21.04.2020 DEAG Deutsche Entertainment AG DE000A0Z23G6
Original-Research: DEAG Deutsche Entertainment AG (von Montega AG): Buy
Original-Research: DEAG Deutsche Entertainment AG - von Montega AG
Einstufung von Montega AG zu DEAG Deutsche Entertainment AG
Unternehmen: DEAG Deutsche Entertainment AG ISIN: DE000A0Z23G6
Anlass der Studie: Update
DEAG is well prepared for temporary effects of the Corona crisis
DEAG recently has published its 2019 annual report and confirmed the preliminary financial key figures. A qualitative guidance for 2020 has been announced under consideration of the effects caused by the “corona crisis”.
Sales and earnings slightly below our estimates: In the financial year just ended, DEAG generated revenue of EUR 185.2m (-7.5% yoy). Consequently, the company did not fully meet our expectations (MONe: EUR 205.0m) due to lower consolidation effects of the acquired five companies and a slightly weaker performance in Q4. We were, however, encouraged by the development of the gross margin, which improved by 340 bp to 22.6% thanks to a stronger business in Ticketing amongst others. The EBITDA margin also rose from 7.3% to 7.6% despite higher personnel costs (average headcount 263 vs. previously 200) as a result of the acquisitions and the extraordinary income from the sales of RGL in the prior year (EUR 5.3m). Based on the increase in D&A primarily due to right-of-use assets for leases from the changed basis of consolidation the EBIT margin was down (4.2% vs. 5.3% in the previous year). The consolidated profit before minority interest amounted to EUR 0.6m and thus is well below the previous year (EUR 6.6m). Alongside the lower operating earnings this is attributable to both higher interest expenses resulting from the increased bond and a lower investment income as well as higher tax expenses. Although the company has already made purchase price payments in the amount of EUR 9.1m, liquid funds increased to EUR 46.3m at the end of the year (PY: EUR 36.4m).
Prohibition of major events extended: The core regions Germany and the UK have also prohibited major events since mid-March after DEAG’s third core market, Switzerland, had already enacted this prohibition early in March. To date, the company has postponed more than 850 events almost completely to Q3/20 and Q4/20 and sporadically also to H1/21. Given the recently extended prohibition for major events in Germany until end of August, however, we assume that DEAG will have to postpone further events or even cancel some of them. The other core regions, Switzerland and UK, have similar prohibitions in place until May. However, we believe that the restrictions will be extended in these countries as well. It must be noted in connection with the cancelled events that DEAG has an extensive insurance coverage when events have to be cancelled with “orders from higher authorities“ (including COVID-19) which in individual cases does not only cover the costs but also (part of) the profits.
The company initially had envisaged an increase in sales and EBITDA in the lower double-digit ranges in the current financial year. Subject to the further development of the “corona crisis“, however, management also does not rule out a moderate or even significant decline in sales and EBITDA though. We believe the effect should not be too negative in Q1 yet as the operational development had not been affected until early in March according to the management. We anticipate sales of EUR 24.5m (-3.8% yoy). Conversely, the second and third quarter will be significantly affected by the negative effects of the “corona crisis” on the live entertainment industry. A cumulated sales contribution of between EUR 91.9m and EUR 125.9m as in Q2 and Q3 of the previous year should be lacking in the current year for the most part. We expect to see a normalisation of public life from the fourth quarter onwards which would also result in an increase in demand for live entertainment.
Impacts on our valuation model: We have significantly reduced our expectations for 2020 on the back of the extended prohibition of major events until end of August. We anticipate a decline in sales by 35% yoy. Although most of the costs are variable, DEAG should not succeed in sustaining the pleasant margin level reached in 2019. Against this backdrop, we expect an EBITDA margin of only approx. 5%. That said, management has taken various actions to unburden the cost basis and to preserve liquidity. For instance, the company has introduced short-time work and negotiated an increase and a flexibilisation of the credit lines with its principal banks. It has also applied for a low-interest loan from KfW and has optimised debt services. Additionally, DEAG currently makes use of deferred payments for taxes and social security. While DEAG had liquid funds of almost EUR 50m as per 31 December, we consider the preventive measures initiated by management to be reasonable during the current crisis. As things stand at present, we expect revenue to increase significantly again and margins to return to the previous level in 2021.
Conclusion: DEAG has successfully concluded the last financial year. Now the company is facing major challenges because of the “corona crisis”. However, the recently extended prohibition of major events in Germany provides clarity regarding the operational development over the next few months. The discussions with management have shown that the company is well prepared for the significant decline in sales and earnings in our view. Furthermore, this should only be a temporary problem and DEAG is expected to return to its path of success from 2021. We believe the clearly disproportionate price decline of the last weeks (-49.8% vs. CDAX -22.0%) has already priced in a worst-case scenario so the current price level is an attractive opportunity to buy in. Our price target is reduced to EUR 6.00 as a result of our revised forecast (previously EUR 6.60).
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Medien (Film, Musik) , A0Z23G , LOUD , XETR:ERMK