Quarto's (LON:QRT) year-end update indicates that the publishing operations have delivered the performance as expected, despite challenges in the UK retail market and the tailing off of the colouring book trend. 2016’s acquisitions have done notably well and our forecasts are unchanged. A buyer has been found for Australian/New Zealand distributor, Books and Gifts Direct (BGD), which will allow greater focus on opportunities for the core publishing business. Net debt of $62.2m was ahead of end FY15 due to working capital timing and weaker trading at BGD. Quarto has an attractive yield and continues to trade at an overlarge discount to peers.
Focus on publishing; Value in IP
The intended disposal of BGD removes a drag on financial performance and on management time. Completion should be before preliminary results on 22 March 2017 and its figures classed as discontinued business. The indicated price of A$5.75m (being A$1.0m in cash and $4.75m in interest-bearing loan notes) implies a write-down of c $11.0m. BGD accounted for 12% of FY15 group revenues and 13% of group EBITDA, with profits second-half weighted.
The update contains a reference to a revised methodology for recognising the (long) useful lives of the backlist titles. This should more accurately reflect the underlying value of the IP contained within the group but not currently recognised on the balance sheet. We have historically estimated this ‘missing’ value through trade transaction values per backlist title and welcome the formalisation.
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