Tag: QRT

  • Quarto: The End of the Beginning?

    Disclosure: I have an interest in Quarto shares

    Forgive me for the Churchill reference – but it does have some relevance for my illustrated book publishing friends at Quarto. That’s because, along with their 17th March final results announcement, Quarto noted that the two activists still on their board – after almost four years of involvement – will be standing down at the next AGM. The group has successfully passed through a phase of reassessment and considerable uncertainty, as the long-time CEO and founder of the company stepped aside on the activists’ behest and made way for a new leadership team.

    Quarto has reduced debt, sold off non-core assets, started several innovative new imprints and improved financial results. It was, I imagine, something of a tight-rope walk.

    The group still trades at less than 7.5x my run-rate cash flow estimate. I think they can generate around 13% of their market cap in freely available cash each year, with which management can choose to either pay down debt, distribute a dividend, or invest in acquisitions.

    My opinion here has not changed – this is too high a free cash flow yield for a high quality company. The market gives it little credit for the resilience of its business model and places undue emphasis on financial risks from a relatively high (though now substantially improved) debt position.

    Despite continued strong momentum in the shares over the last few years, the rating remains little changed – the improvement in price has mirrored underlying improvement in the company. There is further to go, and the slight loosening of the one-track strategy of debt reduction heralds, for me, the next chapter of the investment.  (more…)

  • Quarto: Déjà vu all over again

    Disclosure: I have an interest in Quarto shares

    Quarto reported results today. For those wanting some background, I'll requote what I first said when I looked at the company:

    Quarto are in publishing, but with a few key differences from firms that may immediately spring to mind. The most important one is probably the type of books they are producing. Instead of focusing on fiction, a rather hit & miss affair that hopes to churn out a few bestsellers every year to compensate for some of the flops, Quarto have a varied portfolio of books with very narrow remits and niche audiences. Perhaps I could best illustrate this with their best selling book in 2010: ‘Complete Guide to Wiring’. By focusing on books for such small groups of people and keeping such a wide portfolio, Quarto remain fairly insulated from the more brutal swings in consumer spending.

    Over two thirds of the group's sales come from backlist - titles published in prior years. No title accounts for more than 1% of group revenues in any given year; last year, the biggest was around 0.6%, the second around 0.4%, and the tail develops after that. I repeat those facts as a sort of mantra when people ask about Quarto, because when I tell them it's a book publishing company I always get the same blank stare. Investors remember Quercus, which blew up after over-stretching itself after the success of Stieg Larsson. Investors remember Bloomsbury, which saw its revenues double and then drop by 33% in consecutive years thanks to Harry Potter. 

    I think it's undeniable that Quarto are fundamentally different. 

    QRT_RevEBIT (more…)

  • Portfolio

    Buys, sells and questions

    HAT

    The place I must start, obviously, is with H&T Group. I posted quite bullishly on them last Friday, and today they're down 19% on their half yearly figures. One of the perils of being a stockpicker, I guess, is that you're bound to be shown up like that sometimes! I'm actually quite surprised at the scale of the fall given the results. Profits are down, as expected, mostly on the decline in the fortunes of gold. The dividend cut must've been expected by anyone anyone giving the business any serious thought - if one of their major profit streams is drying up and profits are heading back to a more normal level, expecting the dividend to stay as it was before is naive. I think the fall is overdone, and I might go as far as to say that I prefer the stock now. There are a few things that bother me with the update, though.

    For instance - management says they think 'consolidation or rationalisation' may be likely in the 'medium-term'. They're fairly ambiguous terms, in my view, but the first means - to me - mergers or takeovers; fewer operators, basically - and the second means store closures. That they're still opening any stores and haven't rule out any further seems a little strange. Perhaps that's being overly nit-picky; stores take a while to set up, so there's a lag between deciding to open no more and no more actually opening. But the overall tone of the statement is also rather negative when they produced what, to me, looked like pretty credible operating figures in their quieter half of the year. Finance costs are down considerably with a refinancing (the group is financially strong), something that'll continue to help in the full year, and the group has cut operating costs on a larger store base.

    There's more to be said, but there's also more I need to do on my end, so I'm holding off on buying/selling for now. I'll pen a more complete write-up later in the week, hopefully, or next week if not - but it's at the top of my list given the price! (more…)

  • 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. (more…)

  • Quarto (QRT)

    The figures

    Leading on from last time, when I caught up with Quarto, the small-cap illustrated and non-fiction publishers, today I'm looking more at the figures. My previous efforts were somewhat diverted by a rather interesting set of boardroom antics and the voting out of the long-standing CEO and founder, Laurence Orbach. So while much of the top structure of the company has changed in the period since I last looked at the company, one thing has been fairly constant - the share price. That's hovered at around 150p since more or less the end of 2010. My not buying then is fairly irrelevant to me from a potential investor perspective - I think I'm shrewder than I was, and it never hurts to give a company - particularly a cheap looking one - a second look.

    I'll try to leave aside the management change issues, but in reality I suspect they permeate quite deeply. A company under the rather conservative control of a founder-CEO for so long surely expects some wobbling and wavering post his departure - particularly given the manner that it happened. So while we've seen an impressive track record of normality (barring 2008's exceptionals) it'd likely be foolish to expect more of the same - particularly as the new driving forces want to more quickly pay down debt and 'improve shareholder returns'. It's clear that historically investors weren't excited by this stock; it's been trading on a lowly valuation ever since the financial crisis - so I think much of the future price performance will depend on how exactly the new board go about carving up the business and rearranging the capital structure.

    Crucially, though, what they have to work with seems good. Assets inside the business have earnt decent returns on capital going back as far as I can see (mid double digit), though this has hasn't returned to pre-crisis levels. I wonder if investors are sceptical of whether that will happen; the most clear knee-jerk reaction to seeing a company that produces books is that the internet/e-readers/the 21st century will destroy its business. I think Quarto's business model is substantially more resilient than one might expect though, with their diversification  and so on. The way the business is structured - something I mentioned last time, referring to the way all investment is essentially in intangibles - also gives them a pretty good degree of flexibility. They are able to fairly easily move to new markets by simply producing new and different books if old ones dry up. In that way, the only way Quarto really loses is if paper books as a medium around the world die. As I also mentioned before, I think their niche approach gives them a more resilient product. Enormous, homogeneous, mass-market products are replicable and subject to the constant visscitudes of competition. Focusing on very small markets means, among other things, your consumers are pre-selected to be (essentially) price inelastic.  (more…)

  • Quarto (QRT)

    Catching up

    The graph is amended from the first publication; I had forgotten to adjust some of the figures for USD, which made it rather unrepresentative! I've now adjusted all pre-'11 figures by multiplying by the avg. USD/GBP exchange rate in that year, which gives a fairer comparison.

    I first wrote about Quarto about a year and a half ago, in 2011. Back then I found it an interesting company - interesting because of the way it operates and presents its figures, for instance, which reflect a business model subtly different from the more standard buy-and-sell-stuff approach, or buy an asset and churn products off of it over its lifetime method (manufacturing). It's a book publisher, which means it's focused on intangibles, really - lots of cash outflow invested in new books, money which essentially disappears down the drain, and which you then hope to recoup in the years after the investment through sales. Of course, if you do this in scale and reasonably successfully it becomes basically the same as any other business - in aggregate your investments will pay off most of the time, you'll have a steady cash inflow from previous investments and invest the majority of that into future titles, giving you cash flow in the next few years. The only difference is that somehow it feels more unstable - their investment isn't in a nice shiny new factory, but all the nebulous man-hours and such. Still, since Quarto does illustrated books and non-fiction; self help, DIY and the like; it's not focused on the sort of novel-based, one-off 'big hit' approach, either. They don't need to find the next Harry Potter to turbocharge their performance. Something I said last time was that 'no book brought in more than 1% of revenue'. That's still true.

    I immediately warm to that sort of business model more than I would a novel publisher. They sell all around the world, they produce a lot of books (many of them co-edition; they try to make back the cost of producing it before it's even produced) and they simply continuously invest in new ones. It feels sustainable. A lot of their books look quite niche; The Complete Guide to Wiring is still in one of their division's top 5 books; but there's also more mass market stuff in there. I have an aversion to these sorts of books - '1001 movies you must see before you die', for instance, is the last thing I would ever think about picking up off a shelf (why are people so enthralled by lists?!); but it's the sort of repeated-edition publishing that you can refresh and will always have an audience. Apparently. The market has spoken, and that particular book has been around for 10 years now, so my opinion is obviously out of touch! (more…)