Is Facilities by ADF too cheap?
A review of #ADF
Yesterday (12th November 2024) Facilities by ADF released a trading update which sent the company down roughly 40% to sit at a current market cap of £35mil. Was it that bad? Was it previously overpriced?
To figure this out we need to look backwards first and then start to look forwards
Interim Results - 16th September 2024
Revenue - £15mil, down 30%
EBITDA - £2.5mil, down 57%
Loss before tax - £0.8mil, down 130%.
These results are obviously not great, so what has gone wrong?
Writers Strike
This took place from 2nd May 2023 and 9th November 2023… which reminds me, I haven’t said what Facilities by ADF does and why this is key.
They basically provide posh trailers for the film and tv industry to use when filming, they’ve provided these for The Crown, Peaky Blinders and Ted Lasso, amongst many other big shows.
If the writers are striking, there’s nothing to film and no use for the services for Facilities by ADF.
This heavily impacted the second half of FY23 and the first half of FY24 (to come back to in the future, this makes FY22 the last proper period).
The outlook of the interim results seemed pretty positive and the balance sheet was okay, but a lot of lease liabilities due to not owning the trailers. Assuming revenues continued to improve into H2 this would not be a problem.
An acquisition
They acquired a company called Autotrak, they lay down the mats at Festivals and events to make a field a nice unmuddied walkway (doesn’t always end up this way but starts it). A similar business to ADF but diversified and on first look, attractive.
Picked up for £21.3mil (initial of £10mil by a placing), with an EBITDA of £4.3mil. Not a bad multiple and it should not be impacted by the writers strike.
So, the trading update that caused it all to go wrong
Due to the US election and the UK budget (is that a fair excuse?) they have seen productions due in FY24 pushed into FY25, delayed work, not cancelled. They therefore expect revenues of £35mil and EBITDA of £7.3mil to £8mil and breakeven at proper non EBITDA nonsense level. End of October cash balance of £3.3mil and keeping dividend.
Now lets assess the value of this business.
H2 is estimated to have done the below:
Revenues of £20mil
EBITDA of £5mil (using roughly lower end of estimates).
Extrapolate that out and we could look at FY25 having revenues of £40mil and EBITDA of £10mil.
Stockopedia is currently showing revenues of £67mil, but I don’t think they have been adjusted down yet.
I think the truth is somewhere between my simple calculation of £40mil and the stocko forecasts of £67mil. So split in the middle £53mil.
If FY25 produced £53mil, then what does bottom line look like? FY22 (remember I said I would come back to this) did revenues of £32mil and Net Profit of £4.6mil, this was pre acquisition, pre inflation so is not directly comparable, but lets rock with it. That would put ADF on a p/e of 7x earnings, but with possible considerable debt in the form of lease liabilities and some future payouts due from the acquisition.
My view
Turnarounds take a while, ADF are not alone with these issues, we have seen Videndum and Keywords both struggle with the writers strike so we know this is not an ADF specific problem and one that naturally will recover (unless we hit future strikes).
This has been a disastrous IPO but this is now the trough for them, with normalisation of the film and tv industry and an added string to their bow in the acquisition I believe we will start to see a stabilisation of earnings and the beginning of a recovery.
I am disappointed they haven’t scrapped the dividend as this would have provided some balance sheet strength to make sure they get through this period but cashflow should only improve from here.
The full year results are likely to be pretty rough, but moving into 2025 should be quite exciting as the company has been kitchen sinked.
It is certainly risky and if they end up needing to raise cash then it will be nasty (and keeping the dividend will look extremely stupid), but I think from this price level there is a lot of negativity built in and there could be good upside for those willing to take the risk and have the patience to wait a year or two for the business to fully recover.
At 7x earnings and on depressed earnings, I’m calling this “too cheap”. (prepared to have egg on my face)