7digital — A step change with 24-7 deal

7digital — A step change with 24-7 deal

7digital’s acquisition of 24-7 consolidates its position as the largest provider of B2B music services in Europe and adds £18m of secured revenues to its pipeline. Accelerated platform integration means EBITDA profitability will be pushed out to FY18, when management expects the deal to be significantly earnings enhancing and the group to be both profitable and cash flow positive.

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7digital

A step change with 24-7 deal

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4 July 2017

Price

6.0p

Market cap

£11m

Share price graph

Share details

Code

7DIG

Listing

AIM

Shares in issue

183m

Business description

7digital is a leading provider of end-to-end digital music platform solutions & services. Its platform and access to global music rights enables businesses in the radio, electronics and telecoms industries around the world to offer and commercialise music streaming and radio services. Customers include musical.ly, Onkyo, Panasonic, Astro, Cdiscount, Electric Jukebox, eMusic and i.am +.

Bull

Global footprint. Leading provider of B2B platform services to the music industry. Well-positioned in the global music industry’s transition to streaming services.

Pipeline of prospects, high-margin recurring licence revenues growing, EBITDA profitability expected across FY18.

24-7 deal provides synergy potential and cements its leading position.

Bear

Disruptive business model; large B2C competitors could retaliate.

The download business, while much lower margin than licensing revenues, is a drag on growth.

Limited share liquidity.

Analysts

Bridie Barrett

+44 (0)20 3077 5727

Fiona Orford-Williams

+44 (0)20 3077 5739

7digital is a research client of Edison Investment Research Limited

7digital’s acquisition of 24-7 consolidates its position as the largest provider of B2B music services in Europe and adds £18m of secured revenues to its pipeline. Accelerated platform integration means EBITDA profitability will be pushed out to FY18, when management expects the deal to be significantly earnings enhancing and the group to be both profitable and cash flow positive.

24-7 acquisition adds a significant new client

7digital has completed the acquisition of Copenhagen’s 24-7 from MediaMarktSaturn (MMS), Europe’s leading consumer electronic retailer. The final deal values 24-7 at £2.2m through the issue of 23.1m new shares and £0.9m acquired cash which is refundable post completion. After issue, MMS will become a 12.7% shareholder and significant customer of the enlarged group, which will continue to service its Europe-wide Juke! service for a contract value of £11m over three years, as well as additional development work worth £6m (over two years). The acquisition also brings contracts with other customers, including Danish telco TDC with an annualised value of £2.7m.

Step change in scale; earnings enhancing by FY18

Management estimates that the acquisition will increase its revenues by £5m in FY17 and by over £8m in FY18, more than doubling licence revenues from those reported in FY16. Although the accelerated integration of the platform is likely to mean that 7digital remains loss making at the EBITDA level in FY17 (versus its previous expectation of becoming profitable at the EBITDA level across the year in FY17), it expects the deal to be significantly earnings enhancing in FY18, with the overall group becoming profitable. MMS will also front load its contract with set-up fees of £5.7m in FY17 supporting near-term cashflow.

Considerable strategic progress; undemanding rating

7digital has made considerable strategic progress over the last year, culminating in the acquisition of its largest European competitor. With at least £18m of additional revenues secured over the next three years, a stronger balance sheet following its recent £3m equity raise and the support of all three major music labels as customers and partners, we believe 7digital is well positioned to benefit from the rapid evolution of the market for music streaming services. The emphasis now will be on integrating the platforms, securing new clients and delivering profitability in FY18. Given the group was already on track to reach EBITDA profitability pre the 24-7 deal, this appears highly achievable and the FY18 P/E of 4.0x undemanding.

Consensus estimates

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT
(£m)

EPS
(p)

EV/Sales
(x)

EV/EBITDA
(x)

P/E
(x)

12/16

11.9

(3.5)

(4.7)

(4.5)

0.7

N/A

N/A

12/17e*

19.5

(1.6)

(2.6)

(1.6)

0.5

N/A

N/A

12/18e*

25.0

3.3

2.7

1.5

0.4

2.9

4.0

Source: 7digital accounts, Bloomberg.

Disclaimer

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 7digital 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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.
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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

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. 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 7digital 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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") (c) FTSE [2017]. "FTSE(r)" 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

US

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

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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