SpaceandPeople — Update 29 March 2016

SpaceandPeople — Update 29 March 2016

SpaceandPeople

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

SpaceandPeople

Transitioning the proposition

Final results

Media

29 March 2016

Price

60.0p

Market cap

£12m

Net cash (£m) at 31 December 2015

0.7

Shares in issue

19.5m

Free float

81.9%

Code

SAL

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.6

(4.0)

8.1

Rel (local)

2.1

(1.3)

29.1

52-week high/low

87.5p

54.0p

Business description

SpaceandPeople markets and sells promotional and retail licensed space on behalf of shopping centres and other venues throughout the UK and Germany and also in France and India.

Next events

AGM

28 April 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

SpaceandPeople is a research client of Edison Investment Research Limited

SpaceandPeople (SAL) has had a transitional year in terms of both its client base and its products and services. With the Network Rail contract and the more recent British Land wins, there is plenty of promise for future growth, clearly more than offsetting lower revenues from Retail Merchandising Units. Headline FY15 numbers were also affected by the translational effect on German revenues and slower-than-hoped build in revenues from S&P+. This is all factored into the rating, which remains at a discount to other small marketing services businesses, despite the premium yield.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

15.4

1.2

3.9

2.0

15.4

3.3

12/15

13.8

1.1

4.3

2.2

14.0

3.7

12/16e

14.2

1.5

5.3

2.4

11.3

4.0

12/17e

14.8

1.7

6.0

3.0

10.0

5.0

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

Transformative potential of new initiatives

FY15 results reflect the shift in business model, with the decline in usage of Retail Merchandising Units (RMUs) and switch to the Mobile Promotion Kiosks (MPKs). German sales increases were offset by the shift in £:€ and a change in revenue recognition deferred £150k of net promotional revenues into FY16. Following a strong start, S&P+ has yet to build in the way initially envisaged, although it is showing good progress in the number of projects. The UK MPK business is picking up and occupancy in Germany is improving. However, these factors are overshadowed by the transformative potential of the five-year Network Rail contract, Immochan (currently running a pilot project) and, more recently, the British Land contract (see February note). It is early days for all these initiatives and the timing on returns from them are not yet clear. With additional levels of cost taken on board to support the growth, we have taken a cautionary stance and trimmed our FY16 numbers by 17% at the EBITDA level and by 21% on EPS.

Funding resource to support change and growth

Year-end net cash of £0.7m reflected lower FY15 operating cash flow post a reduction in other creditors and higher capex of £0.705m – mostly on new MPKs. Our model indicates a return to positive net cash flow in FY16. The group has facilities of £2m, giving the flexibility to step up the pace of investment if necessary.

Valuation: Marked EV/EBITDA discount

SAL’s shares continue to be valued at a discount to other smaller marketing service agencies on EV/EBITDA for FY16 of 28%; 5% on a P/E basis, with the peer group on 7.6x and 12.0x, respectively. The proposed FY15 dividend was raised by 10%, underlining management’s confidence in the continuing business. We expect the valuation discrepancy to narrow as the business model takes clearer shape and the benefits of the new contracts start to come through in earnings.

Shift in business mix

We have revised our numbers to reflect the FY15 outturn and to reflect our first thoughts for FY17.

Exhibit 1: Revisions to forecasts

EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2015

4.3

4.3

u/c

1.3

1.1

-15

1.7

1.5

-12

2016e

6.7

5.3

-21

1.9

1.5

-21

2.4

2.0

-17

2017e

-

6.0

N/A

-

1.7

N/A

-

2.3

N/A

Source: Company, Edison Investment Research. Note: 2015 ‘New’ is actual numbers.

Switch to MPKs with greater profit potential

UK

The switch in business from the RMUs accelerated in FY15, with average numbers reducing from 141 to 133 following the end of the agreement with shopping-centre owner Intu, and the loss of the Manchester Arndale venue after it changed hands (which also hit the retail revenues). Further attrition is likely for FY16 with the loss of the Whiterose Shopping Centre. With the structural decline in RMUs, the team has been focusing on building sales in pop-up units, where 30 traded over the Christmas period.

While RMU sales have been decreasing, the potentially more profitable MPK business has been increasing. From four in January 2015, the average number of units for the year was 32, with 49 in situ by the year end. The plan for FY16 is for this number to build to over 80 over the course of the year.

The Network Rail contract officially kicked off on 1 October 2015, so it is still very early days. One notable effect, though, has been a significant increase in the group’s industry profile, leading to a step up in the number of enquiries from agencies, building a strong sales pipeline into FY16.

For S&P+, the challenge was always going to be the comparison with FY14, when the operation won a substantial project. However, it had a larger number of smaller orders in FY15 and has a strong pipeline of opportunities into the new financial year – with the challenge of converting these into firm orders.

Germany and France

German retail revenues were down year-on-year, although almost all of the reduction (£0.4m) was due to translation. The scale of continuing operations with shopping centre builder and manager ECE will be lower in FY16 but in more profitable locations. In Promotions, the roll-out of MPKs has been slower than originally hoped, although management expects new contracts to come through in FY16.

In France, five Immochan (the shopping centre arm of Auchan) centres have been identified to take MPKs in the pilot project (note September 2015), with a view to further roll-out when the concept is proven.

Exhibit 2: Financial summary

£m

2013

2014

2015

2016e

2017e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

14.567

15.446

13.814

14.203

14.750

Cost of Sales

(4.023)

(5.839)

(5.900)

(6.500)

(7.100)

Gross Profit

10.544

9.607

7.914

7.703

7.650

EBITDA

 

 

2.657

1.616

1.544

2.005

2.300

Operating Profit (before amort. and except.)

2.293

1.155

1.105

1.467

1.763

Intangible Amortisation

(0.014)

(0.019)

(0.016)

(0.016)

(0.016)

Exceptionals

0.000

(0.391)

0.000

0.000

0.000

Other

0.000

0.000

0.000

0.000

0.000

Operating Profit

2.279

0.745

1.089

1.451

1.747

Net Interest

0.160

0.018

(0.028)

(0.018)

(0.018)

Profit Before Tax (norm)

 

 

2.453

1.173

1.077

1.450

1.745

Profit Before Tax (IFRS)

 

 

2.439

0.763

1.061

1.434

1.729

Tax

(0.648)

(0.166)

(0.197)

(0.270)

(0.319)

Profit After Tax (norm)

1.805

1.007

0.841

1.180

1.426

Profit After Tax (IFRS)

1.791

0.597

0.864

1.164

1.410

Minority interest

0.180

(0.140)

(0.033)

(0.150)

(0.250)

Average Number of Shares Outstanding (m)

19.5

19.5

19.5

19.5

19.5

EPS - normalised (p)

 

 

10.1

3.9

4.3

5.3

6.0

EPS - (IFRS) (p)

 

 

10.1

2.3

4.3

5.2

5.9

Dividend per share (p)

4.1

2.0

2.2

2.4

3.0

Gross Margin (%)

72.4

62.2

57.3

54.2

51.9

EBITDA Margin (%)

18.2

10.5

11.2

14.1

15.6

Operating Margin (before GW and except.) (%)

15.7

7.5

8.0

10.3

12.0

BALANCE SHEET

Fixed Assets

 

 

9.822

9.619

9.867

9.655

9.442

Intangible Assets

8.232

8.243

8.242

8.217

8.191

Tangible Assets

1.590

1.376

1.625

1.438

1.250

Investments

0.000

0.000

0.000

0.000

0.000

Current Assets

 

 

7.225

6.336

5.928

5.974

7.290

Stocks

0.000

0.000

0.000

0.000

0.000

Debtors

4.329

3.864

3.916

4.026

4.181

Cash

2.088

2.115

1.723

1.650

2.800

Other

0.808

0.357

0.289

0.297

0.309

Current Liabilities

 

 

(7.027)

(5.915)

(4.774)

(4.600)

(4.609)

Creditors

(6.822)

(5.665)

(4.524)

(4.350)

(4.459)

Short term borrowings

(0.205)

(0.250)

(0.250)

(0.250)

(0.150)

Long Term Liabilities

 

 

(0.010)

(0.260)

(0.808)

(0.210)

(0.210)

Long term borrowings

0.000

(0.250)

(0.750)

(0.150)

(0.150)

Other long term liabilities

(0.010)

(0.010)

(0.058)

(0.060)

(0.060)

Net Assets

 

 

10.010

9.780

10.213

10.818

11.913

CASH FLOW

Operating Cash Flow

 

 

2.499

1.723

0.192

1.587

2.346

Net Interest

0.160

(0.018)

(0.028)

(0.018)

(0.018)

Tax

(0.375)

(0.898)

0.039

(0.243)

(0.287)

Capex

(0.593)

(0.275)

(0.705)

(0.350)

(0.350)

Acquisitions/disposals

0.000

0.000

0.000

0.000

0.000

Equity Financing/Other

0.039

0.000

0.000

0.000

0.000

Dividends

(0.681)

(0.800)

(0.390)

(0.429)

(0.468)

Net Cash Flow

1.049

(0.268)

(0.892)

0.547

1.223

Opening net debt/(cash)

 

 

(0.834)

(1.883)

(1.615)

(0.723)

(1.250)

HP finance leases initiated

0.000

0.000

0.000

0.000

0.000

Other

0.000

0.000

0.000

(0.020)

0.027

Closing net debt/(cash)

 

 

(1.883)

(1.615)

(0.723)

(1.250)

(2.500)

Source: Company accounts, Edison Investment Research

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Germany

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United Kingdom

New York +1 646 653 7026

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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