Is it worth following insiders who have this last month bought £584,542 worth of shares in AIM-listed, entertainment industry contracts provider FFI (FFI)?
The stock listed at 150p last June and, after initially rising, slumped to a 73p low at the end of last year after it declared first results – interims to 30 September 2017 – were effectively below growth expectations, blamed on misconduct scandals in the US film industry delaying or cancelling various projects.
It was hardly disastrous: US completion contract revenue did edge up 4.3% to $13 million in FFI’s principal (69%) geographic area for this activity.
To an extent, FFI may have invited suspicion along the adage, “best avoid foreign companies listing on AIM.” While the holding company has a Mayfair office, American managers of the principal subsidiary – Film Finances Inc – are headquartered in Los Angeles, so it’s easy to wonder why they didn’t gain a US listing rather than the relatively lightly regulated AIM market.
Yet FFI did originate in London in 1950, and Burford Capital (BUR) has been a multi-bagger AIM stock with American management and a financing angle; both companies are pursuing global not just US business.
A high PE, no yield and modest net assets
The 2016 year involved a revenue drop, inviting a question whether the £59 million placing, said mainly to fund diversification into ancillary services such as post-production and editing, was also a defensive move.
Company REFS doesn’t show any forecasts, but assuming FFI is capable of a benchmark 2p earnings per share (EPS) – with its moderate 157 million shares issued – that implies a price/earnings (PE) over 40 times.
Meanwhile, there is not even a commitment to a dividend policy: the prospectus stated the board doesn’t anticipate paying dividends for at least two years, and then only if appropriate versus cash flow and growth needs. Given the business is US incorporated, a possible 30% withholding tax could apply.
The end-September 2017 balance sheet showed goodwill/intangibles representing 31% of net assets, what you would expect for what is largely a “people business”, although £40 million equivalent net assets works out at 25.5p per share – versus a current share price of 86.5p, which capitalises the group at £136 million.
Such a raw view doesn’t convey attractive risk/reward, and FFI was clearly sold on a growth rating; hence, the stock has been sensitive to adverse change in its story.
FFI Holdings – financial summary year ended 31 Mar 2014 2015 2016 Turnover (£ million) 27.2 31.6 25.7 IFRS3 pre-tax profit (£m) 4.4 6.1 2.2 Normalised pre-tax profit (£m) 4.4 6.1 2.2 Operating margin (%) 16.1 19.4 8.2 IFRS3 earnings/share (p) 1.7 2.4 0.9 Normalised earnings/share (p) 1.7 2.4 0.9 Earnings per share growth (%) 38.8 -63.6 Price/earnings multiple (x) 101 Historic annual average P/E (x) 319 124 Cash flow/share (p) 6.5 2.5 -1.0 Source: Company REFS
Insiders including CEO, sold moderately at flotation
Quite how broker Liberum convinced institutions to pay 150p per share, FFI so far affirming the adage to let flotations prove their mettle for a while. FFI issued 21 million new shares to raise funds for investment, although 18.4 million (i.e. £27.6 million) were placed from holders selling; and the prospectus could have done a better job clarifying up front who these people are.
It’s necessary to trawl through to page 190 and then compare with existing holdings: the chief executive sold 7.4 million, but retains a total 47.5 million including exposure via Ransohoff Trust, thus he owns 30.3% of FFI.
Golden Sun Capital Management sold 9.1 million retaining 48 million; Amlin sold 1.7 million retaining 10.8 million; and another employee sold 194,256 shares. The CEO has, therefore, locked in some gains, but is manifestly incentivised to deliver value for new investors.
Is the diversification strategy justified?
From a Los Angeles HQ there are 11 offices globally, FFI proclaiming itself market leader in “completion contracts” for film, TV and streaming products.
They guarantee to financiers, a production will be completed on time and on budget, FFI taking an up-front fee as responsibility for ensuring the outcome. It then mitigates its own risk by taking out insurance, which is why administrative expenses took 63.5% of interim gross profit and the operating margin was 7.5% versus Burford Capital enjoying over 75% (albeit with an investments-approach to litigation financing).
One declared objective on page 37 of the prospectus was to apply £6.2 million to establish a captive insurer and new agreement with insurers, “significantly reducing insurance costs” – the interims declaring as from October 2017, if yet to be quantified.
It also targeted £15.6 million for acquisitions “enabling the group to broaden its product offering and cross-sell these services to producers additionally to completion contracts.” Sceptics might say this is a response to the 2015-2016 drop in revenue to mitigate risk.
Also, while Australia, Europe and Africa/Middle East have shown contract completion revenues up over 20% recently, and new contributions from China, the US market could be maturing – hence only a 4.3% rise – and represents a bulk 68.7% of contracts completion revenue.
Beware the apology about industry (sex abuse) scandals. Certainly FFI has been busy with acquisitions (see recent months’ news flow) though it remains to be seen just how well they smooth revenues.
Finance director and non-execs buy seriously
Buying started by Simon Ingram, one of the non-executive directors, early last October – 350,000 shares at 156p for a £546,000 outlay. After the drop, in early January he added 240,000 shares at 75.3p, a further £180,792. He clearly believes in FFI’s long-term business model.
Around this time another non-exec bought 50,000 at 76.5p and his wife 25,000 at 76p, then on 19 January the finance director bought 225,000 shares at 77p – which ought at least to affirm belief in long-term positive numbers. Non-execs might not have a full grasp, but a relatively new FD should – this one having served for 11 months.
The chairman has also joined in, adding 225,000 shares at 77p, if having an interest to defend – holding over 10 million shares already. It’s serious cluster buying though, with the FD finally attracting the market’s attention, hence a 13% rally.
Strong balance sheet albeit $10.9 million flotation costs
At end-September, FFI had steady short-term debt of just US$2 million and $0.5 million longer-term, versus $44 million cash and $62.6 million restricted cash, which note 11 clarifies as for use in film productions, according to funding agreements.
Some $12 million of the restricted cash is also held in escrow to satisfy insurance premiums. Yet the last cash flow statement was impacted by a $1.8 million loss due to whopping $10.9 million exceptional cost (note 4) linked to the AIM flotation and fund-raising.
Near-term negative working capital movements, making for $4.9 million negative net cash flow from operations. Doubtless investors will want to see this improving as the annual cash flow profile (see table) has also declined.
No margin of safety at 86.5p
Without the director buying I concede I’d have passed over FFI and awaited more evidence. The company does look to have hit misfortune out of its control – the Hollywood abuse scandals – and appears well placed to take advantage of Chinese media growth.
Yet it’s an open question how the diversification will pan out. Going back 15 years or so, I recall visiting one such “film/media support services” operation in Soho – owned by a listed company – which appeared well set-up but would struggle as soon as the UK economy weakened, as lower advertising hit media demand.
I don’t think it was Chrysalis plc (CYS), but distinctly recall that diversified media services group sustained a big PE – similarly in the order of 40 times, like FFI – until it was broken up. You need to assume with FFI, hype over the US economy is not misplaced and it will avoid recession.
FFI therefore rates a Speculative Buy for its strong market positioning and being capitalised for growth. If the story evolves reasonably to plan, without delays becoming ingrained, it probably offers upside despite the high PE.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.