Quarto (QRT)

Half year results

On Monday, as I was looking for investments to potentially replace stocks in a portfolio I’m fast feeling is no longer obviously cheap, I stumbled back upon my thoughts on Quarto group a couple of months ago. The price is more or less the same, and I remember being bullish then, so I booted back up the spreadsheet and clicked back on their website, only to find they were reporting results two days from then.

That’s always a slightly uncertain moment for me, because I’m still not sure what I feel about buying directly before results. If I’m of the conviction that the stock is undervalued, surely the balance of risks on every results day is going to be positive – it’s more likely to surprise (since, if the stock is cheap, expectations are implicitly low)  on the positive and see upwards share price movement. I think that logic is solid, but I rarely follow it. I prefer to wait for results and see where the cards lie before making my decision. Perhaps that’s just my all too-human aversion to being in the dark. Maybe I pay a premium for the privilege!

Either way, the business is obviously functionally the same as it was in my look at it the last time, with two posts; one focusing on the business, and one focusing on the figures. Click through to those for a more complete representation than I’ll put here, but to sum up the business in one sentence; Quarto are an international book publisher who focus on non-fiction books – manuals, ‘lists’ etc. – which makes their revenues and operations less volatile than fiction publishers.

What do the half-year results tell us about how the business is progressing? Well, not a lot, but perhaps that’s a good thing given that I was thinking of buying. It meant the price of the company stayed roughly flat today. It is interesting to see co-founder Robert Morley resinstated to the board after his departure in all the Orbach-related intrigue last year (discussed in first post). The company’s working on the usual objectives one comes to expect when a company gets ruffled up – debt reduction and cost reduction. In Quarto’s case, there’s also a notable hat-tip on digital revenue, after Orbach’s level-headed but evident scepticism meant they had a rather lowkey digital strategy before. Still, I have to say, I’m happy to see the company isn’t leaping into the fire on this – I see the same refrain as before on the subject, which gives me confidence in Leaver (new CEO, old board member): “we feel strongly that our titles work best in print… That said, if our readers choose to read them digitally we want to make that same content available to them in whatever form they choose to consume it.” A reasonable strategy, I reckon.

Quarto seem pretty bullish on the prospects of all their individual segments, and talk about $1m of cost that’s already been ‘cut out’ this year. It’s always nice to read, but I find essentially meaningless – measuring how costs are cut in a business as big as most listed ones are seems to be completely impossible, particularly when you’re talking about less than 1% of total cost, since the knock-on effects and so on are ever present. Given year-to-year noise in costs and revenues, too, it represents nothing more to me than a nice headline for the company to put up.

The figures front is what matters the most, but sadly on that basis we don’t have a lot to go by, there – the previous 6 months are traditionally the slowest month of the year for Quarto, and the real crunch time for their full year profits comes next. That said,  operating profit is up on revenues which are slightly down, and a $4m operating profit in their quiet half of the year bodes well for their full year performance. Broker forecasts seem rather bullish to me, but a repeat of last year’s performance – putting them on a P/E of 8  – seems like a reasonable guess (and I stress the ‘guess’ part!).

I note that the company is still investing at a similar level to last year – investment in pre-publication costs, the stuff that gets the books to market, is only down about 4%, which is higher than one might expect given changes at the top. Companies tend to like reducing investment while they shift things around, but it also shows that Quarto isn’t unduly prioritising debt reduction. Debt reduction is a slight concern for me, since the interest burden on the debt will rise as interest rates (eventually) rise, and I also note they’re not that far away from one of their covenants – pre-exceptional operating profit to net interest payable – but Quarto do say that interest charges will be lower this year.

I like the business, I think there’s more flexibility in the way they make money than is first apparent, and I suspect that the back catalogue of titles they have built up provides a significantly greater value to the company than my usual metric – net tangible asset value – suggests. Assuming no enormous price movements, I’ll buy some for the portfolio tomorrow morning.

One Reply to “Quarto (QRT)”

  1. Laurence

    Hello Lewis,
    This is one that’s on my list but didn’t get to it as yet. So I had a quick look…

    The interesting thing about this business is that it develops say 200 books per year and therefore generates an enormous amount of IP that isn’t on the balance sheet. It covers the cost of this development upfront and I note that one of its most popular titles was developed back in 1982! I’m sure long lasting titles like this make up for the more mediocre ones. It is also one the few businesses that in the printed area that I can think of that is resilient to the internet.

    Its always good to find a business where you can see a catalyst – something that’s going to change the present to the future in a shorter timeframe. This company has several;

    – New management; they’ll be keen to make their mark.
    – An activist shareholder that’s going to look over the new managements shoulder.
    – Individual business reporting. This is a great one! It makes each manager account for their triumphs and their sins. No manager will want his division to experience the signs of meritocracy or be judged as a failure. It is a simple but marvellous too to focus the mind.
    – An improving world economy (I think!). though i would guess that this business will do equally well in good times and bad. in good times the hobbies are in vogue, in bad; the DYI….

    The downsides;
    As you mention, the debt is an issue. I note that they are going to aggressively reduce it (hopefully not at a cost to the business). They are fit to carry the debt but I simply prefer if it were lower. If interest rates move up, which they will inevitably will, the business my suffer.

    The exceptionals I am usually wary of. In general they have a tendency to become semi-permanent! Hopefully not in this case.

    All-in-all, a fine business model. Simple and safe. And the price is quite attractive.

    Regards
    Laurence

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