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== Valuation == === DCF-based valuation: 168p per share === Its primary valuation methodology is DCF as it captures the potential long-term growth of the business, specifically from MMAG’s rental business, which is in its infancy. Beyond its explicit forecast period Edison assumes 5% (between weighted average market growth rates of 4–6%) annual revenue growth for ‘outright’ (ie non-rental) revenue through FY25, before prudently fading down to 3.5% growth by its terminal year, FY31. The aggregated growth rates reflect: * A gradual fade down for Technology outright revenue growth from 10% pa to 5% pa by FY31, lower than management’s medium-term guidance of 10–15%. * Declines of 15% pa for Media, also much lower than management’s medium-term guidance of declines of 5–10% pa to be more conservative. This leads to Media contributing £12m revenue in FY31 (£51m in FY21) and just £2.3m contribution after direct labour. * 1% growth pa for Books revenue to £8m in FY31 (£9m in FY21) and £2.3m contribution. For rental income, Edison estimates strong growth in the active subscriber base from 13.5k at end FY21 to c 36k in FY22 and to 286k active subscribers by FY31. This reflects growing the daily gross additions from 60 in FY22 to 200 from 2027, namely increasing the rate of daily new additions by 20–40 pa. Edison also assumes revenue per active subscribers increases by 3% pa, to £26.10 pm in FY31. These assumptions lead to estimated rental income of c £87m by FY31 so that it represents c 28% of group revenue. Its estimates for rental income increase MMAG’s estimated revenue growth by 2–5% pa through FY31. For outright revenue Edison assumes a gradually reducing contribution after direct labour margin from 21.4% in FY21 to c 16% by its terminal year, which reflects a stable margin for Technology (c 15%), and declining margins for Media (c 19% in FY31 versus c 24% in FY21) and Books (c 27% in FY31 versus 29% in FY21). For Media and Books, Edison assumes a stable gross margin and cost deleverage due to wage inflation. The growing contribution of rental income with a 70% estimated contribution after direct labour margin naturally increases the group margin from 22% in FY21 to 32% in FY31. In aggregate, its EBITDA margin increases from 8.4% in FY21 to 21.3% by FY31. Using a WACC of 10% (risk-free rate of 3%, risk premium of 6% and Beta of 1.2, limited trading history, with low debt) and 2% terminal growth, its DCF-based valuation is c 168p per share. The table below shows the sensitivity of the DCF to changes in assumptions for the WACC and terminal growth rate. {| class="wikitable" |+Exhibit 14: DCF sensitivity (pence per share)<ref>Source: Edison Investment Research.</ref> ! ! ! colspan="5" |Terminal growth rate |- | | |1.0% |2.0% |3.0% |4.0% |5.0% |- | rowspan="9" |WACC |12.0% |112 |120 |131 |145 |162 |- |11.5% |120 |130 |143 |158 |179 |- |11.0% |130 |141 |156 |174 |199 |- |10.5% |141 |154 |171 |193 |223 |- |10.0% |153 |168 |188 |215 |253 |- |9.5% |166 |184 |208 |241 |288 |- |9.0% |182 |203 |232 |273 |333 |- |8.5% |199 |225 |261 |312 |392 |- |8.0% |220 |251 |295 |360 |470 |} The valuation is sensitive to the growth rate and timing of the active rental subscribers and the associated capex on signing a new customer. If Edison assumes slower growth in rentals to c 157k active subscribers by FY31, the DCF valuation would reduce to c 141p per share. Edison reiterates its forecasts, which reflect more pessimistic assumptions for Technology outright revenue growth and declines in Media revenue growth than management expects, in order to be prudent on the valuation. === Peer group comparison: Trading at a discount === Below Edison shows MMAG’s valuation relative to UK consumer-facing companies that also predominantly operate online. Edison would highlight none of these are direct comparators given different business models, category mix and geographic exposures. All multiples are annualised to MMAG’s November year-end, but sales growth rates and margins are for the individual company’s financial year. {| class="wikitable" |+Exhibit 15: Peer valuations<ref>Source: Refinitiv, Edison Investment Research. Note: Priced at 8 July 2022.</ref> !Company !Year end !Price !Market Cap (local, m) !EV (local, m) !Sales growth FY1 (%) !Sales growth FY2 (%) !EBITDA margin FY1 (%) !EBITDA margin FY2 (%) !EV/ Sales FY1 (x) !EV/ Sales FY2 (x) !EV/ EBITDA FY1 (x) |EV/ EBITDA FY2 (x) |PE FY1 (x) |PE FY2 (x) |- |AO World PLC |Mar |40 |189 |292 |(5) |(12) |0.7 |1.6 |0.20 |0.21 |16.3 |10.0 |N/A |61.4 |- |ASOS PLC |Aug |983 |974 |1,390 |4 |11 |4.9 |5.8 |0.33 |0.30 |6.5 |5.0 |20.7 |13.7 |- |boohoo group plc |Feb |60 |749 |805 |2 |13 |4.4 |6.0 |0.40 |0.36 |8.2 |6.4 |26.6 |19.1 |- |Gear4music Holdings PLC |Mar |180 |37 |72 |11 |9 |7.3 |7.7 |0.45 |0.41 |6.1 |5.4 |10.8 |9.5 |- |In The Style Group PLC |Mar |75 |39 |31 |27 |19 |0.7 |2.1 |0.48 |0.40 |28.2 |10.4 |N/A |41.0 |- |Made.Com Group PLC |Dec |44 |172 |89 |(3) |7 |(7.1) |0.8 |0.25 |0.23 |N/A |120.6 |N/A |N/A |- |Moonpig Group PLC |Apr |212 |718 |808 |14 |15 |24.2 |24.8 |2.45 |2.13 |10.1 |8.7 |16.5 |14.6 |- |N Brown Group PLC |Feb |24 |110 |371 |2 |3 |11.5 |11.8 |0.51 |0.50 |4.3 |4.2 |4.0 |4.1 |- |Naked Wines PLC |Mar |172 |125 |90 |9 |10 |0.6 |1.4 |0.24 |0.22 |26.9 |19.7 |141.7 |62.1 |- |Sosandar PLC |Mar |19 |41 |34 |139 |46 |(1.4) |5.2 |0.88 |0.64 |25.2 |11.0 |40.9 |15.6 |- |THG PLC |Dec |82 |1,011 |1,321 |21 |20 |6.1 |7.5 |0.51 |0.43 |8.2 |5.8 |N/A |N/A |- |Victorian Plumbing Group PLC |Sep |54 |174 |147 |(0) |8 |6.7 |8.3 |0.54 |0.50 |7.7 |5.9 |15.8 |11.4 |- |Virgin Wines UK PLC |Jun |78 |43 |27 |(3) |12 |9.8 |10.1 |0.37 |0.33 |3.7 |3.2 |8.4 |7.5 |- |High | | | | |139 |46 |24.2 |24.8 |2.45 |2.13 |28.2 |120.6 |141.7 |62.1 |- |Median | | | | |4 |11 |4.9 |6.0 |0.45 |0.40 |8.2 |6.4 |16.5 |14.6 |- |Low | | | | |(5) |(12) |(7.1) |0.8 |0.20 |0.21 |3.7 |3.2 |4.0 |4.1 |- |musicMagpie PLC |Nov |45 |48 |43 |6 |7 |6.0 |6.8 |0.28 |0.26 |4.6 |3.8 |32.8 |47.1 |- |Premium/ (discount) to peer group median | | | | | | | | |(38%) |(36%) |(43%) |(41%) |98% |223% |} The UK online peers have de-rated significantly during the last 12 months as forecasts have been downgraded due to a combination of slowing revenue growth versus initial expectations and lower profits due to higher costs, eg freight. The latter is less of an issue for MMAG given its local sourcing. In addition, Edison believes WACCs have risen due to higher interest rates and likely greater required market risk premium. Relative to the peers, MMAG’s forecast revenue growth of c 6% in FY1 and c 7% in FY2 is more consistent than the group median (4% and 11% respectively) albeit there is a wide range of expectations. Its expected EBITDA margin for MMAG of 6.0% in FY1 and 6.8% in FY2 is comparable with the median of the peers, 4.9% in FY1 and 6.1% in FY2, but as indicated above, MMAG’s EBITDA margin has potential to accelerate quickly as rental income grows. MMAG is trading at a discount to the median of the other consumer-facing online companies when comparing EV/sales and EV/EBITDA multiples, but a premium when using P/E multiples. {| class="wikitable" |+Exhibit 16: Financial summary<ref>Source: musicMagpie accounts, Edison Investment Research.</ref> ! ! !£m !2018 !2019 !2020 !2021 !2022e !2023e !2024e |- |30-November | | |IFRS |IFRS |IFRS |IFRS |IFRS |IFRS |IFRS |- |INCOME STATEMENT | | | | | | | | | |- |Revenue | | |115.5 |131.5 |153.4 |145.5 |154.7 |166.1 |179.9 |- |Cost of Sales | | |(88.7) |(101.1) |(108.6) |(101.2) |(111.8) |(118.6) |(126.7) |- |Gross Profit | | |26.8 |30.4 |44.8 |44.3 |42.9 |47.5 |53.2 |- |EBITDA | | |2.6 |4.6 |13.9 |12.2 |9.3 |11.3 |15.6 |- |Normalised operating profit | | |(0.2) |2.0 |11.3 |8.5 |2.3 |2.0 |6.2 |- |Amortisation of acquired intangibles | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Exceptionals | | |(0.6) |(0.7) |(1.3) |(4.6) |0.0 |0.0 |0.0 |- |Share-based payments | | |0.0 |0.0 |(0.4) |(17.4) |(0.5) |(1.0) |(1.5) |- |Reported operating profit | | |(0.8) |1.3 |9.6 |(13.5) |1.8 |1.0 |4.7 |- |Net Interest | | |(1.5) |(2.1) |(2.1) |(0.6) |(0.5) |(0.6) |(0.6) |- |Joint ventures & associates (post tax) | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Exceptionals | | |0.0 |0.0 |(0.6) |(0.7) |0.0 |0.0 |0.0 |- |Profit Before Tax (norm) | | |(1.7) |(0.2) |9.2 |7.9 |1.8 |1.4 |5.6 |- |Profit Before Tax (reported) | | |(2.3) |(0.9) |7.0 |(14.8) |1.3 |0.4 |4.1 |- |Reported tax | | |0.0 |0.0 |1.6 |2.7 |(0.0) |(0.0) |(1.1) |- |Profit After Tax (norm) | | |(1.7) |(0.2) |10.5 |6.4 |1.5 |1.1 |4.2 |- |Profit After Tax (reported) | | |(2.3) |(0.9) |8.6 |(12.1) |1.3 |0.4 |3.0 |- |Minority interests | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Discontinued operations | | |(2.1) |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Net income (normalised) | | |(1.7) |(0.2) |10.5 |6.4 |1.5 |1.1 |4.2 |- |Net income (reported) | | |(4.4) |(0.9) |8.6 |(12.1) |1.3 |0.4 |3.0 |- | | | | | | | | | | |- | colspan="2" |Basic average number of shares outstanding (m) | |N/A |N/A |100.0 |104.9 |107.8 |107.8 |107.8 |- |EPS - basic normalised (p) | | |N/A |N/A |10.52 |6.11 |1.37 |1.03 |3.88 |- |EPS - diluted normalised (p) | | |N/A |N/A |10.52 |6.11 |1.37 |1.03 |3.88 |- |EPS - basic reported (p) | | |N/A |N/A |8.57 |(11.56) |1.19 |0.38 |2.76 |- |Dividend (p) | | |0.00 |0.00 |0.00 |0.00 |0.00 |0.00 |0.00 |- | | | | | | | | | | |- |Revenue growth (%) | | | |13.8 |16.6 |(5.1) |6.3 |7.4 |8.3 |- |Gross Margin (%) | | |23.2 |23.1 |29.2 |30.4 |27.7 |28.6 |29.6 |- |EBITDA Margin (%) | | |2.2 |3.5 |9.0 |8.4 |6.0 |6.8 |8.7 |- |Normalised Operating Margin | | |(0.2) |1.5 |7.4 |5.8 |1.5 |1.2 |3.4 |- | | | | | | | | | | |- |BALANCE SHEET | | | | | | | | | |- |Fixed Assets | | |14.2 |12.9 |13.9 |21.1 |28.0 |30.7 |34.6 |- |Intangible Assets | | |7.9 |8.1 |8.4 |9.7 |11.1 |10.3 |10.8 |- |Tangible Assets | | |6.2 |4.7 |3.9 |6.1 |11.9 |15.7 |19.3 |- |Investments & other | | |0.0 |0.0 |1.7 |5.3 |5.0 |4.7 |4.4 |- |Current Assets | | |8.8 |10.4 |14.5 |14.6 |13.3 |15.5 |16.5 |- |Stocks | | |4.8 |6.2 |6.8 |8.0 |8.3 |8.6 |9.0 |- |Debtors | | |3.0 |2.1 |2.5 |3.7 |4.0 |4.3 |4.6 |- |Cash & cash equivalents | | |1.0 |2.0 |5.1 |2.8 |1.1 |2.6 |2.9 |- |Other | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Current Liabilities | | |(12.5) |(13.2) |(18.7) |(9.0) |(8.9) |(9.2) |(9.7) |- |Creditors | | |(11.6) |(10.4) |(10.9) |(8.4) |(8.2) |(8.6) |(9.1) |- |Tax and social security | | |0.0 |0.0 |(0.1) |(0.3) |(0.3) |(0.3) |(0.3) |- |Short term borrowings | | |(0.1) |(2.0) |(7.0) |0.0 |0.0 |0.0 |0.0 |- |Other | | |(0.8) |(0.8) |(0.7) |(0.4) |(0.4) |(0.4) |(0.4) |- |Long Term Liabilities | | |(16.2) |(16.5) |(7.3) |(2.4) |(6.4) |(9.4) |(9.4) |- |Long term borrowings | | |(12.0) |(12.7) |(4.2) |(0.9) |(4.9) |(7.9) |(7.9) |- |Other long-term liabilities | | |(4.2) |(3.8) |(3.1) |(1.6) |(1.6) |(1.6) |(1.6) |- |Net Assets | | |(5.7) |(6.4) |2.4 |24.3 |26.1 |27.5 |32.0 |- |Minority interests | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Shareholders' equity | | |(5.7) |(6.4) |2.4 |24.3 |26.1 |27.5 |32.0 |- | | | | | | | | | | |- |CASH FLOW | | | | | | | | | |- |Op Cash Flow before WC and tax | | |2.6 |4.6 |13.9 |11.8 |9.3 |11.3 |15.6 |- |Working capital | | |(0.1) |(1.9) |(0.6) |(4.9) |(0.6) |(0.2) |(0.3) |- |Exceptional & other | | |(2.5) |(0.3) |(1.3) |(4.2) |0.3 |0.3 |0.3 |- |Tax | | |0.0 |0.0 |0.0 |0.0 |(0.0) |(0.0) |(1.1) |- |Net operating cash flow | | |(0.0) |2.3 |12.0 |2.6 |8.9 |11.3 |14.5 |- |Capex | | |(1.7) |(1.4) |(1.9) |(7.2) |(13.6) |(11.6) |(12.9) |- |Acquisitions/disposals | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Net interest | | |(0.4) |(1.2) |(2.7) |(2.3) |(0.5) |(0.6) |(0.6) |- |Equity financing | | |0.0 |0.0 |0.0 |14.5 |0.0 |0.0 |0.0 |- |Dividends | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Other | | |(0.8) |(1.0) |(1.1) |(0.7) |(0.6) |(0.6) |(0.6) |- |Net Cash Flow | | |(3.0) |(1.4) |6.3 |6.9 |(5.8) |(1.5) |0.3 |- |Opening net debt/(cash) | | | |11.1 |12.6 |6.3 |(1.8) |3.8 |5.3 |- |FX | | | |0.0 |0.0 |0.0 |0.0 |0.0 |0.0 |- |Other non-cash movements | | | |1.5 |(6.4) |(8.2) |5.6 |1.5 |(0.3) |- |Closing net debt/(cash) | | |11.1 |12.6 |6.3 |(1.8) |3.8 |5.3 |4.9 |}
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