FFI Holdings Profit Warning: Shares Down 40%

FFI Holdings Profit Warning: Film financier FFI Holdings (LON:FFI) warned that a poor H2 would impact profits to the tune of $6m in the FY19 accounts. The share price declined another 40% in early trading:

This does not show the whole picture and it has been a rather disastrous downturn for the company. It IPO’d in 2017 at a massive 150p a share, which means at today’s price it is close to being a wipeout for anyone that invested in it at the start.

Sadly it is looking like another case of investors being suckered into a ramped-up IPO, as all the news has been bad since. The winners of course are the company owners, and IPO advisors all who have been paid handsomely during this period.

Perhaps the nature of the company had generated excitement among investors. There are few firms offering similar services and the cinema does not seem to be going anywhere soon. FFI originally offered completion contracts to the film industry but now offer a larger raft of services such as pre and post production services, insurance, and content distribution. Ultimately though, this may be a double edged sword for investors: such a different business makes it difficult to compare to others and really appraise value. Certainly at the time of the IPO where the company was valued at over £250m it was priced for growth, which has not materialised.

What did the FFI Holdings profit warning say?

The warning comes in today’s trading update. It’s immediately bad news:

The Company’s Completion Contract business has been experiencing a significantly slower second half of fiscal 2019 primarily driven by timing of closing current deals, a decrease in average production size, lack of larger production titles and reserves for possible claims, the details of which are still be worked out. Additionally, the Company’s Insurance Agency business has been impacted by the delay in certain larger production titles which were originally scheduled for calendar Q1 2019. These titles are now expected to close in calendar Q2 2019.

The previous trading update came in December 2018 with the announcement of the first year results. Nothing said there seems to have given advance notice of this with the CEO stating they were expecting a busy second half of the year.

The effects of these items are quantified:

The combined impact is expected to be approximately $6 million of EBIT. While there is considerable uncertainty in the incidence and timing of a number of items, the Board of Directors expects Underlying EBIT for the fiscal year ending 2019 to be in the range of $7.5-$11.5 million.

Looking at the interims, H1 underlying EBIT was $6.0m. With a rather massive range, we can then see that H2 underlying EBIT has to be in the range of $1.5m-$5.5m. That is a rather wide range.

The Business

Curiously for such a massive share price drop, the company seems to be in not bad shape. They are a global leader in completion contracts, which acts almost as a bridging loan in property. These allow films to be completed without the risk of running out of cash. The business for this is strictly niche. Most big film producers have no need for this and is reflected in the average transaction volume of approximately $12m.

One burning question is where all the money from the flotation has gone: it raised $59m. The answer is acquisitions. FFI has gone on a large buying spree of smaller production companies and also into distribution. This could be loosely termed as a vertical integration. This has greatly expanded the base of earnings and allowed for some decent diversification. As we can see from the interims, it is not the case that the original completion contract business dominates the company:

Technical Services, Insurance Agency and Content Distribution did not exist in 2017, so these additions are clearly making an immediate impact.

One of the problems with the acquisitive nature is the balance sheet, which may turn investors off. Goodwill and intangible assets have shot up due to the acquisitions, and both receivables and payables have shot up as FFI have assumed them. For the market cap of the company, these figures are large, with net assets (and liabilities) in excess of £100m.

Curiously, there is little debt. The group was more or less debt free until a ‘Production Loan’ for $3.5m appeared in the accounts for last year, which is now paid off. The cash position was $15m, which has dwindled down because of the acquisitions.

In terms of cashflow, this has been negative in the past year, although again because of the acquisitions and a repayment of borrowing, this can be easily explained. In short, the group runs a profit and is in a net cash position. It also has another $73m of restricted cash under its assets, although arguably this is not really the same as cash as this would be cash paid up front to be released only when services have been provided – which incurs costs.

Is the FFI Holdings profit warning a buying opportunity?

This could be a great investment depending on your situation. There are a hell of a lot of moving parts to the business here, and I find it difficult to understand them all. The upside here is clear. The most recent published research note (available on Research Tree) gave a target price of 91p.

Stockopedia is less kind, assigning it as a ‘Value Trap’, although it’s value score is 98. The reasons for this can be understood. A massive proportion of the market cap is now in cash, and trades at a very low multiple of earnings. Today’s update has given less certainty to the price. At the top end the multiple is around 3, at the bottom, perhaps about 6, which is still cheap.

The bear case for this to me seems quite obvious. Giving such a wide range of earnings opens up a bit of a credibility issue. Almost as if the management are not too sure what will happen in the next year.  With several companies added on to the business recently, that is perhaps understandable.

Another bigger problem is whether the company has simply gotten too big, too fast. Since IPO, the constant commentary has been profit warnings. There has been scant evidence that these have paid off. Cash proceeds from IPO and consolidated results have helped mask other issues. At the very least, the market hasn’t really warmed to the supposed synergies generated. With H2 looking as it is, it suggests that the momentum is downward.

Additionally the enlarged group size adds an element of instability to proceedings. There are now a lot of assets and liabilities in play. Adverse events could make cashflow a problem. This is quite ironic seeing as the original FFI business sought to iron out those problems for film producers.

From a practical point of view the spread here will be large to purchase this share. And at this price point there may even be a temptation for the owners to take it private again. At the moment I see it as too complicated, and needs time to see how the acquisitions bed in. 3/5.

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