TECHNICOLORE

CLOSING POSITION AFTER ANOTHER PROFIT WARNING -3.25%

It feels that it is a bigger profit warning than just the risen cost of DRAM and mgt sees falling rev in Connected Home by about 10% in 1H (tough comps) but expect rev to rise 15% in 2H … It feels that they postponing again a turnaround: I would take my profits / cut my losses and revisit the stock following the 1H results on July 27, 2017

TECHNICOLORE
PRODUCT CYCLE TO DRIVE GROWTH OVER NEXT THREE YEARS: PT 6.60 EUR; upside of 61%

Wednesday • 29th March 2017 • 17:13

TECHNICOLOR Blue Sky  € 9.32 upside of 128%                

PRODUCT CYCLE TO DRIVE GROWTH OVER NEXT 3 YEARS: CHANGE IN EARNINGS MOMENTUM CREATES POTENTIAL FOR A RE-RATING

Technicolor, a worldwide technology leader in the media and entertainment sector is at the forefront of digital innovation. They lead the market in delivering advanced services to content creators and distributors.

Has TCH seen the bottom after several profit warnings over the past 2 years?  Mgt sharply cut its ebitda objectives for 2020 to €680mn vs. €750mn.  Despite lower than expected ebitda, cash conversion remained strong, resulting in a FCF beat. The stock trades on a low (cheap) 2018 ev/ebitda of 2.8x and if one assumes that the Technology business should trade on 12x net profits of 100mn the Entertainment and Connected Home (CH) businesses trade on “only” 2x ev/ebitda.  Consensus is looking for CAGR of 24% over the next 3 years, which would warrant a multiple of 4-to-6x, ARRIS trades on 6x ev/ebitda with margins at 13% vs TCH at 12% (2018). Re-rating should come as soon as the co. confirms its latest guidance.  Next business update is on April 27, 2017.

During the results conf call, the CEO stated: “Following the successful integration of our 2015 acquisitions, our operating businesses are now well positioned to seize growth opportunities while continuing to invest in innovation. Our focus moving forward will be to capture opportunities arising out of the emergence of new immersive premium content experiences and new delivery technologies.” Technicolor is a premium brand with premium pricing and has no intention to compete in the low end markets.

Synergies from recent acquisitions should help margins over the coming quarters: Cisco acquisition added 3 points to the CH business in 2016 bringing it to 8.3%.  Further synergies are more back-end loaded, which translate into lower ebitda margins (8%) in 2017 vs. 9/10% for 2018 (mgt guidance).  CH is expected to benefit starting in late 2017 from cable operator products (DOCSIS3.1) upgrade which should drive profits growth for the next 3 years.  DOCSIS 3.1 will allow cable operators to deliver gigabit speeds to customers at less than half the cost of fibre.

Set Top boxes and DVD replication are viewed as old technology.  The recent consolidation in the CH business, Cisco Connected Device and Pace (Arris Intl) should boost Technicolor market share and notoriety in the US. Will OTT model takes over the Set Top Boxes? It is doubtful over the medium term as premium content is still where the value is. On average, broadband (cable/telco) operators have accounted for 100% of net add. in the US. Investment in new Set Top Boxes technology should allow existing players to remain unavoidable.  The DVD replication might not be fashionable but it is highly cash generative as it doesn’t require investments.

The most recent profits warning was on the back of weak Latin America business, the loss of Canadian customers and a large US client as well as quality problem with Broadcom chips and supply shortage at Micron and Samsung. It could amount to about 350mn of revenue shortfall in 2017. The recovery will take some time, but starting from a much lower base.  Based on a conversation with the company, the only risk to their guidance is a harsher settlement with Samsung which would bring their guidance to the bottom of the 460/520mn range.  Chips shortage should cost TCH 1% at the same time, the co. has more than 4bn of tax losses carry forward, ie, will not pay taxes for the foreseeable future.

Target Price          € 6.60    (upside of 61%)                                                                   

Blue Sky                 € 9.32    (upside of 128%)

SEE LINK FOR VALUATION SPREADSHEET:  TECHNICOLOR