ADF - Still In The Frame - 12/12/22

It is almost a year now since I first looked at Facilities by ADF, which back in January caught my eye as a newcomer to the AIM.

The shares of this provider of trailer and associated facility services to the TV/Film Industry subsequently performed very well, peaking at 86p, which as a result saw my sitting on a decent profit.  

Since then - in keeping with the wider market uncertainty - ADF has seen its shares retrace, perhaps in part driven by what seemed a hard ask to deliver a strong second half in order to meet the full year expectations.  

Over the last few weeks though, the shares have performed well, bouncing off of the low forties where the recent announcement of a welcome acquisition has reignited interest in the company.

With what seems like an ideal bolt-on-buy being brought into the fold, I thought now was perhaps an ideal time to once again catch up with key management players, to learn more on that purchase and gain some insight into how things may currently be playing out.

As part of that process, I also wanted to raise a few questions that had been homed in on by others, either on specific bulletin boards or through a direct email to myself.

The first of those points which is worth a look at comes as part of the acquisition of Location One, which is described as the UK’s largest integrated TV and film location service and equipment hire company.

In terms of cost, the initial consideration of £4.43 million was stated as being paid in cash, alongside the issue of 3,407,419 new ADF ordinary shares, subject to lock-in agreements.

There is also an additional contingent earn out consideration of up to £2.66 million, payable in cash instalments, subject to business performance thresholds over a 36-month period with the overall total consideration of £8.9m.

One aspect of the deal that appeared to have been passed over though which clearly has relevance, was whether a loan of £2.7m relating to Location One had been taken on by ADF as a result of the purchase.

Speaking with both CEO Marsden Proctor and Chairman John Richards, it has to be my opening gambit, where Richards is quick to respond and enlighten me on this particular aspect of the deal.

He says that they were clearly fully aware of the debt and did take this on as part of the deal, but that it was very much factored into  the average adjusted EBITDA performance at Location One over the last few years, which equated to a 5x multiple.

As part of this process with that debt taken into consideration it was effectively removed, in order to arrive at the agreed price.

Additionally, Richards says that they are actually refinancing that debt as they can achieve better terms to what was previously fixed by Location One.

In relation to the purchase itself, both feel it is an excellent fit and stress that they already knew the business extremely well as their paths had repeatedly crossed, with CEO Proctor already familiar the management  team.

Proctor adds that the Location One business and operations runs parallel with the ADF offerings, where it tends to come in at an earlier stage. This sees it providing the infrastructure such as temporary flooring for trailers along with installing lighting, all of which complements ADF, which typically follows on with its key services.

Richards adds that importantly, it is a similar sized industry whilst there is not surprisingly a mirroring of the big-name client list which takes in the likes of Amazon, BBC, Sky and Warner Bros, thus arguably further cementing an already strong position for ADF across the Industry.  

The CEO also tells me that within Location One’s depots they have their own tanks that provide for bio-fuel on which all of their vehicles run, whilst additionally, it is also a reseller of that to productions, making for a good propistion at a time of high energy costs.

Likewise, ADF also uses biofuel. with such energy costs charged directly to productions.

With the industry seemingly still buoyant and busy I ask the question regarding moving further afield with penetration into Europe. Proctor says that ideally, they would rather do all of their work in the UK, simply because it is much easier to manage.

That said, he also adds that so far this year they have undertaken work in Spain and Paris for productions, including The Crown and Sexy Beasts. They are, he says, happy to travel. but such distances can deplete their resources as they typically take twenty or thirty units on location.

Touching on the growth path and further acquisitions, Richards says that bolt-on-buys were always part of their plans moving forward but that targets have to be the right fit and bring something either new or in parallel to the business.

They won’t, he adds, be overpaying and any purchase will fit into the 4x-6x adjusted EBITDA on which they won’t compromise.

Clearly, the Location One deal had been ongoing for sometime as the Chairman stresses that at one stage they actually walked away before the deal was concluded.

He also points out that they don’t wish to change the name over the door, as, if the business is worth buying and management is proven, why alter that.

Summing up on the Location One purchase he also adds that it absolutely falls in line with every aspect of the criteria they had laid out, so they are extremely happy with what it brings to the business offering.

That buy aside, Richards says that they are still looking at other options and in the current climate it will be interesting to see what price and multiples would-be sellers will be expecting to receive.

They still have funds of their own left from the IPO to utilise he says and any future deal will always have a deferred and contingent element, so they are very much in the market for another addition that ticks all the right boxes.

Looking at ADF’s Interim Results which saw record revenue for the period, it is clear that there will be a heavy second half weighting, particularly if they are going to meet the full year expectations.

For the first half revenue came out at £12.6m with adjusted EBITDA of £2.6m which seemingly implies a lot of work to do in the second half to achieve the anticipated numbers out in the market from broker Cenkos.

This sees a calling for full year revenue of £31.8m with adjusted EBITDA of £7.8m and a profit after tax of £3.5m which in turn provides for EPS of 4.6p.

Given that ADF has only recently announced the acquisition of Location One, as a holder of the shares I concluded that if there was any hint on the company not hitting the anticipated numbers, then something would no doubt have been announced to the market at that time.

And, given that its year end is only a matter of weeks away now, I find I have to ask the question in relation to a confidence in meeting that current guidance.

Richards says it’s something that they have already been asked at the time of the Interim Results and the answer now is the same, in that expectations remain in-line with guidance.

CEO Proctor expands and says that they have already commenced the longer-term projects that enjoy greater margins, with these typically running from at the low end 26 weeks to 35 and 40 as opposed to the shorter- term operations that are circa 8 weeks.

With that confirmed and the reiteration of prospects on meeting the full year numbers, then the shares remain worthy of my holding and continue to look attractive for the medium to longer term.

Certainly, the current economic climate creates for uncertainty in any market and the specific unease around big streamers seeing a reversal on the growth of subscribers has no doubt spooked some investors.  

Proctor remains confident though, where he tells me recent conversations with some of their US clients reveals that they have been taking advantage of the weakness of the pound in relation to the dollar and that they have the money to spend.

That suggests, plans for further productions remain firmly intact and Proctor also reveals that there have been no cancelations or deferments of productions that they are aligned to.

Additionally, he points out that many of the subscription packages are actually cheaper than they were a few years back and alongside that, there is an increasing numbers of players in the market which is driving the market.

Whilst acknowledging that Netflix has lost subscribers and resided over a reduction in growth, others such as Disney and Amazon are ahead of schedule and he views the increased level of players as a positive.

As an example of the evolution of the sector the CEO also highlights the launch of ITV X, which is a new streaming service claiming to offer more new shows for free than anywhere else and this is another development that he views as a positive.  

In terms of the outcome for the coming months, Chairman Richards doesn’t disagree with my own thoughts, that rather than a mass exodus from streaming subscriptions, the relative outlay is small in comparison with other leisure activities and could hold up better than expected.

Potentially there could be a similar positive as with the lockdown, as consumers discretionary spend could well be diverted away from the likes of restaurants and other more costly activities in exchange for a stay at home with the TV.

Either way, continued growth looks assured for the longer term as the appetite for ever more content from streamers remains firmly intact.

Following on from a massive long term investment commitment from the big- name players into UK studios over the last eighteen months or so, an Ampere Industry analysis report as recently as August of this year stated that despite streamers announcing layoffs and cost cuts, they will still collectively increase spending on original productions next year to a massive $23bn.  

That is a significant sum and with ADF being a key component in the UK production network, then the current market forecasts for next year further highlight the upside potential with the shares trading on a forward PER of under 10.

In order for ADF to service such a demanding market though, there is a big requirement for a fleet extension and to this end The CEO tells me that this remains on track with little in the way of disruption and orders are in for 2023 and 2024.

He adds that as part of that process organic growth is increasing which sits well with forthcoming assistance from the recent acquisition.

Looking ahead to next year's forecast numbers from Cenkos, the expectation is for revenue of £47.6m delivering adjusted EBITDA at £12.3m with adjusted pre-tax profit of £6.6m which in turn provides for adj EPS of 6.3p.

I shall be catching up again with management further down the line and add additional comment then.

Footnote. There have been a quite a few comments here on the blog following my coverage, so if anyone feels like emailing me directly, fee free to do so infoprivatepunter@gmail.com