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MusicMagpie
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=== 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.
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