Article by Aventine Asset Management, Capitalize For Kids
Evertz is a tellurian personality in a foster record attention positioned to disproportionately advantage from a ascent cycle to cloud-based 4K / HDR media delivery.
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The association has demonstrated well-developed inner earnings and intelligent collateral allocation practices over a prolonged duration of time, is trade during an undemanding gratefulness and yields 4.5%. We have a high luck 12-month approaching sum lapse for Evertz Technologies in additional of 30% with a intensity for additional upside from transaction-related catalysts.
Evertz: Finding a Next Gear
Evertz creates record that we use everyday. As a manufacturer of foster hardware and program smoothness solutions to both home and mobile we advantage from Evertz record any time we entrance live or on-demand calm from your TV or mobile device. When we watch present replay of an 80-foot putt attack a cup, a Tom Brady QB hide opposite a idea line, or a buzzer-beater from half justice we are benefitting from Evertz’ multi-faceted record platform. When we are examination Discovery Channel and an announcement constrained Shark Week pops adult it is being tranquil and displayed regulating Evertz Technology from a cloud. Evertz products were a tack in NBC prolongation operations centers for a Pyongchang Olympics, assisting to constraint over 2,400 hours of 4K calm and broach it to a world. Evertz is a tellurian personality in a attention and will be constituent to a ongoing enrichment of high-definition broadcasting technology, nonetheless few investors have ever listened a name.
The full Evertz product lineup includes software, hardware apparatus and virtualized “cloud based” solutions. Primary clients embody eccentric calm platforms (eg. Amazon and Netflix), network broadcasters (eg. NBC, Turner), specialty calm channels (eg. Discovery) and wire radio use providers generally. The addressable marketplace represents an annual spend of approximately $40 billion. While Evertz is not a usually user in this marketplace they are a premier product in any of a spaces they contest in. Moreover, Evertz is noticed as an dignitary by their commissioned patron bottom that is a profitable rival advantage in an attention that is always looking brazen to a subsequent product apartment or upgrade.
The Investment Opportunity
Evertz presents one of a many constrained opportunities in a investment universe. This is an underfollowed association with a good inner earnings and collateral allocation practices that is trade during an undemanding gratefulness and profitable a 4.5% yield. Evertz checks a boxes on a infancy of a pivotal investment criteria: good products, specialized market, unchanging income trends, glorious money flows, well-developed government team, and really good positioned for destiny growth. We have a high luck 12-month approaching sum lapse for Evertz Technologies of 31% comprised of a $21.50 aim cost and a 4.5% dividend. Additionally we see assuage luck of a transaction-related matter heading to +50% earnings over this timeframe.
We trust that Evertz is during an rhythm indicate and should be bought in both enlargement and income-oriented portfolios alike. While a batch has been operation organisation for several years a appealing division routine has rewarded shareholders with a plain devalue sum lapse annualized during 7.7% given Jan 2015 (14.1% given Jan 2011). Limited liquidity might forestall incomparable portfolios from holding a position during a stream time, though this provides nimble investors an event to get in brazen of accelerating income growth. We see new product upgrades, including attention heading virtualization and IP-based products, pushing a intonation of new vast sequence awards over a subsequent 12-18 months.
- We design clever pipeline/backlog enlargement as a attention moves towards virtualized and IP formed technology. Upcoming vast attention conferences should act as a springboard to this new sales activity.
- The income indication for certain segments of foster record has spin many some-more repeated in nature. We see a some-more fast income form ancillary aloft multiples. We guess that now 15% of Evertz income is repeated and see this figure doubling in a entrance years.
- In a fast-moving record space innovators will continue to take marketplace share. With an attention heading RD spend, Evertz is positioned to say a standing as a leading-edge provider.
- The biennial foster cycle of marquee tellurian events provides event for Evertz to showcase their capabilities this year.
- At 7.5% of marketplace tip ($98 million) money is starting to build adult again. We see high luck of a special division or money saved transaction in comparatively nearby future.
- Canadian record companies are now in a crosshairs of private equity and money abounding US record companies as evidenced by a vast series of new takeover bids.
- With 80% of sales outward of Canada a vicious Canadian dollar is providing a boost to inner banking money flows.
The pivotal business fundamentals for evaluating Evertz are Free Cash Flow, Balance Sheet, RD Spend and Sales Backlog. The Evertz business indication is to recycle a infancy of giveaway money upsurge into new product enlargement around investigate and development. This enables them to stay in a position of rival advantage (driving sales and backlog) though requires relations high and fast handling margins. Below we prominence their successful execution on this strategy:
I. Free Cash FlowManagement has fostered a enlightenment of value with a concentration on profitability and this has translated into clever money upsurge era on an annual basis. The association understands a need to make enlargement investments on an organically and self-sustaining basis. We calculate stream giveaway money upsurge produce during 4.5% that we find really appealing contra peers. Prudent government of a money cycle within a business authorised Evertz to equivocate arising any new equity given their IPO in 2006.
II. Balance SheetEvertz is radically debt-free with a net $1.28 per share in money on a change sheet. This has been a tack of Evertz’ collateral structure government – a association has never been in a net-debt position given a IPO. Periodic special dividends have resulted in vast drops in reported money per share though we allot probably no change piece risk to this company. Notwithstanding a intensity for accretive corporate actions to be a net use of corporate cash, we design Evertz to continue profitable special dividends when a money balances gets high adequate that it starts to drag on inner lapse metrics.
III. Research DevelopmentEvertz’ investments in investigate and enlargement activities has consistently grown in both comprehensive and relations terms over a past decade and now outpaces that of a closest competitors on a commission of sales basis. These investments are being finished as a attention enters a new record ascent cycle and approach for aloft subsequent era products is flourishing sharply. Client feedback we have listened on new product facilities has been really certain and a association has recently been a aim of a several attention awards for innovation. We do design to see RD as a commission of income tumble in calendar 2018, however this will be a outcome of sales enlargement commencement to overtake spending.
IV. Sales PipelineSales during Evertz have historically tended to be lumpy, a thoughtfulness of a bequest income indication that has been contingent on a reinvestment cycle. As a repeated member of sum income grows this will continue to normalize sum around a longer-term trend. The foster attention underwent a poignant ascent cycle to supplement HDTV capabilities in a 2008 – 2010 period. This was a vast tailwind for Evertz and gathering revenues aloft by 50% over that time frame.
Amazon AWS has emerged as a pivotal selling partner for Evertz over a past year. At a AWS RE:Invent Conference (the heading tellurian cloud computing conference) in Nov 2017 Evertz led a event in a media and party program on a cloud formed concentration solutions accessible to complicated media companies. The event conferred by this elite provider standing with AWS has nonetheless to interpret into a suggestive sales lift, though we are confident that validation from AWS along with a arriving discussion will continue to rouse a code and picture of a Evertz product lineup.
The draft subsequent shows that we are already saying an acceleration in sales enlargement as a year-over-year income trend now stands during 11% on trailing 4-quarter basis. The reserve has also been utterly clever for several buliding nonetheless we saw a drop in a many new stating period. Over a past decade investors have been good served shopping a batch when a reserve enlargement over a final 4 buliding goes negative.
The Biennial Cycle for Global Broadcasting Events
The foster infrastructure business is rather singular in that there is a two-year circuit of marquee tellurian broadcasting events. The years finale in even numbers tends to be where a movement is, and a 2018 calendar sees a PyeongChang Winter Olympics in February, a FIFA World Cup in Russia by Jun and July, and a US mid-term elections in a October-November period. For analogous purposes, 2016 saw a UEFA Euro Cup, a Rio Summer Olympics and a Trump-Clinton US presidential election. Evertz has already perceived certain PR for their partial in NBC’s successful Olympics coverage in a US as good as Eurosport’s coverage opposite mixed platforms and languages to a EU marketplace and will be looking to build on this movement by a residue of a year.
Evertz products paint a vicious member for media companies looking to foster and enhance a strech of live sports and other high form foster events in 4k definition, and Evertz has been successful during securing prolonged tenure contracts with these customers. Evertz is slated to be a obligatory provider for IP/Virtualization solutions to both NBC (through 2032) and Eurosport (through during slightest 2024) for a Olympics that should produce a rarely manifest height for a association to showcase both existent and new tech.
Valuation / Competition
With a prolonged story of plain income enlargement and intelligent collateral allocation decisions it maybe isn’t startling that Evertz is trade during a reward mixed of 10.1x NTM EBITDA relations to a attention peers. We would disagree that Evertz should trade during an even aloft mixed formed on their organic enlargement profile, government team, purify change piece and collateral allocation standards. When we demeanour broadly during a mid-cap Canadian record space, we see a horde of sequence acquirers trade during 16-17x NTM EBITDA with ebbing organic enlargement and feel really gentle with how Evertz stacks adult from a gratefulness viewpoint domestically. In terms of approach tellurian foe for Evertz a subsequent records produce a image into a vital competitors in this space, along with their stream gratefulness metrics:
EVS Broadcast (EVSB – Belgium) – 1 yr. share cost has declined 20% from €35 to €27 especially due to income and domain compression. Forecasts are healthier on a tip line though come with aloft handling losses as a association supports some-more RD and new product initiatives. We trust Evertz is a step brazen of EVS in present replay record and video server products. EVS is trade during 7.5x EBTIDA. Market tip is €360 million.
Harmonic (HLIT – USA) – 1 yr. share cost has declined 35% from US$6 to US$3.75 especially due to a determined miss of profitability and a flourishing debt load. Their reserve is healthy and during record levels ($200mm), so calendar 2018 might move a turnaround if they can govern well. Evertz and Harmonic spin roughly a same revenue, though Evertz boasts a many aloft domain profile, a plain division yield, no debt, and a many cleaner share structure. HLIT is trade during 8.6x EBITDA. Market tip is US$325 million.
Belden Inc. (BDC – USA) – 1 yr. share cost boost of 10% from $70 to $76 (USD), notwithstanding a extreme 30% pullback from a high 80’s during a Jan peak. Belden struggles with organic sales enlargement and is some-more of an acquisition/conglomeration structure, so their concentration is reduction specialized. They have finished good to say their marketplace share, though Evertz continues to margin improved products. BDC is trade during 8x EBTIDA. Market tip is US$2.7 billion.
Imagine Communications (Private – USA) – Despite spending a lot on selling from what we know they are struggling to keep adult with a newest technologies and are losing marketplace share as a result.
Management has a estimable equity seductiveness in a business, are ardent about a record and have consistently shown that they will run a business in a shareholder accessible way. In technology, we won’t tarry for prolonged unless we can see destiny trends as they emerge. During a investigate we have listened Romolo Magarelli and Douglas Debruin referenced as “visionaries” a series of times. This group is not handling from a boardroom – they are hands-on with business and concerned in record development. When we asked about an exit, a government group told us they “are carrying to many fun” to sell a company. Its not mostly we hear government teams speak about their business this approach and a positively lovely to hear. Each of these people owns 31.6% of a association and neither have sole a singular share given a IPO.
The group of EVPs rounding out comparison care are any really means and in possession of interrelated skills. Brian Campbell, an ex-investment landowner in a record zone is a conduct of Business Development and could be a pushing force behind understanding creation if they confirm to take that route. Brian now owns 2.1 million shares of Evertz or 2.75% of a company, adult from 1.2 million when he joined. Rakesh Patel is a CTO of a business, obliged for a investigate of new technology, product enlargement and technical care by a patron formation process. Rakesh now owns 1.2 million shares of Evertz or 1.6% of a association that is down from 1.3 million shares a integrate of years ago. He has played an constituent purpose on a company’s comparison care group given 1998.
Our Base Case Outlook
New Business Wins Accelerate: Evertz is means to constraint 3-4 new patron relations representing annual revenues in a $10-$25 million operation each, while also delivering on designed enlargement in a existent product backlog. Under a bottom box scenario, income enlargement gets a boost to double digits and EBITDA expands from $107 million (current estimate) to $125 million given aloft margins. The company’s EBITDA mixed grows from 10x to 12x given a aloft comprehensive turn of sales as good as a repeated income inlet of new deals. At 12x this gives an craving value of $1.5 billion that corresponds approximately to a aim cost of $21.50 or a 27% benefit from stream levels.
Moderate Probability of a Takeout. We allot a assuage luck to Evertz being acquired by a vital aspirant or private equity. There are several competitors both vast (Cisco) and tiny (Belden) that might be meddlesome in creation them partial of their platform. Below are few engaging considerations that paint opportunities for patron synergies:
- Low selling bill relations to peers. A vast acquirer with endless height selling capabilities could expostulate sales enlargement but many of an incremental business spend.
- Management salaries and a RD spend are high. Reducing possibly of these would be comparatively elementary and urge money on money earnings from an already plain level.
- Several good Canadian record companies have already been acquired this year (RDM Corp, Halogen, Sandvine, DH Corp, Avigilon, Pacific Insight, to name a few) and we consider that tech bankers in Canada are bustling pitching government teams opposite a zone on intensity combinations.
It is not really mostly that we find a listed association with:
- +$1 billon marketplace cap;
- 20% CAGR income enlargement over 15 years;
- Reasonable valuation;
- Zero change piece risk;
- Position of tellurian care in a industry;
- Management group that owns 67% of a batch float; and
- 4.5% division yield.
Evertz is a ideal investment for a Canadian Equity strategy: good products, good money flow, good government team, story of special dividends and unchanging income growth. Looking brazen we consider that a association is really good set adult for continued enlargement over a subsequent 1-2 years also. We trust in this government group as prolonged tenure stewards of financier collateral and plan that a sales force will be means to 1) build on new wins with vital broadcasters, and 2) start to reap vast rewards from operative as a elite businessman into a Amazon AWS ecosystem. We consider that if Evertz continues to govern good and broach innovative patron solutions it can browbeat a emigration of media to software-defined video networking, IP and virtualization. If they can constraint 3-4 vast patron wins over a subsequent 12 months and say a existent bottom we will see a association take a vast step brazen in terms of financier recognition and interest. We consider this association sees a batch cost pull to new all time highs and lapse 30% to shareholders on a sum lapse basement from today’s price. This is a plain bottom case. If we are wrong in terms of timing or bulk of new agreement wins, we see downside produce support in a high $15 dollar operation with a sum lapse of maybe 0-10% formed on stream prices ($16.70).
Aventine Asset Management
Aventine Asset Management is partner-owned investment government organisation with a concentration on collateral refuge and long-term growth. Based in Toronto, Ontario we are a concentrated, long-biased value financier with an importance on opportunities in a mid-cap marketplace segment. Aventine now manages 4 strategies – Aventine Canadian Equity, Aventine US Equity, Aventine Stable Income, and Aventine Total Wealth.
Andrew Shortreid, CFA
T: 416.847.1767 x500
James Telfser, CFA
T: 416.847.1767 x