Long Term Liabilities 0 (3) 0 Long term borrowings 0 0 0 Other long term liabilities 0 (3) 0 Net Assets 9,925 13,182 15,567 CASH FLOW Operating Cash Flow 7,130 4,554 1,535 Net Interest (151) (6) (5) Tax (256) (2,870) (1,428) Capex (99) (581) (100) Acquisitions/disposals 0 0 0 Financing 0 1,310 0 Dividends 0 (2,462) (1,077) Net Cash Flow 6,624 (55) (1,075) Opening net debt/(cash) 2,278 (4,346) (4,291) HP finance leases initiated 0 0 0 Other 0 0 0 Closing net debt/(cash) (4,346) (4,291) (3,216) Source: Company accounts, Edison Investment Research
11
Quercus | 17 October 2012
Contact details Revenue by geography
55 Baker Street 7th Floor, South Block % 28% 67% 7% London W1U 8EW +44 (0)20 7291 7200 www.quercusbooks.co.uk US UK Other
CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation
EPS 08-12e N/A ROCE 12e 33% Gearing 12e N/A Litigation/regulatory EPS 10-12e -19% Avg ROCE 08-12e 46% Interest cover 12e N/A Pensions EBITDA 08-12e 137% ROE 12e 24% CA/CL 12e 3.5x Currency EBITDA 10-12e -18.5% Gross margin 12e 60% Stock days 12e 41 Stock overhang Sales 08-12e 23% Operating margin 12e 20% Debtor days 12e 236 Interest rates Sales 10-12e -12% Gr mgn / Op mgn 12e 3x Creditor days 12e 79 Oil/commodity prices
Management team
Chairman: David Potter Co-founder and CEO: Mark Smith David is non-executive chair of Spark Ventures and a non-executive Before founding Quercus with Wayne Davies in 2004, Mark was MD of director of Otus VCT. He has 35 years’ experience in the finance sector, Custom Publishing at Orion Publishing Group, where his brief included including Investec Bank UK, where he was deputy chair, Guinness monetising the backlists and archives of Orion and Weidenfeld & Mahon as group CEO and previously at CSFB, Samuel Montagu and Nicolson. Previously, he was head of business development at Letts Midland Bank. Educational, sales and marketing manager, MQ Publications and head of sales development, ABC Ents, Australia.
CFO and COO: Colin Adams A chartered accountant (KPMG), Colin joined CAM Galaxy Holdings Ltd, a marketing services company, as financial controller in 1989. In 1991 he joined Larousse plc, before joining Bloomsbury in 1994, pre-IPO. As FD of Bloomsbury, he was involved with a number of fund raisings and acquisitions. He is also a non-executive of Autharium Ltd and is on the Investment Committee of the Creative Capital Fund, which provides seed capital for London based media businesses.
Principal shareholders (%)
Pentland Group 47.25 Mark Smith 13.26 Artemis 6.46 A Cheetham 5.67 Wayne Davies 3.79
Companies named in this report
Bloomsbury, Quarto, Haynes
EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. It has won industry recognition, with awards both in Europe and internationally. The team of 95 includes over 60 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 400 companies across every sector and works directly with corporates, fund managers, investment banks, brokers and other advisers. Edison’s research is read by institutional investors, alternative funds and wealth managers in more than 100 countries. Edison, founded in 2003, has offices in London, New York and Sydney and is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584).
DISCLAIMER Copyright 2012 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Quercus and prepared and issued by Edison Investment Research Limited for publication in the United Kingdom. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison Investment Research Limited at the time of publication. The research in this document is intended for professional advisers in the United Kingdom for use in their roles as advisers. It is not intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. A marketing communication under FSA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison Investment Research Limited has a restrictive policy relating to personal dealing. Edison Investment Research Limited is authorised and regulated by the Financial Services Authority for the conduct of investment business. The company does not hold any positions in the securities mentioned in this report. However, its directors, officers, employees and contractors may have a position in any or related securities mentioned in this report. Edison Investment Research Limited or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. This communication is intended for professional clients as defined in the FSA’s Conduct of Business rules (COBs 3.5).
Registered in England, number 4794244. Edison Investment Research is authorised and regulated by the Financial Services Authority. www.edisoninvestmentresearch.co.uk London +44 (0)20 3077 5700 New York +1 646 653 7026 Sydney +61 (0)2 9258 1162 Lincoln House, 296-302 High Holborn 245 Park Avenue, 24th Floor, Level 33, Australia Square, 264 George St, 12 London, WC1V 7JH, UK NY 10167, New York, US Sydney, NSW 2000, Australia