PLENTY OF ACTION AT ADF - 29/05/22

Time to take another look at Facilities by ADF, which I last covered here back in January of this year, following its arrival on the AIM.

Back then, following my buying into the story I was fortunate enough to catch up with management in order to hear more of the story and the prospects for the business going forward.

Suffice to say, following what were excellent maiden full year 2021 results, I was once again able to speak with both the CEO and CFO in order to glean more on the performance and current prospects.

For those unfamiliar with ADF, the company provides extensive services to the film and TV production industry, such as make up and costume trailers amongst others. Customers are big and major players in the form of Netflix, Disney, Apple along with the BBC and ITV.

Looking at the results which were unveiled last week, revenue surged to £27.8m which was a big improvement on the 2019 figure of £15.9m and which is a better comparable than the Covid ravaged 2020 number of just £8m.

CEO Marsden Proctor was certainly pleased with the performance which saw adj EBITDA of £7.7m and adj pre-tax profits of £3.9m being achieved.

During the period the company supported thirty nine productions that included well known titles such as The Crown and Peaky Blinders, a successful outcome that looks set to continue and indeed accelerate.

Proctor says, “we expect to comfortably pass the seventy production mark this year and there has been a big level of interest, so it is all very positive”.

Looking beyond the current year and into 2023 he expects more of the same, with no indication of any slow down and where he expresses confidence of that continuing in the same vein as the current year.

One of a number of drivers in terms of visibility for productions is the commissioning of specific directors or writers of choice who have to be engaged well in advance.

Typically, he says, streamers or TV production company's now have to book those in for 2024, given the strong and ongoing demand, which demonstrates the extensive commitment to content.

Going on the CEO adds “a lot of productions are now commissioned for three or four years with five or six seasons and for example, we know that we will be doing a third Slow Horses for Apple following the first last year and the second season that we are working on now. Demand for content is so great and networks need product and productions which is also driven by a lot of spin-offs”.

An example of this can be seen from the Witcher, which ADF did last year and has subsequently paved the way for a new spin-off titled the Lark.

Further evidence of the extensive runway for the industry can be seen by the massive investment from the major players who have invested heavily in both existing and new studios across the UK.

An understandable train of thought in relation to this growth however is that surely such new studios will include the kind of facilities that ADF provides, arguably reducing the growth opportunities for the company.

Proctor dismisses such a notion and explains, “sound stage space is prime estate for studios, so they won't forgo any of that for costume or make up stores. Also, the vast majority of productions are mobile and that isn't going to change, so studios that are being built do not have the facilities included”.

With demand currently strong and expected to remain so, ADF has an extensive line of new trailers on order as mentioned in my previous coverage here and Proctor says that they are currently making sure that the supply chain is managed as best as can be.

Although he says there are a few minor delays, it is not affecting the company operationally.

Additionally, they are in discussions with the landlord next door to their main operation to take on 45k sqft of factory in order to ramp up the building and the kitting out of vehicles.

Although clearly confident, there is an element of frustration with the perception regarding the industry as recently played out in the press regarding Netflix subscriptions.

Proctor says that the major industry players have very large pockets with multi revenue streams and he views increasing competition in the space positively. “Netflix enjoyed the lie of the land for a long time without much in the way of competition and Amazon and others are really just starting out on their journey now. It will continue to evolve and that is good for us and subscribers too, so we don't see it as a problem for us, rather it is a positive thing.

Apple for instance are building their own studios here now and they will be here for a long time, so it is looking very good with positive signals that are contrary to what has been seen in the press around Netlix, so we are therefore positive and view the future as being very, very bright”.

In terms of UK activity the CEO speaks of lots going on in Scotland with two new big studios being built there along with plenty of action in the south west and north west.

Looking at a potential bear case for ADF, the major impact would come in the shape of a serious drop in demand, fuelled by the public appetite for streaming ebbing away as consumers tighten their belts.

To this end, Proctor agrees with my own thoughts that such a scenario as an impending recession could well play out in a similar way to that of the pandemic. Where, rather than go out to a restaurant or other leisure activity, people may well be more inclined to stay home with a take-away and stream a movie or popular series as with increasing competition, the costs by comparison to other activities impacts less on the pocket.

Also, the CEO points out that streaming and the appetite for such content has expanded beyond the home environment with people electing to watch on their tablet or mobile when on the move.

Clearly, the major players across the industry do not envisage a slow down any time soon as evidenced by the appetite to secure new studio space and the massive investment that has and is being made.

Organic growth is of course a major driver for the company, but as one of only a few major players in what is a fragmented space there are opportunities for acquisitions to assist with growth.

CFO Neil Evans says that they are currently engaging at an exploratory stage with a couple of players in the industry doing the same sort of things, along with a couple of others that do complementary aspects.

Part of the strategy would be to hoover up coverage in specific regions as there is a lot now going on away from London, which are currently served by smaller often family owned providers.

The CFO adds that they will be pressing on with the discussions and will update shareholders when there is something more concrete to say.

Funding for any purchase would be achieved through a combination of cash and the issuing of new shares, along with other available options which would no doubt be dictated by the size of any such purchase.

Looking ahead to the current full year 2022 numbers broker Cenkos is forecasting revenue to hit £31.8m with EBITDA at £7.8m and pre-tax profits of £3.5m with EPS of 4.6p.

For next year, the same broker anticipates revenue increasing to £38.4m with EBITDA at £10.2m and pre-tax profit of £4.5m which would see EPS of 5.9p.

There is also expectation of a total maiden dividend for the current year of 1.4p per share, rising to 1.8p next year.

Given the positive picture though, either or both of those forecast numbers could yet prove conservative and with potential for an earning enhancing acquisition there could be risk to the upside.

At the current price the shares stand on a forward (2023) PER of 11 which looks decent value to my eye, which is why I continue to hold with a view to adding in due course.