Business Financial Plan for 7 Digital PLC

 

 

 

Business Financial Plan for 7 Digital PLC 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents 

1.Music industry overview5 

1.1Music Industry5 

1.2Comparative market cap of Music Industry5 

2.Company overview (7 Digital group PLC)5 

3.Company risk overview6 

3.1Financial Risk6 

3.2 Business Risk6 

3.2Altman Z score7 

4.Ratio Calculation8 

5.ATO calculation9 

5.1WACC & cost of equity calculation10 

5.2DDM method (Share price calculation)10 

5.3Share price using FCFE (Free cash flow to equity approach)11 

FCFF is free cash flow that is used to paid out dividends. If we retain this amount we have share price of 2.81. that means free cash flow retention is increasing the share price.11 

6.Summary of Findings12 

7.Conclusion14 

8.References15 

9.Appendices16 

 

 

 

 

 

 

 

 

 

 

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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction 

Purpose: 

The purpose of this report is to find the best possible alternative for financing decision making of debt & Equity. It is in such way that the company & its stakeholders can benefitted from financing 

Method of Investigation: 

1. Financial & Business Risk Analysis 

2. Altman z score 

3. Ratio calculation 

4. Forecasting income statement & Balance Sheet 

5. WACC calculation 

6. FCFF calculation 

7. Share price determination 

8. Get the results 

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. 

 

 

 

 

 

 

 

 

 

1. Music industry overview 

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. Music Industry 

Music industry, especially service-based music industry is quite large in size. To compete in this industry sound financial structure is needed. So, we will review financial structure to get the best possible results. 

2. 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. 

2. 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. 

 

 

 

3. Company risk overview 

Every company has risk. Company has to measure risk to plan for future. We will look inside both business risk and financial risk. 

1. Financial Risk 

 

Financial Risk
Particulars	Historical Years (Euro in mn)
	2014	2015	2017	2018	2019
EPS	1.83	1.05	0.24	0.5	-0.31
Change in EPS		-42.62%	-77.14%	108.33%	-162.00%
EBIT	8029	4972	1227	2071	-1096
Change in EBIT		-38.07%	-75.32%	68.79%	-152.92%
Degree of Financial Leverage		1.12	1.02	1.57	1.06

 

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. 

3.2 Business Risk 

 

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. 

 

2. Altman Z score 

 

A	0.27	0.10	0.24	0.25	0.22
B	0.19	0.10	0.02	0.05	-0.03
C	0.21	0.13	0.03	0.05	-0.03
D	0.86	0.72	0.70	0.71	0.62
E	1.36	1.28	1.15	1.08	1.07
Z-Score	3.17	2.39	2.00	2.05	1.56

 

 

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. 

 

 

4. Ratio Calculation 

 

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. 

 

5. ATO calculation 

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.  

1. WACC & cost of equity calculation 

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.  

2. 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. 

 

3. 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

 

FCFF is free cash flow that is used to paid out dividends. If we retain this amount we have share price of 2.81. that means free cash flow retention is increasing the share price. 

 

4. 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.  

 

 

 

 

 

 

 

 

6. Summary of Findings 

Method	Share price
DDM	1.12
FCFE	2.81
LTD	12.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7. Conclusion 

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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8. References 

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 

 

 

 

 

 

 

 

 

9. Appendices 

1. 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

 

 

 

2. 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