Business Financial Plan for 7 Digital PLC
Table
of Contents
1.2 Comparative market cap
of Music Industry
2. Company
overview (7 Digital group PLC)
5.1 WACC & cost of
equity calculation
5.2 DDM method (Share
price calculation)
5.3 Share price using FCFE
(Free cash flow to equity approach)
Executive
Summery
7 digital group is a business to business music and radio services company. This company wants to build up their capital. For that reason, they are evaluating alternative of Debt & Equity. So, the company wants to evaluate different method to value share price. Revenue has decreased from 2018 to 2019. It is a negative sign for company. Right financial structure will retrieve the company financial position. Company is grey zone during the year of 2017, 2018, 2019. But the company is going to distress according to Altman standard Z score in 2019. This is also a major concern. Because investors are reluctant to provide fund this companies. So, the challenge must be meet to finance of the company. We will evaluate alternatives to meet the challenge
Purpose:
Method of
Investigation:
a. Financial & Business Risk
Analysis
b.
Altman
z score
c.
Ratio
calculation
d.
Forecasting
income statement & Balance Sheet
e.
WACC
calculation
f.
FCFF
calculation
g.
Share
price determination
Scope:
The scope of working on this area has been limited because
we have to work on secondary data that is available. If first hand data is
available then it may be easier to make the accurate report.
Music industry is moderately
large in size. Top 5 top companies capture around 38% market share in the
industry. Competition is pretty high in this industry. To compete in this
industry, sound capital structure is must.
1.1 . Comparative market cap of Music Industry
|
Company |
Market cap |
Employees |
|
Media holding PAO |
1.15m |
2 |
|
Tele vista SA |
3.55m |
14 |
|
Grand Vision Media Holdings PLC |
3.85m |
-- |
|
4fun Media SA |
4.00m |
4 |
|
Tele typos S.A. |
5.32m |
475 |
|
7Digital Group PLC |
5.40m |
147 |
|
Catalyst Media Group plc |
11.25m |
0 |
|
OTT One Nyrt |
16.85m |
-- |
|
Impresa Sociedad Gast D Prtcps Socsl SA |
20.76m |
900 |
Here we can find the market cap of the peer industry of 7 digital group PLC. Market cap of 7 life digital is comparatively lower than other industries. Number of employees is at acceptable level.
1.
Company overview (7 Digital
group PLC)
7digital Group plc, previously
UBC Media Group plc, is a business-to-business digital music and radio facilities
company. The Company is tangled in providing technical infrastructure and
musical rights used to generate music streaming and radio services for a
variety of clients. including consumer brands, mobile operators, broadcasters,
automotive systems, automotive systems, record labels, artists and retailers. It
has net loss of -2571 million in 2017.
Every company has
risk. Company has to measure risk to plan for future. We will look inside both
business risk and financial risk.
1.1 Financial Risk
DFL (Degree of Financial
Leverage) is shown here. DFL trend is downward from 2018 to 2019. But the
degree of financial leverage is high in 2018. It becomes lower in 2019. It means
company is going in better position.
|
Business
Risk |
|||||
|
Particulars |
Historical Years (Euro in mn) |
||||
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Revenue |
51058 |
50710 |
40984 |
42446 |
38659 |
|
Mean of Revenue |
44771.40 |
||||
|
SD of Revenue |
5742.42 |
||||
|
Revenue
Variability (CV) |
0.1283 |
||||
From the sales data we can
see that standard deviation of revenue is 5742.42. Revenue has decreased from
2018 to 2019. Revenue variability is (CV) is lower that means company is in
better position regarding risk return trade off. But standard deviation is very
high regarding to revenue.
|
EBIT |
8029 |
4972 |
1227 |
2071 |
-1096 |
|
Mean of EBIT |
3040.60 |
||||
|
SD of EBIT |
3533.95 |
||||
|
EBIT Variability (CV) |
1.1623 |
||||
EBIT variation is high of the
company according to co variance. Though there is sign of improvement. Company
has to focus in this area to reduce this variability.
|
EBIT |
8029 |
4972 |
1227 |
2071 |
-1096 |
|
Change in EBIT |
-38.07% |
-75.32% |
68.79% |
-152.92% |
|
|
Revenue |
51058 |
50710 |
40984 |
42446 |
38659 |
|
Change in
Revenue |
-0.68% |
-19.18% |
3.57% |
-8.92% |
|
|
Degree of
Operating Leverage |
55.86 |
3.93 |
19.28 |
17.14 |
Degree of operating leverage
is calculated using change in EBIT and change of Revenue. We can see that
revenue will change around 17.4% in response to sales. That is quite lower than
other industries. A great amount of focus must be given in this area.
3.2 Altman Z score
Z score shows the financial
ability of the company to recover from bankruptcy.Altman Z score also measures
financial position of the company. If the z score is less than 1.8, that means
company is heading towards bankruptcy. Company is grey zone during the year of
2014, 2015, 2016. But the company is going to distress according to Altman
standard Z score.[SK1]
[SK1]All this section is not required. Focus on the financial ratio
analysis to assess your company’s recent past financial performance
|
Liquidity
Ratios |
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Current
ratio |
1.55 |
1.55 |
1.46 |
1.43 |
1.38 |
|
|
Quick
Ratio |
0.58 |
0.70 |
0.62 |
0.68 |
0.70 |
|
|
Cash
as % of Total Asset |
0.25 |
0.31 |
0.30 |
0.34 |
0.37 |
|
|
|
|
|||||
|
Profitability
Ratios |
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Gross
Profit Margin |
32.36% |
30.20% |
29.28% |
27.53% |
25.99% |
|
|
Operating
Profit Margin |
2.99% |
4.88% |
-2.84% |
-4.15% |
-7.06% |
|
|
Net
Profit Margin |
2.17% |
4.36% |
-3.01% |
-4.01% |
-6.60% |
|
|
Basic
Earnings Power Ratio |
3.43% |
5.29% |
-3.03% |
-4.56% |
-7.79% |
|
|
Return
on Total Assets (ROA) |
2.49% |
4.73% |
-3.22% |
-4.37% |
-7.23% |
|
|
Return
on Equity (ROE) |
6.04% |
11.40% |
-8.36% |
-11.38% |
-18.58% |
|
|
Earnings
Per Share |
0.24 |
0.5 |
-0.31 |
-0.41 |
-0.68 |
|
|
|
|
|
||||
|
Solvency/Leverage |
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Long
term debt ratio |
0.12 |
0.11 |
0.11 |
0.10 |
0.09 |
|
|
Debt-to-Equity |
0.59 |
0.59 |
0.62 |
0.62 |
0.64 |
|
|
Equity
Multiplier |
2.42 |
2.41 |
2.60 |
2.66 |
2.75 |
|
|
Interest
Coverage Ratio |
4.63 |
7.27 |
-10.75 |
-14.99 |
-28.41 |
|
|
|
|
|||||
|
Efficiency
Ratios |
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Total
Asset Turnover |
1.15 |
1.08 |
1.07 |
1.02 |
0.98 |
|
|
Fixed
asset turnover |
4.12 |
4.40 |
4.78 |
5.09 |
5.42 |
|
|
Interest
Burden Ratio |
0.78 |
0.86 |
1.09 |
1.22 |
1.38 |
|
|
Tax
Burden ratio |
0.93 |
1.04 |
0.97 |
1.02 |
1.05 |
From the liquidity ratio
analysis, we can see that company is in moderate liquidity position. Current
ratio and cash ratio both decrease slightly from 2018 to 2019.
From solvency ratio we can
see that debt to equity ratio decreased slightly from 2018 to 2019. It decreases
interest burden also. But it decreases the benefit of tax shield. Because
higher debt to equity ratio, higher the tax shield. Company takes the benefit
of reduced tax burden.
Return on asset (ROE) is -7.23% on investment.
This shows bad position. It indicates how effectively company management is
using asset to generate a positive return from investment on shareholders
equity.
Fixed asset turnover ratio is
5.42. This means that fixed assets are turning 5.42 times to produce revenue. Higher
the ratio, higher the return on asset. This is ratio is moderate regarding
criteria.
|
Years |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Net Profit Margin |
0.1411 |
0.0195 |
0.0217 |
0.0436 |
-0.0301 |
|
|
|
|
|
|
|
|
Total Asset Turnover |
1.3580 |
1.2811 |
1.1468 |
1.0849 |
1.0678 |
|
|
|
|
|
|
|
|
ROA |
0.1916 |
0.0250 |
0.0249 |
0.0473 |
-0.0322 |
|
|
|
|
|
|
|
|
Financial Leverage |
2.1686 |
2.3975 |
2.4231 |
2.4104 |
2.6017 |
|
|
|
|
|
|
|
|
ROE |
41.56% |
5.98% |
6.04% |
11.40% |
-8.36% |
Du Pont analysis is to
evaluate component part of ROE. Profit margin has decreased slightly from 2018
to 2019. Bur it led towards negative in 2019.
ROA (return on asset) is also
negative. That means management has failed to utilize the asset to generate
revenue.
|
Particular |
(in mn) |
||||
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Operating Assets (OA) |
37599 |
38582 |
35738 |
39123 |
36205 |
|
Operating Liabilities
(OL) |
18987 |
17696 |
15541 |
17166 |
16485 |
|
Net Operating Assets
(NOA) |
18612 |
20886 |
20197 |
21957 |
19720 |
|
Change in NOA |
|
2274 |
-689 |
1760 |
-2237 |
|
Total Stockholder's
Equity |
17338 |
16510 |
14749 |
16231 |
13916 |
|
Financial Assets (FA) |
0 |
0 |
0 |
0 |
0 |
|
Financial Liabilities
(FL) |
1274 |
5376 |
5448 |
5726 |
5804 |
|
Net Financial
Obligations (NFO) |
-1274 |
-5376 |
-5448 |
-5726 |
-5804 |
|
|
|
|
|
|
|
|
ATO |
|
2.7246 |
1.9623 |
2.1016 |
1.7607 |
|
Average ATO |
|
|
|
|
2.1373 |
We can see that net financial
obligation is negative from year to year. Average ATO is 2.1373. That is quite
good.
|
Risk-free Rate |
4.00% |
|
Cost of debt |
9.00% |
|
Risk Premium (Baa Rated) |
2.00% |
|
Tax rate |
25% |
|
Beta |
1.6 |
|
After tax Cost of Debt |
6.75% |
|
Adjusted Beta |
1.40 |
|
D/E Ratio (Average) |
|
|
Business Risk |
1.0% |
|
Weight of Equity |
4.00 |
|
Financial Risk |
2.0% |
|
Weight of Debt |
6.00 |
|
Cost of Equity |
9.80% |
|
WACC |
79.72% |
Here we can see that cost of
equity of 7 digital company is 9.80%. That is higher than cost of debt of 9%.
Company has higher debt and
lower equity ratio. We can see that weighted average cost of capital is 79.72%.
Debt reduces cost because of tax shield.
1.1 DDM method (Share price
calculation)
|
Particulars |
Time 0 (2019) |
Projected Years |
||||
|
2020 |
2021 |
2022 |
2022 |
2023 |
||
|
SGR |
|
-6.30% |
-6.30% |
-6.30% |
-6.30% |
-6.30% |
|
Net Sales |
38659 |
36221.95 |
33938.52 |
31799.05 |
29794.44 |
27916.20749 |
|
NPM |
|
2.16% |
2.16% |
2.16% |
2.16% |
2.16% |
|
Net Profit |
|
781.7969 |
732.5126 |
686.3351 |
643.0687 |
602.5298389 |
|
DPR |
|
52.52% |
52.52% |
52.52% |
52.52% |
52.52% |
|
Dividend |
|
410.5918 |
384.7082 |
360.4563 |
337.7332 |
316.442578 |
|
Cost of Equity |
|
9.80% |
9.80% |
9.80% |
9.80% |
9.80% |
|
Year |
|
1 |
2 |
3 |
4 |
5 |
|
PV of
discount factor |
|
0.9107 |
0.8294 |
0.7553 |
0.6879 |
0.6265 |
|
PV of
dividend |
|
373.93 |
319.08 |
272.27 |
232.33 |
198.25 |
|
Summation
of PV of dividend |
1,395.85 |
|
|
|
|
|
|
Terminal
growth rate |
|
|
|
|
|
13% |
|
Continuing
value |
|
|
|
|
|
2,750.00 |
|
PV of
terminal value |
2750 |
|
|
|
|
|
|
Equity
value |
4,145.85 |
|
|
|
|
|
|
Less:
Cost of Financial Distress |
|
|
|
|
|
|
|
Real
Equity value |
4,145.85 |
|
|
|
|
|
|
Number
of shares outstanding |
3710 |
|
|
|
|
|
|
Value per share |
1.12 |
|
|
|
|
|
According to DDM model share
price is higher than current stock price, that means share is undervalued. So,
there is scope of improvement & the shareholders can benefit long time from
this company.
1.1 Share price using FCFE (Free
cash flow to equity approach)
|
Particulars |
Time 0 (2019) |
Projected Years |
||||
|
2020 |
2021 |
2022 |
2022 |
2023 |
||
|
SGR |
|
-6.30% |
-6.30% |
-6.30% |
-6.30% |
-6.30% |
|
Sales |
38659 |
36221.9 |
33938.5 |
31799 |
29794.4 |
27916.2 |
|
OPM |
|
6.59% |
6.59% |
6.59% |
6.59% |
6.59% |
|
Operating income |
|
2386.50 |
2236.05 |
2095.09 |
1963.02 |
1839.27 |
|
ATO |
|
2.1373 |
2.1373 |
2.1373 |
2.1373 |
2.1373 |
|
NOA |
19720 |
16947.7 |
15879.3 |
14878.3 |
13940.3 |
13061.5 |
|
Change in NOA |
|
-2772.3 |
-1068.4 |
-1001 |
-937.92 |
-878.8 |
|
FCF |
|
5158.82 |
3304.43 |
3096.12 |
2900.94 |
2718.07 |
|
WACC |
|
79.72% |
79.72% |
79.72% |
79.72% |
79.72% |
|
Year |
|
1 |
2 |
3 |
4 |
5 |
|
PV of discount factor |
|
0.5564 |
0.3096 |
0.1723 |
0.0959 |
0.0533 |
|
PV of FCF |
|
2870.54 |
1023.11 |
533.405 |
278.094 |
144.986 |
|
Summation of PV of FCF |
4850.13877 |
|
|
|
|
|
|
Terminal growth rate |
|
|
|
|
|
|
|
Continuing value |
|
|
|
|
|
181.878 |
|
PV of terminal value |
10 |
|
|
|
|
|
|
Enterprise Value |
4860 |
|
|
|
|
|
|
Less: Interest Bearing Debt |
5321 |
|
|
|
|
|
|
Add: Cash & Cash Equivalent |
10902 |
|
|
|
|
|
|
Equity value |
10441 |
|
|
|
|
|
|
Less: Cost of Financial Distress |
|
|
|
|
|
|
|
Real Equity value |
10440.84 |
|
|
|
|
|
|
Number of shares outstanding |
3710 |
|
|
|
|
|
|
Value per share |
2.81 |
|
|
|
|
|
1.1 Issuing of long term debt
|
Particulars |
|
Projected Years |
||||
|
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Sales |
|
36221.95 |
33938.52 |
31799.05 |
29794.44 |
27916.21 |
|
OPM |
|
6.59% |
6.59% |
6.59% |
6.59% |
6.59% |
|
Operating Profit |
|
2386.50 |
2236.05 |
2095.09 |
1963.02 |
1839.27 |
|
Share of Results of Associated Companies |
-23 |
-30.10 |
-40.78 |
-64.37 |
-76.01 |
-88.94 |
|
EBIT |
|
2356.40 |
2195.27 |
2030.72 |
1887.01 |
1750.33 |
|
Less: Financial Income and Expenses |
-102 |
-151.02 |
-200.04 |
-249.06 |
-298.08 |
-347.1 |
|
EBT |
|
2205.38 |
1995.23 |
1781.66 |
1588.93 |
1403.23 |
|
Less: Tax (25%) |
|
551.34 |
498.81 |
445.41 |
397.23 |
350.81 |
|
Add: Minority Interest |
324 |
140.00 |
100.00 |
-88.30 |
-227.84 |
-350.02 |
|
Net Profit |
|
1794.03 |
1596.42 |
1247.94 |
963.86 |
702.40 |
|
Add: Depreciation
& Amortization |
|
1550 |
1256 |
700 |
700 |
700 |
|
Working Capital |
8011 |
|
|
|
|
|
|
Less: Changes in Working Capital |
-1594 |
2097.50 |
-854.50 |
-395.75 |
-26.00 |
-1272.63 |
|
Less: Capital
Expenditure |
|
700 |
700 |
700 |
700 |
700 |
|
Add: Net Borrowings |
|
4300 |
4300 |
4300 |
4300 |
4300 |
|
FCFE |
|
4846.53 |
7306.92 |
5943.69 |
5289.86 |
6275.02 |
|
Cost of Equity |
|
9.80% |
9.80% |
9.80% |
9.80% |
9.80% |
|
Year |
|
1 |
2 |
3 |
4 |
5 |
|
PV of discount factor |
|
0.9107 |
0.8294 |
0.7553 |
0.6879 |
0.6265 |
|
PV of FCFE |
|
4413.80 |
6060.36 |
4489.54 |
3638.91 |
3931.20 |
|
Summation of PV of FCFE |
22533.81 |
|
|
|
|
|
|
Terminal growth rate |
|
|
|
|
|
|
|
Continuing value |
|
|
|
|
|
40097.87 |
|
PV of terminal value |
25120.6302 |
|
|
|
|
|
|
Equity Value |
47654.44 |
|
|
|
|
|
|
Less: Cost of Financial Distress |
|
|
|
|
|
|
|
Real Equity Value |
47654.44 |
|
|
|
|
|
|
Number of Outstanding Shares |
3710 |
|
|
|
|
|
|
Value Per Share |
12.84 |
|
|
|
|
|
If the company issue long term debt of 4300 million than the value per share will be 12.84. which is higher than any other financial instrument.
|
Method |
Share price |
|
DDM |
1.12 |
|
FCFE |
2.81 |
|
LTD |
12.84 |
From the above analysis we
can see that issuing long term debt is giving the highest share price. But we
cannot use that because of company bad financial position that we have seen
from Altman Z score. Investors may not agree to invest in this company. So, we can
use free cash flow to finance the firm needs. That will give the share price of
2.81. This will improve the share price and ultimately investors will be
benefitted.
7 Digital Group PLC(2013,
14). Final Results for the year ended 31 August 2013.[online] Available At:
https://www.7digital.com/wp-content/uploads/2020/01/7digital-Group-plc-2014-12-31-FINAL.pdf
7 Digital Group
(2015,16,17,18,19). Final Results for the year ended 31 August 2015 &
2016.[online] Available at: https://www.7digital.com/reports/
AIM (2019). 7 Digital Life
Plc FUNDAMENTALS. https://www.londonstockexchange.com/raise-finance/equity/aim
https://investopedia.com/resources/
KR Subramanyam ,( 2014).
Financial Statement Analysis, 11e, emphasizes effective business analysis and
decision
making by analysts, investors.
CH Gibson, PA Frishkoff
,(1989) Accounting Principles and Guidelines Accounting Coach Financial
Statement Analysis: Using
Financial Accounting Information
a.
Base
income Statement
|
Particulars |
Historical Years (in mn) |
||||
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Net Sales |
51058 |
50710 |
40984 |
42446 |
38659 |
|
Less: Cost of Sales |
33754 |
33337 |
27720 |
29629 |
27340 |
|
Less: Operating Expenses |
11207 |
11632 |
10987 |
10855 |
10524 |
|
R & D Expenses |
5647 |
5968 |
5909 |
5863 |
5612 |
|
Selling &
Marketing Expenses |
4380 |
4380 |
3933 |
3877 |
3791 |
|
Administrative
Expenses |
1180 |
1284 |
1145 |
1115 |
1121 |
|
Core Operating Profit |
6097 |
5741 |
2277 |
1962 |
795 |
|
Add: Other Income |
2312 |
420 |
848 |
476 |
221 |
|
Less: Other Expenses |
424 |
1195 |
908 |
368 |
2089 |
|
Operating Profit |
7985 |
4966 |
2217 |
2070 |
-1073 |
|
Net Financial Expense/(Income) |
-239 |
2 |
265 |
285 |
102 |
|
Share of results of associated companies |
44 |
6 |
30 |
1 |
-23 |
|
Minority Interest |
459 |
99 |
631 |
507 |
324 |
|
Tax Reported |
1522 |
1081 |
702 |
443 |
290 |
|
Tax Savings/(Dissavings)-Financial Activity |
-59.75 |
0.5 |
66.25 |
71.25 |
25.5 |
|
Tax-Operating Activity |
1462.25 |
1081.5 |
768.25 |
514.25 |
315.5 |
|
After-tax Operating Income |
7025.75 |
3989.5 |
2109.75 |
2063.75 |
-1087.5 |
|
Less: Dividend |
2083.96 |
1512 |
1488.4 |
1485.2 |
1484 |
|
Transfer to Reserve
/ Net Profit |
4941.79 |
2477.5 |
621.35 |
578.55 |
-2571.5 |
a.
Base
Balance Sheet
|
Particulars |
Historical Years (in mn) |
||||
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Operating Assets |
|
|
|
|
|
|
Cash and Short-term
Investments |
11753 |
6820 |
8873 |
12275 |
10902 |
|
A/R |
11200 |
9444 |
7981 |
7570 |
7181 |
|
Inventories |
2876 |
2533 |
1865 |
2523 |
2330 |
|
Prepaid Expenses |
3465 |
5673 |
4894 |
4777 |
5042 |
|
PPE |
1912 |
2090 |
1867 |
1954 |
1842 |
|
Goodwill |
1384 |
6257 |
5171 |
5723 |
4838 |
|
Other Assets |
2736 |
4157 |
2905 |
1968 |
1406 |
|
Deferred Income Taxes |
2273 |
1608 |
2182 |
2333 |
2664 |
|
Total Assets |
37599 |
38582 |
35738 |
39123 |
36205 |
|
Operating Liabilities |
18987 |
17696 |
15541 |
17166 |
16485 |
|
A/P |
7074 |
5225 |
4950 |
6101 |
5532 |
|
Accrued Expenses |
7114 |
7023 |
6504 |
7365 |
7450 |
|
Provisions |
3717 |
3592 |
2718 |
2590 |
2627 |
|
Deferred Tax
Liabilities |
1082 |
1856 |
1369 |
1110 |
876 |
|
Financial Liabilities |
1274 |
5376 |
5448 |
5726 |
5804 |
|
Long-term Debt |
203 |
861 |
4432 |
4242 |
3969 |
|
Short-term Debt |
1071 |
3591 |
771 |
1037 |
1352 |
|
Other Financial
Liabilities |
0 |
924 |
245 |
447 |
483 |
|
Total Liabilities |
20261 |
23072 |
20989 |
22892 |
22289 |
|
Stockholder's Equity |
|
|
|
|
|
|
Share Capital |
246 |
246 |
246 |
246 |
246 |
|
Share Premium |
644 |
442 |
279 |
312 |
362 |
|
Treasury Shares |
-3146 |
-1881 |
-681 |
-663 |
-644 |
|
R/E |
13870 |
11692 |
10132 |
10500 |
7836 |
|
Cumulative Translation
Adjustments |
3159 |
3709 |
3112 |
3989 |
4073 |
|
Minority Interest |
2565 |
2302 |
1661 |
1847 |
2043 |
|
Total Stockholder's
Equity |
17338 |
16510 |
14749 |
16231 |
13916 |
|
Total Liabilities &
Stockholder's Equity |
37599 |
39582 |
35738 |
39123 |
36205 |
