Mondo TV — YooHoo! Netflix deal drives significant upgrades

TMT

Mondo TV

YooHoo! Netflix deal drives significant upgrades

Budget update

Media

4 December 2017

Price	€6.2
Market cap	€187m

Net debt (€m) at end September 2017		0.5m

Shares in issue	30.2m
Free float	52%
Code	MTV

Primary exchange	Borsa Italiana Star
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	0.2	63.5	66.9
Rel (local)	4.2	61.4	27.5

52-week high/low

€6.6

€3.6

Business description

Mondo TV is a global media group with a focus on the production, acquisition and exploitation of animated children’s television series. Headquartered in Rome, it also holds controlling stakes in listed subsidiaries Mondo TV France (47%), Mondo TV Suisse (67%) and Mondo TV Iberoamerica (72%). It owns the rights to over 1,500 TV episodes and films, which it distributes across 75 markets. 80% of revenues are generated in Asia, 10% in Italy, 7% in Europe and 3% in America.

Next events

Full-year results

March 2018

Analysts

Bridie Barrett	+44 (0)20 3077 5700
Fiona Orford-Williams	+44 (0)20 3077 5739

media@edisongroup.com

Edison profile page

Mondo TV is a research client of Edison Investment Research Limited

Underpinned by its recently announced Netflix global deal for YooHoo and Friends, as well as a couple of major new productions for the Chinese market, Mondo has significantly increased net profit expectations over the next five years. We upgrade our forecast net profit by 4%, 40% and 44% for the three forecast years, respectively. FY18 P/E and EV/EBIT parity with peers could drive the shares up towards €9.0 per share.

Year end	Revenue (€m)	EBIT (€m)	PBT* (€m)	EPS* (€)	DPS (c)	EV/EBIT (x)	P/E (x)
12/15	16.8	5.6	5.4	0.12	0.0	35.9	53.0
12/16	27.4	12.7	12.7	0.32	2.0	15.8	19.2
12/17e	37.6	20.0	18.7	0.46	0.0	10.0	13.6
12/18e	47.0	22.1	21.8	0.53	0.0	9.1	11.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Global deal with Netflix, new Chinese productions

Mondo’s recently announced deal with Netflix for the global distribution of its new flagship production, YooHoo and Friends, represents a milestone for the group. As well as being its first deal with an OTT major player, it is its first US premiere and with production cost already covered, we expect it to have a significant impact on profitability from 2019. Mondo has also announced two new major productions for a total value of $16m with a new Chinese partner, of which one has already been licensed in China.

Significant increase to five-year plan

Having already edged ahead its full-year guidance after the H117 results, following the Q3 results in November, which showed revenues increase of 43% and net earnings growth of 92% to €9.2m, management increased its net profit guidance once again for the current year to €12.5m (from €12.0m). The deals outlined above have also prompted a material upgrade to its five-year business plan to 2022, with EBITDA expected to more than quadruple over the period, on a broadly unchanged level of investment in content. We are upgrading our earnings forecasts significantly over the next three years, reflecting our confidence that the budget is well underpinned.

Valuation: Upgrades should drive further re-rating

The shares have deservedly performed well over the last few months. Following the upgrades, they now trade on a 40-60% discount to peers based on FY18e EV/EBIT and P/E multiples despite higher forecast earnings growth over the three-year period. A rating in line with peers could provide upside to €9.0 per share. We note that the strong share price performance could result in exercising up to 3.6m of warrants (€6.5/share, €8/share and €10/share), which would bring extra cash.

Trading update

Nine-month results – FY17 net profit guidance increased by 4%

2017 is shaping up to be an excellent year for Mondo, which is starting to see good returns on some of its newer brands. Revenue growth at nine months was 43% (34% at H1), and EBITDA of €17.4 increased by 52%, with margins increasing to 72% as a result of a greater share of revenues from rights sales and licensing, now accounting for the larger part of revenues. After adjusting for the amortisation on an increasing budget for content investment, EBIT increased by 74% to €12.9m and net earnings increased 92% to €9.2m.

Having already increased its guidance for 2017 after the H117 results, management has again increased its guidance for FY17 net earnings to €12.5m (from €12.0m).

Global Netflix deal for YooHoo and Friends

We noted in our initiation that Mondo was close to signing its first agreement with a global OTT platform for its flagship series under production, YooHoo and Friends.

On 16 October, Mondo TV Suisse (67% subsidiary of Mondo TV) and its Korean partner, Aurora World, announced a deal with Netflix. The series will be presented as a Netflix Original with the first series scheduled to premiere in the US in late 2018. Netflix has acquired the global rights (with the exception of certain European markets where it will first premiere on free-to-air television before moving to Netflix).

This is the first deal Mondo has done with a global OTT platform and also represents its first premiere in the US market, a significant step forward for its international strategy and ambition to develop a global brand. It will also have a material financial impact from 2019 and is one of the key reasons behind management’s update to its five-year business plan (see below). A high-profile sale of TV rights supports the potential for licensing and merchandising opportunities (which remain substantially owned by Mondo and Aurora).

Two new productions in China

Another significant announcement relates to two new 3D CGI animation projects (on 13 November) in partnership with Chinese firms Hong Kong HKHZ Media (production) and HKYueke (pre-production). Production will start in January 2018 and Mondo will contribute to the total $16m budget. It has already covered its share of the production budget via a licensing agreement with Hong Kong Yiqi Culture Film & Television Media Co for €6.3m for distribution within China (Mondo retains 30% of the rights and 80% of licensing revenues).

Updated five-year plan

Along with some smaller licensing deals, the above two announcements underpin management’s upgrades on 30 November to its five-year business plan (which now runs through to 2022), summarised in Exhibit 1.

Overall, on a broadly unchanged budgeted investment in content, the group has made little change to its aggregate revenue expectations, but, with the mix of revenues increasingly weighted towards rights and licensing sales, it has raised its EBITDA expectations substantially in 2019 and 2020, with an even more significant increase at the EBIT and net profit level. Rights sales and licensing can have a higher overall value but a lower EBIT margin).

Looking out five years, management budgets for a near tripling of net profit. The revenue/investment in content multiplier is forecast to increase from c 1.8x this year to 4.3x in 2022; this would bring it closer to but still much lower than those delivered by some of its larger peers; for example, the equivalent for eOne’s Family division is c16.7x.

Exhibit 1: New business plan vs old

€m	2017	2018	2019	2020	2021	2022
Revenue – new	37.64	47.0	61.8	76.0	88.6	100.24
Revenue – previous	37.64	52.3	60.6	73.3	84.5	N/A
Change – revenues	0%	-10%	2%	4%	5%	N/A
EBITDA
EBITDA – new	28.03	36.2	47.3	58.8	65.9	75.24
EBITDA – previous	27.83	36.8	43.0	54.0	63.8	N/A
Change – EBITDA		-2%	10%	9%	3%	N/A
EBIT
EBIT – new	20.00	22.1	31.7	38.6	45.3	50.2
EBIT – previous	19.80	19.6	25.4	31.7	38.2	N/A
Change – EBIT		13%	25%	21%	18%	N/A
Net profit
Net profit – new	12.53	15.8	21.5	25.4	30.0	32.2
Net profit – previous	12.03	12.7	17.0	20.4	24.6	N/A
Change – net profit		24%	26%	24%	22%	N/A
Revenue/content multiplier – new	1.8	2.2	2.8	3.2	3.8	4.3
Revenue/content multiplier – previous	1.8	2.5	2.8	3.1	3.6	N/A

Source: Mondo TV

Edison’s forecast changes

We increase our FY17 forecasts based on the improved outlook in the current year and update FY18 and FY19 forecasts with reference to management’s new plan. Whereas previously we had provided for a 5% contingency against this plan in FY18 and FY19, we believe that the fact that management is increasing its expectations as a result of the recent deals, provides comfort that budgets are being set relatively conservatively. We remove the 5% contingency in 2018 although retain a small contingency in FY19. We summarise our forecast revision in Exhibit 2.

These changes result in a substantial c 25% increase to our forecast for EBIT in FY18 and 39% increase in 2019. At the net profit level, we increase forecasts by 4%, 40% and 44%, respectively, over the forecast period.

A strong share price performance could trigger exercise of the warrants attached to the GEM and Atlas facilities. 20% (0.7m) of the warrants are at €6.5/share, 60% (2.2m) at €8/share and the balance is at €10/share. We note that while this could be somewhat dilutive to earnings, the exercise would also bring up to €29m in extra cash to the balance sheet.

Exhibit 2: Summary forecast changes

€m	2017e			2018e			2019e
	Old	New	Change	Old	New	Change	Old	New	Change
Revenues	37.6	37.6	0.0%	49.7	47.0	-5.6%	54.6	58.7	7.6%
EBITDA	27.8	28.0	0.7%	35.0	36.2	3.5%	38.7	45.0	16.2%
EBITDA margin	73.9%	74.5%	0.7pp	0.7	77.1%	9.6pp	70.9%	76.6%	8.0pp
Normalised EBIT	19.8	20.0	1.0%	17.7	22.1	24.7%	21.1	29.3	38.9%
Normalised EBIT margin	52.6%	53.1%	0.5pp	35.7	47.1%	11.4pp	38.7%	49.9%	11.2pp
Normalised net income	12.0	12.5	4.2%	10.9	15.2	40.1%	13.1	19.0	44.4%
Reported net income	12.0	12.5	4.2%	10.9	15.2	40.1%	13.1	19.0	44.4%
Normalised diluted EPS (€)	0.44	0.46	4.2%	0.4	0.53	40.1%	0.45	0.65	44.4%
Net debt/(cash)	-0.6	-1.4	125.9%	-11.4	-20.2	77.6%	-16.4	-41.6	153.3%

Source: Edison Investment Research

Valuation

Management’s new plan targets a near tripling of EBITDA over the five-year budget period. Even on a shorter time horizon, we are forecasting a three-year CAGR in EBITDA of 35% to FY19e.

The shares have performed justifiably well – nevertheless, the scale of the upgrade means that they continue to trade at a discount to peers.

Adjusting the EV for approximately €15m value of the minority interests, our new forecasts imply that the shares trade on an EV/EBIT of 9.1x in FY18 and 6.8x in FY19. In 2018, this is a 40-60% discount to the children’s entertainment peer set (13.8x in FY18) and the wider Italian media sector (12.4x in FY18). On an FY18 P/E of 11.7x and 9.5x in FY19 the discount is similarly large.

While Mondo TV’s smaller scale arguably could demand a discount to peers, we believe that its higher growth potential counterbalances this; we believe the shares have the potential to increase towards €9.0/share based on peer group average EV/EBIT and P/E multiples.

Exhibit 3: Financial summary

	€m	2014	2015	2016	2017e	2018e	2019e
31-December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
INCOME STATEMENT
Revenue		11.3	16.8	27.4	37.6	47.0	58.7
Cost of Sales		(3.8)	(7.9)	(9.3)	(9.6)	(10.8)	(13.8)
Gross Profit		7.5	8.9	18.1	28.0	36.2	45.0
EBITDA		7.5	8.9	18.1	28.0	36.2	45.0
Normalised operating profit		2.2	5.6	12.7	20.0	22.1	29.3
Amortisation of acquired intangibles		0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		0.0	0.0	0.0	0.0	0.0	0.0
Share-based payments		0.0	0.0	0.0	0.0	0.0	0.0
Reported operating profit		2.2	5.6	12.7	20.0	22.1	29.3
Net Interest		(0.4)	(0.1)	0.0	(1.3)	(0.3)	(0.3)
Joint ventures & associates (post tax)		0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		0.0	0.0	0.0	0.0	0.0	0.0
Profit Before Tax (norm)		1.8	5.4	12.7	18.7	21.8	29.0
Profit Before Tax (reported)		1.8	5.4	12.7	18.7	21.8	29.0
Reported tax		(0.0)	(2.2)	(4.5)	(5.5)	(5.9)	(7.8)
Profit After Tax (norm)		1.8	3.3	8.3	13.2	15.9	21.2
Profit After Tax (reported)		1.8	3.3	8.3	13.2	15.9	21.2
Minority interests		(0.1)	(0.2)	0.3	(0.7)	(0.7)	(2.2)
Discontinued operations		0.0	0.0	0.0	0.0	0.0	0.0
Net income (normalised)		1.7	3.1	8.6	12.5	15.2	19.0
Net income (reported)		1.7	3.1	8.6	12.5	15.2	19.0

Basic average number of shares outstanding (m)		26	26	26	27	29	29
EPS - basic normalised (€)		0.07	0.12	0.32	0.46	0.53	0.65
EPS - diluted normalised (€)		0.07	0.12	0.32	0.46	0.53	0.65
EPS - basic reported (€)		0.07	0.12	0.32	0.46	0.53	0.65
Dividend (€)		0.00	0.00	0.02	0.00	0.00	0.00

Revenue growth (%)			48.5	63.2	37.3	24.8	25.1
Gross Margin (%)		66.4	52.7	66.0	74.5	77.1	76.6
EBITDA Margin (%)		66.4	52.7	66.0	74.5	77.1	76.6
Normalised Operating Margin		19.6	33.2	46.4	53.1	47.1	49.9

BALANCE SHEET
Fixed Assets		19.6	25.0	37.0	50.5	57.5	63.7
Intangible Assets		9.7	16.1	31.4	44.9	51.9	58.1
Tangible Assets		0.3	0.3	0.3	0.3	0.3	0.3
Investments & other		9.7	8.5	5.3	5.3	5.3	5.3
Current Assets		27.5	32.2	37.8	47.5	59.2	74.6
Stocks		0.0	0.0	0.0	0.0	0.0	0.0
Debtors		18.4	22.3	31.7	41.1	36.0	30.0
Cash & cash equivalents		0.4	2.9	1.8	4.1	22.9	44.3
Other		8.7	7.0	4.3	2.3	0.3	0.3
Current Liabilities		(15.4)	(14.5)	(14.1)	(14.7)	(14.4)	(14.8)
Creditors		(10.2)	(10.9)	(11.7)	(12.3)	(12.0)	(12.4)
Tax and social security		(0.1)	(0.1)	(0.2)	(0.2)	(0.2)	(0.2)
Short term borrowings		(3.9)	(2.9)	(2.1)	(2.1)	(2.1)	(2.1)
Other		(1.3)	(0.7)	(0.1)	(0.1)	(0.1)	(0.1)
Long Term Liabilities		(0.6)	(0.4)	(0.8)	(0.8)	(0.8)	(0.8)
Long term borrowings		(0.2)	(0.2)	(0.6)	(0.6)	(0.6)	(0.6)
Other long term liabilities		(0.4)	(0.2)	(0.2)	(0.2)	(0.2)	(0.2)
Net Assets		31.2	42.3	59.9	82.6	101.5	122.7
Minority interests		1.0	1.4	0.6	0.6	0.6	0.6
Shareholders' equity		32.2	43.7	60.4	83.2	102.1	123.3

CASH FLOW
Op Cash Flow before WC and tax		7.5	8.9	18.1	28.0	36.2	45.0
Working capital		(2.8)	(0.4)	(1.9)	(6.9)	6.9	6.4
Exceptional & other		(0.5)	1.0	0.7	0.0	0.0	0.0
Tax		(0.0)	(2.2)	(4.5)	(5.5)	(5.9)	(7.8)
Net operating cash flow		4.1	7.3	12.5	15.6	37.2	43.5
Capex		(7.3)	(9.8)	(20.6)	(21.6)	(21.1)	(21.8)
Acquisitions/disposals		0.0	0.0	0.0	0.0	0.0	0.0
Net interest		(0.3)	(0.2)	(0.2)	(0.3)	(0.3)	(0.3)
Equity financing		3.4	6.1	7.2	8.5	3.0	0.0
Dividends		0.0	0.0	0.0	0.0	0.0	0.0
Other		0.2	0.1	0.3	0.0	0.0	0.0
Net Cash Flow		0.1	3.4	(0.7)	2.3	18.8	21.4
Opening net debt/(cash)		3.7	3.6	0.2	0.8	(1.4)	(20.2)
FX		0.0	0.0	0.0	0.0	0.0	0.0
Other non-cash movements		0.0	0.0	0.0	0.0	0.0	0.0
Closing net debt/(cash)		3.6	0.2	0.8	(1.4)	(20.2)	(41.6)

Source: Mondo TV (historicals), Edison Investment Research (forecasts)

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Mondo TV and prepared and issued by Edison for publication globally. 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 at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA 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 has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison 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. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Equities

Equities by Sector

Sectors

Investment Strategy

Latest

Equity strategy and market outlook – March 2024

Equity strategy and market outlook – February 2024

Equity strategy and market outlook – January 2024

Thematics

Latest

Listed private equity – Performing a balancing act

ConsumerWatch – At least someone loves me

MediaWatch – Rinse and repeat

Audiovisual

Latest

IP Group – executive interview

Take on Trusts – March 2024

Oakley Capital Investments – executive interview

About Edison

About Edison

Careers

Mondo TV (MI: MTVI)

Mondo TV — YooHoo! Netflix deal drives significant upgrades

TMT

TMT

Latest

Ultimovacs — Steadfast commitment to UV1 progression

OSE Immunotherapeutics — AbbVie deal clears antitrust hurdle

Jersey Electricity — Decarbonisation fuelling growth

Foxtons Group — FY24 underpinned by market share gains

Manx Financial Group — Executing on a high-growth strategy

More on Mondo TV

Mondo TV — Disco Dragon has all the moves

Mondo TV — Production value well ahead

Mondo TV — MeteoHeroes are go for gaming

Mondo TV — The deals keep coming

Latest from the TMT sector

Next 15 Group — Baked in AI opportunities

IP Group — Several potential portfolio catalysts on the horizon

Checkit — New product launch and contract wins

EML Payments — Cutting the final link to PFS vendors

Collplant Holdings — Steady commercial advancement

Subscribe to Edison