Lodge Partners Pty Ltd 1 Tuesday, 27 February 2007 Lodge Partners Research ABN: 25 053 432 769 AFSL: 246271 BUY - $0.24 Destra Corporation (DES) Katie Belle: +61 3 9200 7055 [email protected] On the way to a pure play in media and entertainment Company Data ASX Code DES Price $0.245 12 month price target $0.32 12 month dividend yield 0% Implied return 31% Shares on issue 189.6m Market cap $46.4m 12 Month price range $0.16/$0.37 Monthly turnover 8.8m Forecast Changes 2007F 2008F 2009F NPAT 46% 31% 18% EPS 47% 32% 17% DPS 0% 0% 0% Earnings Summary Yr to 30 June 2006 2007F 2008F 2009F Lodge adj profit 1.6 3.8 6.4 8.6 Rep. Profit(pre-sig) 1.6 3.8 6.4 8.6 EPS (¢) 1.2 2.2 3.7 4.9 EPS growth 275.2% 85.1% 67.3% 34.8% P/E ratio 20.7 x 11.2 x 6.7 x 5.0 x DPS (¢) 0.0 0.0 0.0 0.0 Yield 0.0% 0.0% 0.0% 0.0% Franking 0% 0% 0% 0% Payout ratio 0% 0% 0% 0% EV / EBIT 39.4 x 8.5 x 5.0 x 3.0 x EV / EBITDA 23.4 x 7.0 x 4.5 x 2.8 x CFPS (¢) 0.6 1.0 3.3 5.1 Price / CF 44.1 x 25.7 x 7.5 x 4.8 x NTA per share $0.00 $0.10 $0.10 $0.14 Pr / NTA -95.9 x 2.6 x 2.4 x 1.8 x Share Price Chart Source: Iress Market Technology Switching the earnings drivers: In 1HY07, DES switched the earnings drivers of the business away from hosting towards content and advertising. This is in line with the company’s strategy of transitioning to a pure play media and entertainment company. In September 2006, DES acquired Brand New Media (advertising and media sales) and on 3 January 2007 DES acquired Central Station Records and MRA Entertainment (content). The 1HY07 results include a 4 month impact of the Brand New Media acquisition but no contribution from CSR/MRA. In addition, DES divested its hosting business on 19 December 2006 for $19m, and 1HY07 results include almost a full six month impact from this business. We estimate 1HY07 EBITDA of $3.1m which includes the hosting contribution (compared to reported EBITDA of $1.8m which excludes hosting). We have upgraded our forecast FY07 EBITDA to $5.2m (up from $5m) in line with an expected 60/40 skew towards 1HY earnings. Benefits of prior year tax losses: In 1HY07, DES reported an NPAT (pre sig) of $3.4m, which includes a tax benefit of $2.6m. As at 31 Dec 06, DES has $7.7m of prior year tax losses available to offset future taxable income. We forecast a 0% effective tax rate and assume a $1m tax benefit as a significant item in FY07. We then forecast an effective tax rate of 20% from 2008 for 3 years. Paying down debt: In September 2006, DES sold its domain names business for $800K and in December 2006, DES booked a net profit of $12.2m from the sale of its hosting business to Blue Freeway for $19m ($18m cash and $1m in BLU shares). This cash was used to pay for the CRS/MRA acquisition and to pay down debt. At the end of 1HY07, DES has ~$3m debt and we forecast that this will be cleared by FY07 in the absence of any significant acquisitions. Delivering on the strategy: Over the past 12 months, DES has continued to deliver on its three point strategy of acquiring content, building communities around content and selling advertising. The recent acquisitions and divestments have helped fulfil this strategy by: • increasing the content range and digital music catalogue • licensing of brand including Planet X and Wild • establishing an online media sales division • production of brand funded content to distribute across online, pay TV and free to air TV distribution channels • launch of Virgin Blue Media for Virgin in-flight entertainment • expanding blue chip portfolio of advertisers for online assets The synergies and leverage in DES’s business through multiple distribution channels and an expansion of advertising sales capacity are only starting to appear and are not fully reflected in our forecasts. Target Price $0.32, BUY Recommendation: We value DES at $0.32 per share using a DCF (WACC: 14.8%, beta: 2.0). At current prices, DES is trading on a PE of 11.2x in FY07 and 6.7x in FY08, which we consider undemanding. Over the past 12 months, DES has successfully transformed into a pure play media and entertainment company with a finger in several digital pies. DES will continue to be a moving entity in 2HY07 and we expect further acquisitions and divestments in the short term. Thus our valuation of $0.32 per share reflects a base case scenario with potential for further upside. Destra Corporation (DES) Lodge Partners Pty Ltd 2 Tuesday, 27 February 2007 Valuation data Profit and loss ($M) Year ending Jun 2005 2006 2007F 2008F 2009F Year ending Jun 2005 2006 2007F 2008F 2009F Lodge adj profit 0.3 1.6 3.8 6.4 8.6 Sales revenue 15.6 33.4 83.7 101.9 111.5 Reported profit 0.3 1.6 16.4 6.4 8.6 growth over pcp 113.6% 150.4% 21.8% 9.5% EBITDA 1.2 2.2 5.2 8.1 11.1 EPSadj (¢) 0.3 1.2 2.2 3.7 4.9 Dep'n and amort'n (0.6) (0.9) (0.9) (0.8) (1.0) EPS growth 275.2% 85.1% 67.3% 34.8% EBITAg 0.6 1.3 4.3 7.3 10.1 P/E ratio 77.7 x 20.7 x 11.2 x 6.7 x 5.0 x Goodwill impairment 0.0 0.0 0.0 0.0 0.0 EBIT 0.6 1.3 4.3 7.3 10.1 DPS (¢) 0.0 0.0 0.0 0.0 0.0 growth over pcp 110.7% 224.8% 71.9% 38.0% Yield 0.0% 0.0% 0.0% 0.0% 0.0% Net interest expense (0.1) (0.0) (0.5) 0.6 0.6 Franking 0.0% 0.0% 0.0% 0.0% 0.0% Pre-tax profit 0.5 1.3 3.8 8.0 10.7 Payout ratio 0% 0% 0% 0% 0% Tax (0.2) 0.4 0.0 (1.6) (2.1) Effective tax rate 35.2% -29.2% 0.0% 20.0% 20.0% EV / EBIT 71.7 x 39.4 x 8.5 x 5.0 x 3.0 x Preference dividends 0.0 0.0 0.0 0.0 0.0 EV / EBITDA 36.6 x 23.4 x 7.0 x 4.5 x 2.8 x Minorities 0.1 0.0 0.0 0.0 0.0 Lodge adjustments 0.0 0.0 0.0 0.0 0.0 FCF/share (¢) 0.8 0.4 12.1 3.1 4.9 Lodge adj profit 0.3 1.6 3.8 6.4 8.6 Price / CF 28.9 x 60.2 x 2.0 x 7.8 x 5.0 x Reported profit (pre sig) 0.3 1.6 3.8 6.4 8.6 NTA per share $0.03 $0.00 $0.10 $0.10 $0.14 One-off items (post tax) 0.0 0.0 12.6 0.0 0.0 Pr / NTA 8.6 x -95.9 x 2.6 x 2.4 x 1.8 x Reported net profit 0.3 1.6 16.4 6.4 8.6 Balance sheet ($M) Cashflow ($M) Year ending Jun 2005 2006 2007F 2008F 2009F Year ending Jun 2005 2006 2007F 2008F 2009F Cash 2.9 4.0 9.9 9.6 15.5 EBIT 0.6 1.3 4.3 7.3 10.1 Receivables 2.9 9.4 17.0 20.7 22.6 Net interest paid (0.1) (0.2) (0.5) 0.6 0.6 Inventories 0.0 7.0 8.3 10.0 11.0 Dep'n and amort'n 0.6 0.9 0.9 0.8 1.0 Other 0.0 0.0 0.0 0.0 0.0 Tax paid 0.0 (0.0) 0.0 (1.6) (2.1) Current assets 5.9 20.5 35.1 40.3 49.1 Gross cash from op'ns 1.2 2.0 4.8 7.2 9.6 Net PPE 1.4 1.9 0.4 0.5 0.5 (Inc) / dec in wk'g cap (0.3) (3.8) (2.7) (1.5) (0.8) Investments 0.0 0.0 1.5 1.5 1.5 (Inc) / dec in provisions 0.8 1.7 (0.4) 0.0 0.0 Goodwill 3.5 17.4 26.6 31.6 33.6 Other (0.7) 0.9 0.0 0.0 0.0 Other intangibles 0.2 1.7 1.7 1.7 1.7 Operating cashflow 1.0 0.8 1.7 5.7 8.8 Other 0.0 0.0 0.0 0.0 0.0 growth over pcp Non-current assets 5.2 20.9 30.2 35.3 37.3 Investing cashflows Total assets 11.1 41.4 65.2 75.6 86.3 Capital expenditure (0.3) (0.2) (0.2) (0.2) (0.2) Asset sales 0.0 0.0 0.0 0.0 0.0 Debt 1.4 9.5 0.0 0.0 0.0 Investments (1.0) (11.6) (17.7) (5.7) (2.8) Provisions 0.3 0.7 0.7 0.7 0.7 Divestments 0.0 0.0 19.6 0.0 0.0 Other 3.1 14.1 19.8 23.8 25.9 Other 0.0 (0.0) 0.0 0.0 0.0 Total liabilities 4.9 24.3 20.5 24.5 26.6 Financing cashflows Equity / reserves 46.1 55.3 66.5 66.5 66.5 Equity raised 2.0 4.6 11.3 0.0 0.0 Retained profits (39.8) (38.2) (21.8) (15.4) (6.8) Dividends paid 0.0 0.0 0.0 0.0 0.0 Total s/h funds 6.2 17.1 44.7 51.1 59.7 Chg in loans 0.1 7.6 (9.5) 0.0 0.0 Minorities (0.1) 0.0 0.0 0.0 0.0 Other non-op flows 0.0 0.0 0.0 0.0 0.0 Total funds emp. 4.7 22.6 34.9 41.5 44.3 Net chg in cash 1.8 1.1 5.2 (0.2) 5.8 Ratio analysis Interims ($M) Year ending Jun 2005 2006 2007F 2008F 2009F Half yearly 1h05 2h05 1h06 2h06 1h07 EBITDA / sales 7.8% 6.7% 6.2% 8.0% 10.0% Sales revenue 7.3 26.1 43.9 EBITAg / sales 4.0% 4.0% 5.1% 7.2% 9.1% EBITDA (0.8) 3.1 3.1 EBIT / sales 4.0% 4.0% 5.1% 7.2% 9.1% EBIT (1.1) 2.4 2.5 Return on assets 7.6% 3.5% 7.7% 11.1% 14.3% Lodge adj profit (0.7) 2.3 2.1 Return on equity 5.4% 9.6% 8.5% 12.5% 14.4% Reported profit (pre sig) 0.5 1.2 2.2 Return on funds emp. 26.6% 9.6% 14.8% 19.2% 23.6% EBIT / sales -15% 9% 6% Net debt / (cash) ($M) (1.5) 5.5 (9.8) (9.6) (15.4) EPS (¢) (0.6) 1.8 1.4 Debt / equity 23.1% 55.9% 0.1% 0.1% 0.1% EPS growth on pcp n.a. n.a. n.a. Net debt / equity (24.0%) 32.4% (22.0%) (18.8%) (25.8%) DPS (¢) 0.0 0.0 0.0 Interest cover 5.9 x 29.1 x 9.4 x -11.5 x -16.2 x % of FY EBIT -83% 183% 59% Destra (DES: $0.25) Mkt Cap: $46.2m Destra Corporation (DES) Lodge Partners Pty Ltd 3 Tuesday, 27 February 2007 Disclaimer In accordance with section 949A of the Corporations Act 2001, any recipient of the information contained in this document should note that information is general advice in respect of a financial product and not personal advice. Accordingly the recipient should note that: (a) the advice has been prepared without taking into account the recipient's objectives, financial situations or needs; and (b) because of that, the recipient should, before acting on the advice, consider the appropriateness of the advice, having regard to the recipient's objectives, financial situation and needs. Although Lodge Partners Pty Ltd ("Lodge") consider the advice and information contained in the document is accurate and reliable, Lodge has not independently verified information contained in the document which is derived from publicly available sources. Lodge assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission which may become apparent after the document has been issued. Lodge does not give any warranty as to the accuracy, reliability or completeness of advice or information which is contained in this document. Except in so far as liability under any statute cannot be excluded, Lodge, its employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Lodge, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive commissions from transactions involving financial products referred to in this document and may hold interests in financial products referred to in this document. General Securities Advice Warning This report is intended to provide general securities advice. In preparing this advice, Lodge did not take into account the investment objectives, the financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. Explanation of Lodge Partners recommendation system: Recommendations are assessments of each Lodge Partners Analyst's view of potential total returns over a 1 year period. Expected total Return is measured as (capital gain (or loss) + dividend)/purchase price We have divided our recommendations into three main CATegories: Buy: Expected Total Return in excess of 15% over a 1 year period. Hold: Expected Total Return between 0% and 15% over a 1 year period. Sell: Expected Total Return less than 0% over a 1 year period. Analyst VerifiCATion I verify that I, Katie Belle, have prepared this research report accurately and that any financial forecasts and recommendations that are expressed are solely my own personal opinions. In addition, I certify that no part of my compensation is or will be directly or indirectly tied to the specific recommendation or financial forecasts expressed in this report. Contact Lodge Partners: Melbourne Level 5, 60 Collins St Melbourne Vic, 3000 Phone: +61 3 9200 7000 Fax: +61 3 9200 7077 www.lodgepartners.com.au Sydney Level 30, 9 Castlereagh St Sydney NSW 2000 Phone: +61 2 8224 5000 Fax: +61 2 8224 5055
DES Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
