Television Francaise 1 (TF1)

Transcription

1 March 11, 2012 Television Francaise 1 (TF1) BUY, TARGET PRICE 9.7 (upside +10.2%) MARKET DATA Stock price (closing 8/3/13) 8.8 Shares nb in M Market value (M ) 1,850 Net Cash M ) EV adjusted (M ) 1,615.1 ISIN Market Eurolist Analysts FR Compartment A P.Schang analyses@nfiance.fr e 2014e 2015e Revenues %growth 0.0% -3.0% 1.4% 1.4% EBIT %margin 8.0% 9.2% 8.9% 9.0% Net profit %margin 5.2% 5.6% 5.5% 5.5% e 2014e 2015e EV/Sales EV/EBITDA PE TF1 is an integrated media group engaged in broadcasting and telecommunications services. The group s core business is TF1, a leading general freeview television channel in France. Other activities consist of: operation of theme channels (including the Eurosport network), film and advertising production, home shopping program, transactions with audiovisual rights and publishing of music CDs and DVDs. At the end of 2012, TF1 entered into a strategic partnership with Discovery Communications group. LATEST PRESS RELEASE COMMENTARY TF1 has released its 2012 annual results, reporting flat consolidated revenues of 2.6 billion. The weak economic environment significantly impacted TF1 s core channel advertising revenues, which fell by 6.7% yearon-year to 1.4 billion. On the other hand, revenues from other activities saw a solid performance, growing by 9.2% year-on-year to 1.2 billion, mainly driven by increased advertising revenues for Eurosport International and the DTT channels, and improved monetisation of online services. Current operating profit was down by 8.8% year-on-year to 258 million, mostly due to reduced profitability of TF1 s main channel. In 2012, the group launched Phase II of its optimisation plan focused on cost-cutting measures. The company expects to achieve 85 million in cost reductions by the end of 2014, with 15 million already reached in Management anticipates for 2013 a 3% drop in total revenues due to an uncertain environment leading to low visibility. Covered by NFinance since March 8, 2013 Calendar May 7 th 2013 : Q results Holdings Bouygues 43.7% Employees 7.2% Free float France 12.6% Free float rest of world 36.5% ANALYSIS TF1 s performance was in line with expectations. After the announcement of the results, the stock price quickly declined (by nearly 12% as of March 5, 2012), most likely due to the weak outlook for 2013 noted by management. It appears that currently the group is focused on controlling costs and adapting the business model to the new media landscape. The partnership with Discovery should also benefit the company. Given the global economic crisis, we believe TF1 is still showing a satisfactory performance, while implementing a sound operating strategy. VALUATION We initiate TF1 with a BUY rating and a target price at 9.7 per share (DCF 8.3 WACC 11.8% terminal growth rate +1.0%, Peers 9.6, Historical ratios 11.2), based on TF1 s market leadership, solid financial position and costcutting measures. It is worth noting that our DCF employs conservative estimates for revenues (remaining relatively flat after the expected decline in 2013). 1

2 SUMMARY... 3 GROUP PRESENTATION... 4 GROUP HISTORY... 6 INVESTMENT TRIGGERS... 7 Strategic alliance with Discovery Communications... 7 Market leader in France... 7 Solid operating performance of the group s theme channels and digital activities... 7 Healthy financial position... 8 INVESTMENT RISKS... 9 Challenging environment for the broadcasting industry... 9 Difficult advertising market... 9 Geographically concentrated revenues VALUATION FINANCIAL OVERVIEW

3 SUMMARY TF1 is a France-based company primarily providing television broadcasting services. The group manages France s leading freeview general channel TF1. It also operates theme channels, including the Eurosport network. Besides television broadcasting, the group has other activities, such as film and audiovisual production, trading of audiovisual rights, production of commercials, publishing of music CDs and DVDs and movie distribution. The global economic turmoil has had a large impact on the company s operations, especially due to the decline in advertising spending. Moreover, the company s core audience is dispersing to smaller channels and online video services. As a result, since 2010 total revenues have remained relatively flat. TF1 initiated an optimisation plan in 2012 to control costs and adapt its business model to the shifting environment. TF1 s core channel is seeing a gradually decreasing audience share, but remains France s most watched channel. Its advertising revenues are also dropping, down by 6.7% in 2012, as marketers are pressured to control costs or shift spending to other parts of the world. However, the company is developing and investing in new theme channels and new media online video services. TF1 has also formed a strategic alliance with Discovery Communications, one of the largest nonfiction media companies in the world. Going forward, we believe that the group s other channels and digital services will be the main source of revenue growth, while its core channel will remain a cash cow at least in the near to medium term. 3

4 GROUP PRESENTATION Television Francaise 1 (TF1) is a France-based media group engaged in television broadcasting and communication services. Its core business is TF1 a freeview general channel. The company was privatised and listed on the stock market in Since then, TF1 has expanded to operate multiple freeview and pay-tv channels, as well as engaging in other activities. Through its subsidiaries, the group operates in three main segments: Broadcasting France (80% of total revenues in 2012), which comprises: TF1 SA the leading freeview general television channel in France; Home Shopping; Theme Channels, including Eurosport France, LCI, TV Breizh, TMC, NT1, HD1, TF6, Série Club, Stylía, Histoire, Ushuaïa TV, TF1 Distribution and TF1 Thématiques; TF1 Entreprises; Production TV and film production entities; e-tf1 online services; Other mainly includes TF1 Publicité and Metro France. Audiovisual rights (5% of total), including: Catalogue mainly comprises TF1 Droits Audiovisuels and TF1 International; TF1 Vidéo. Broadcasting International (15% of total) which includes Eurosport International. The majority of revenues comes from France with 83% of total in 2012, followed by Continental Europe with 15%. Revenue by region in 2012: 2% 15% France Continental Europe 83% Other Countries Source: company reports 4

5 Optimisation plan In 2012 the group initiated Phase II of its optimisation plan, focusing on cost-cutting measures and greater flexibility. This is part of the adjustment of the group s business model to a changing environment. TF1 expects to generate recurring savings of 85 million by the end of 2014, due to optimisation of programming costs, reduced overheads and higher productivity. During 2012, 15 million of savings have already been achieved. 5

6 GROUP HISTORY 1987: TF1 is privatised and listed on the stock market. 1989: Creation of TF1 Enterprises, including video, telematics, licenses and merchandising. 1990: Setting up of Banco Production (production of television feature films) and the acquisition of Protécréa (audiovisual production). 1991: Eurosport network is acquired. 1994: Cable launch of LCI a non-stop news channel. 1995: Acquisition of 60% of Glem Productions, a producer of entertainment programmes. Launch of the primary website: : Launch of TPS (Télévision Par Satellite) in partnership with France Télévision, France Télécom, CLT, M6 and Lyonnaise des Eaux. Creation of TCM (34% owned by TF1), a company that manages broadcasting rights. 2001: TF1 becomes the sole owner of Eurosport through acquiring the remaining holdings of Canal+ and Havas. 2002: TF1 increases its stake in TPS to 66%. 2005: TF1 obtained all the rights for exclusive broadcasting in France of the 2010 and 2014 Football World Cup at a cost of 120 million and 130 million, respectively. Eurosport Group launched its new channel Eurosport 2, broadcasting in 37 European countries in seven languages. 2007: TF1 acquired a 67.4% stake in Aronet, publisher of the job website. 2010: Purchase of the 100% interest in the NT1 channel and the 40% interest in the TMC channel owned by the Groupe AB. 2011: TF1 purchased 100% of Metro France, a free daily newspaper. 2012: TF1 and the Discovery Communications group announce a strategic alliance. 6

7 INVESTMENT TRIGGERS Strategic alliance with Discovery Communications In December 2012, TF1 and Discovery Communications announced the closing of a strategic partnership. Along with the agreement, Discovery acquired a 20% stake in Eurosport network, as well as in TV Breizh, Histoire, Ushuaia TV and Stylia channels from TF1 Group for a total consideration of 184 million. In addition, Discovery has the option to increase its share in Eurosport to 51% in 2014, in which case TF1 will have the option to sell the remaining 49%. Discovery Communication is one of the world s largest nonfiction media companies. For TF1, this partnership has several implications and benefits, including: Cash injection necessary for expansion of operations; Programming production and sharing; Improving expertise in content creation; Development of Eurosport using Discovery s global footprint and capabilities; Enhancing the Pay-TV offering in France. Market leader in France TF1 operates the leading free-to-view television channel in France. In 2012, its audience share for individuals aged 4 and over and women under 50 (purchase decision makers) constituted almost 23% and 26%, respectively. According to the company, the gap over the next most popular channel is 8.5 percentage points. This provides TF1 with the opportunity to capture the largest portion (37% in 2011) of the advertising market among all TV channels. Solid operating performance of the group s theme channels and digital activities Despite the global economic turmoil, the group s theme channels and digital services have been the main sources of growth. More specifically, revenues from theme channels (including Eurosport France) and digital services (e-tf1) grew each at a CAGR of 14% over the last 5 years. Broadcasting International (comprising mainly Eurosport International) also generated increasing revenues (CAGR of 6% since 2008). 7

8 Theme channels and digital activities revenues evolution: e-tf1 Theme Channels France Broadcasting International M Source: company reports Digital activities (e-tf1) displayed strong financial performance, with their current operating margin improving substantially, breaking even in 2010 and reaching 18% in Healthy financial position TF1 has a strong balance sheet, with virtually no debt at the end of Its net cash position amounted to 235 million, improving significantly from a net debt position of 31 million at the end of The cash balance was bolstered primarily by Discovery s purchase (mentioned above). Moreover, TF1 is a solid cash generator. The available liquidity could be used to expand operations, pay dividends and fund acquisitions. 8

9 INVESTMENT RISKS Challenging environment for the broadcasting industry TF1 faces increasing competition in the television broadcasting market. As a result, TF1 channel s audience share has been gradually declining over the recent years, dropping to nearly 23% in 2012 (for individuals aged 4 and over) from almost 31% in TF1 channel audience share: 36% 34% 32% 30% 28% 26% 24% 22% 20% 34.8% Women under 50, purchase decision makers Individuals aged 4 and over 30.9% 29.8% 30.7% 28.1% 26.7% 25.5% 27.2% 26.1% 24.5% 23.7% 22.7% Source: company reports All players in the television broadcasting business have to adapt to the fast-paced development of the new media technologies, including online video services. In this context, the old business models of the TV market (operators and broadcasters) are adjusting to the transformation of the market s landscape, while also competing against a new breed of players. The internet lowers the barriers to entry, but also creates new growth opportunities. According to Informa Telecoms & Media, companies should focus on four key areas 1 in order to remain competitive: cloud TV, content delivery networks, connected TVs and social TV. The future of any player in the television broadcasting industry (including TF1) is largely dependent on how well it incorporates and uses the new technology to its advantage. Difficult advertising market The ongoing global economic turmoil is putting a lot of pressure on companies to cut down costs. Television advertising budgets are more than likely to be significantly impacted too, as marketers are looking for more cost-efficient advertising channels, as well as shifting spending to emerging economies. 1 Source: pdf 9

10 Advertising revenues represent more than two-thirds of TF1 s total revenues. Given the economic uncertainty, management anticipates consolidated revenues to contract by 3% in We expect the largest contraction to come from TF1 s main channel, which saw weak performance over the last 5 years, as shown in the chart below: TF1 core channel revenue evolution: 10.0% 8.4% 5.0% 0.0% % -10.0% -4.1% -2.9% -6.7% -15.0% -13.2% TF1 channel net ad revenue change Source: company reports Although the core segment s revenues maintained a declining trend, it still generated profits and cash flows. Geographically concentrated revenues As previously mentioned, almost 83% of total revenues are generated in France, a mature economy. Although there are some growth opportunities driven by new technologies, the market is also very competitive. More diversification beyond France could benefit the group. Broadcasting regulatory requirements Television broadcasting is a tightly regulated industry, primarily due to its social impact. Licensing, content creation and adoption of new technologies are all major areas which are closely monitored by regulators. Any significant change in legislation could adversely impact TF1 s operations, leading to higher costs and/or lower revenues. 10

11 VALUATION We valued TF1 based on three methods: Discounted Cash Flows method (DCF), relative valuation using peer multiples, and historical multiples: Methods Stock price DCF 8.3 Peers 9.6 Historical ratios 11.2 Average 9.7 HISTORICAL RATIOS This method assumes that valuation multiples may revert to their historical averages: Historical ratios 2008 / 2012 Corresponding stock price EV/Sales EV/EBITDA EV/EBIT P/BV PE Median 11.2 PEERS COMPARISON For relative valuation we chose 7 companies and calculated a respective stock price of 9.6 per share: 1. Using 5.1x EV/EBITDA, the company s suggested value is 9.6 per share. 2. At 8.4x EV/EBIT, TF1 s stock is At 13.9x 2013 PE, the company is valued at 9.5 per share. EV/EBITDA EV/EBIT PE 2013 ProSiebenSat 6,6 7,9 13,9 Mediaset 3,0 20,4 83,0 Metropole Television SA 4,3 6,2 13,5 Next Radio Tv SA 10,0 12,3 16,8 NRJ group 5,1 6,8 13,1 Canal+ SA 4,8 8,4 12,6 RTL Group SA 7,7 8,9 14,7 Median 5,1 8,4 13,9 Corrsponding TF1's stock 9,6 11,1 9,5 11

12 DISCOUNTED CASH FLOWS: The DCF model, based on WACC of 11.8% and terminal growth rate of 1.0% results in the following: e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e Revenues 2620,6 2542,5 2578,4 2615,0 2651,8 2688,5 2724,6 2759,7 2793,6 2825,9 2856,5 2885,0 revenue growth % 0,0% -3,0% 1,4% 1,4% 1,4% 1,4% 1,3% 1,3% 1,2% 1,2% 1,1% 1,0% EBIT 210,4 234,3 230,4 234,9 242,0 249,1 256,5 260,9 265,3 269,4 273,3 277,0 margin % 8,0% 9,2% 8,9% 9,0% 9,1% 9,3% 9,4% 9,5% 9,5% 9,5% 9,6% 9,6% Dep & Amort 71,8 74,0 76,0 76,0 76,0 76,0 76,0 76,0 76,0 76,0 76,0 76,0 CapEx -51,4-74,0-73,0-74,5-75,9-77,5-79,0-80,6-82,2-83,9-85,5-87,2 WCR change 87,6 7,7-3,5-3,6-3,6-3,6-3,6-3,5-3,3-3,2-3,0-2,8 Free Cash Flow (FCF) 211,1 131,1 126,6 127,7 134,3 139,6 143,3 145,0 146,9 148,4 149,9 151,2 Discounted cash flow 131,1 113,3 102,2 96,1 89,4 82,0 74,3 67,3 60,8 54,9 49,6 Discounted terminal value 463,5 WACC assumptions: Beta 1,50 Market premium 6,0% RiskFree Rate 2,8% Cost of Equity 11,8% Long-term Equity Weight 100% Terminal growth 1,0% WACC 11,8% DCF valuation M DCF stream 920,9 DC terminal value 463,5 Total DC Enterprise Value 1 384,4 Net Cash -366,5 Equity Value 1 750,9 Price target 8,3 12

13 FINANCIAL OVERVIEW Profit and Loss account: millions Revenues 2,595 2,365 2,622 2,620 2,621 %growth -5.3% -8.9% 10.9% -0.1% 0.0% Net advertising revenue - TF1 channel 1,647 1,429 1,550 1,504 1,403 %growth -4.1% -13.2% 8.4% -2.9% -6.7% - Other media %growth 12.2% -6.0% 39.0% 30.3% 17.4% Diversification revenue (excluding advertising) %growth -10.9% -0.1% 9.1% -3.7% 5.9% EBIT %margin 6.8% 4.3% 8.8% 10.8% 9.8% Net Profit %margin 6.3% 4.8% 8.7% 7.0% 5.2% The financial crisis had a considerable impact on TF1 s activity levels as revenues bottomed in 2009, although they partially recovered in the following year. Since 2010, the top line has remained flat at 2.6 billion. Although total revenue remained constant over the last 3 years, its structure has changed. More specifically, advertising revenues from the TF1 channel have been declining, offset by growing revenues from other activities. Net margin fell in 2009 to its lowest but still positive level of 4.8%, pressured by the economic turmoil. In 2010 the margin recovered to 8.7%, subsequently declining to 5.2% in 2012 partly due to the non-recurring operating expenses related to the optimisation plan, totalling about 48 million (during 2012). 13

14 Balance Sheet millions Goodwill Other intangible assets PP&E Other non-current assets 1, Receivables 1,227 1,350 1,227 1,242 1,302 Inventories Other current assets Cash Equity 1,377 1,396 1,539 1,575 1,685 Financial debts Payables 1,515 1,696 1,639 1,564 1,687 Other liabilities TOTAL 3,740 3,683 3,325 3,354 3,618 Net debt/(cash) position Working capital TF1 s assets are dominated by trade receivables, goodwill and inventory, accounting for 36%, 24% and 17% of total assets (as of 31 December, 2012), respectively. The cash balance increased dramatically to 259 million at the end of 2012 from 36 million a year earlier, bolstered by Discovery s purchase (as mentioned earlier). At the end of 2012 the working capital surplus amounted to 259 million, decreasing by 16% since the end of As of December 31, 2012, nearly 47% of total assets were financed by equity. Trade payables, the other large item on the liability side, accounted for the same share as equity. Cash Flow statement Cash Flows Net Profit D&A Other WCR Operating cash flows CAPEX Free cash flows TF1 has been generating cash inflows from operating activities in the last five years. In 2012, operating cash flows grew by 37% year-on-year, mainly due to a positive impact of working capital. In 2012, TF1 announced a dividend of 0.55 per share, which results in a dividend yield of 6.2%. NFinance Securities is authorized and regulated by the Financial Services Authority (FSA). Information expressed in this study are submitted for information purposes only and are in no way an offer or solicitation to buy or sell the securities mentioned above. The information presented in these analyses and / or studies are from reliable sources. 14

15 NFinance Securities cannot be held liable, directly or indirectly, for any error or omission. Any investment in financial instruments entails taking a risk that may result in the investor losing capital due to, among other things, market fluctuations or during specific financial situations. This document may not be distributed in the United Kingdom except to persons authorized or exempted under the UK Financial Securities Act 186 and Article 11 (13) Financial Securities Act. This document may not be distributed or disseminated in the United States or its possessions. Securities subject of this study have not been registered with the Securities and Exchange Commission and distribution of this study to a resident of the United States is prohibited. NFinance Securities uses the following valuation methods: DCF method: the method of discounted cash flows is to determine the cash flows a company will generate in the future and discounting them at a rate representing the weighted average cost of capital. These assumptions are calculated and defined by the designated analyst. Peer Analysis: this method calculates valuation multiples of comparable listed companies and apply these ratios to the fundamentals of the company value. Historical ratios: this method calculates the historical average valuation ratios of the company and to apply its principles. NAV method: evaluates the assets on the balance sheet at market value by the most appropriate method for the analyst transaction multiples method: consists in applying to the company valuation ratios observed during recent transaction comparable companies. Recommendations for 11/06/2012 0% 2% 31% 67% Buy Hold Sell Neutral 15