The Quarto Group Interim Results: Deep Discounts Persist

Quarto’s (QRT.L) interim results showed a good performance, with revenues up 1% and adjusted operating profit ahead by 6%, despite the well-publicised difficulties of both the book retail sector and the underlying malaise in consumer markets. We are maintaining our full-year forecasts, which make no presumptions of underlying recovery. The balance sheet (which does not reflect the full value of revenue-generating assets) continues to improve. The shares remain on a substantial discount to the international publishing sector and carry a premium yield.

Book Publishing leads the charge
The overall revenue growth figure of 1% (to $73.2m) is an amalgam of the Co-Edition Publishing sales, which fell by 5.4% and growth in the Book Publishing segment of 3.5%. The former reflects the lack of confidence in commissioning of new titles by potential licensees at the end of 2010, although the level of reprints remained good. In both segments, the individual imprints had varying performance. Frances Lincoln, bought last August, is performing well and will bring further opportunities to combine resource with other group imprints. Revenues and profits are heavily weighted to H2, but the trailing 12-month figures give us confidence in our current forecasts.

Digital revenues climb – but more slowly
Growth in sales of Quarto’s eBooks slowed in Q212, but digital revenues nevertheless showed gains of 87% to account for 2.2% of sales in the first half. This reflects the large number of backlist titles converted into eBooks over the last 18-24 months. With only new titles now being added, this growth is likely to continue to slow and is unlikely to reach the proportion of sales achieved by publishers of fiction and non-fiction narrative text.

We await further news on the timing of the Special Meeting called in July to remove Laurence Orbach (the Chairman, CEO and largest shareholder) as a director and to elect Tim Chadwick.

Valuation: Deep discount persist
Our arguments on valuation are well rehearsed. Banking facilities were refinanced earlier in the year and the further reduction in net debt of $2.5m (to $87.8m) on the prior year, despite the $6.9m spend on Frances Lincoln, should reassure the market on the group’s debt position. The balance sheet is conservatively stated and does not reflect the full value of the backlist, which generated 64% of Book Publishing sales in FY11. Given the underlying trading environment, the interim dividend has been held at 3.35p (the FY11 final dividend was increased), giving a covered, and premium, yield.

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