Monday, April 14, 2014

Avesco Group Plc - Light & Sound

Avesco is a collection of businesses that provide audiovisual equipment and services to broadcasters, entertainment events, and corporate exhibits and conferences.

Creative Technology (CT)  provides high end equipment and bespoke services to live event broadcasters and for live entertainment shows (concerts, Vegas shows, etc).

A/V for these kinds of events – the Opening Ceremony of the Olympics, the World Cup Final and the Eurovision Song Contest – are reasonably mission-critical, and one might therefore suppose that CT’s technical expertise, quality of service, and custom solutions for clients with which it has had long term relationships represent consequential barriers to entry.

The growth strategy, such as it is, has been to leverage this reputation and skill set to expand into adjacent markets, notably the corporate event and trade show markets, particularly in the United States. Walmart, Google, Ford, Microsoft and, yes, Herbalife are longstanding and repeat clients, as are, for example, the Frankfurt, Paris, and Geneva Motor Shows.

I mentioned barriers to entry above but, strictly speaking, the competitive advantage belongs to the teams of people who generate the revenue and deliver the services, not to the corporate home. The team in CT Germany up and left to start their own shop at the end of 2012 and Avesco has been (and probably will continue to be) unable to regain the lost revenue stream there.

Full Service (FS) offers a broader range of services than CT’s A/V, in smaller project sizes (from £500 to £25,000), and almost entirely to the corporate sector. 

FS’ center of gravity is in the UK where its “MCL” brand operates a national branch network that executes local conferences and corporate events while, at the same time, offering clients “national coverage and international capability”. It enhances this strategy via long term partnerships with venues like Old Trafford (home of a mid-ranking football team in the midlands), The Brewery, the National Exhibition Centre, and some other locations.

FS also does work in the Netherlands as “JVR” – for example, A/V work for Novartis' Sales & Marketing meetings – and has expanded (as ”Action”) into the south of France and Barcelona, the former an established conference destination, the latter an up-and-coming one.

Broadcast Services (BS) is not more than the sum of its parts – Presteigne Charter and Fountain Studios. 

Presteigne Charter provides dry hire of broadcasting equipment and its revenue fluctuates according to the incidence of major sporting events in any given year. Even years see the Olympics, the World Cup, the Euros, and Commonwealth Games – and therefore good utilization of its rental assets; odd years see only the World Track and Field Championships and therefore result in poor utilization. Management experimented with adding a service component to this segment and found that it lost a lot of money. They scaled down the service offering and lost less money. They've now (end 2013) eliminated services altogether  and the segment should regain its health.

Fountain Studios is a 1 &1/4 acre, fully equipped studio facility in Wembley that is rented out to live TV shows such as Britain's Got Talent and The X-factor, for live televised concerts,  etc.

 That's the overview. Customer concentration is not an issue. The financials, scrubbed of extraordinary items, look like this:

The investment case turns on generating an accurate estimate of Creative Technology's maintenance capex. It seems to me that, of the £109m or so that Avesco has spent on PP&E since the beginning of 2008, some 45% of it has been for growth. 

Taking away growth capex, then, the economics of the business looks like this:


Common sense says that this collection of businesses, barring gross and consistent incompetence, should earn pre-tax returns on capital of at least 10% and probably a touch higher. Since Avesco employs £124 million in net operating assets, a run-rate pre-tax profit of £11.3 is not, I think, a wildly optimistic estimate of its earning power .

All of this is relevant because Avesco is trading at an enterprise value of £37m, or an EV/EBITDA multiple of 2x (trailing) and 1.6x (run-rate). If I'm more or less right about maintenance capex, then it is also trading at a price-to-earnings multiple of ~2x. One could liquidate the business and receive receive two, three or four times the market cap.

Why me, O Lord? Investors may have been more focused on the very large special dividend than on the business that remained, the financial statements are not pretty to look at, the bid/ask spread is typically off putting, and there's no way to know when the market (or, for that matter, management) will decide that 2x earnings is too low a price.

Disclosure: I am long Avesco and I might get longer in the future.  

edited to add the bit in italics 


Maintenance capex

Focus in on the hire stock and compare what it cost to the revenue that it generates:

Buy a piece of equipment for £1 and it generates £1.50 in annual revenue, give or take. That relationship is consistent over time, except for 2013 for the reasons indicated in the main body of the post (CT Germany, for example). 

So, if the change in revenue between 2008 and 2013 has been £48.7, then it more or less follows that growth capex, the investment in hire stock to support that growth, has been £48.7 / 1.5 = £29.  And that represents a large share of the total £47 million in net capex between those dates. And that, in turn, suggests that maintenance capex ( capex less  growth capex) is a much lower figure than indicated by the cumulative D&A between those years.

A second angle from which to view it is to remove depreciation from both the nunerator and the denominator of the usual return on capital equation:

This is a portrait of a nicely profitable company reinvesting cash at attractive rates of return. The company's treatment of depreciation and amortization, however, does not give that impression.

The third and, I think, best way to look at it is intuitively: this is a business that, at bottom, rents out equipment. How likely is it that its business model is to buy a camera for £1 and to rent it out at below its cost? It seems improbable to me. If it recovers at least what it costs, then Avesco is worth at least its net asset value, which is £32 million.