Zoo Digital Group PLC

Zoo Digital Group Plc (ZOO) is a technology company that offers localization and media production services. The company has differentiated its operations in three operating segments: Localisation, Digital Packaging and, Software Licensing. The group offers services over its cloud computing platforms, including ZOOsubs, ZOOcore, ZOOscreen, ZOOhive, ZOOvault, ZOOstudio and ZOOdubs.

On 18^th November 2019, the company will announce the Interim 2020 earnings.

Financial Highlights (for the year ended 31^st March 2019, $’000)

(Source: Annual report, Company Website)

In the financial year 2019, the total revenues surged to $28.8 million as compared with the financial year 2018 of $28.5 million, due to an increase of 4 per cent in the localisation segment as the nascent dubbing service attracted new clients. Adjusted EBITDA decreased to $0.4 million in FY19 against the $2.4 million, reflecting the investment in the localisation business and the run-off of the high margin legacy DVD business. While EBITDA margin stood at 1.4 per cent, a decrease from the previous year data. It also adversely affected the other operational KPI (Key Performing Indicators), operating expenses as a percentage of revenue, which surged to 37 per cent as compared to 33 per cent in 2018. In spite of this investment, the company ended the year with cash of $1.8 million against the $2.4 million in FY18. Basic earnings per share stood at 2.19 cents in FY19 versus the loss per share of 6.81 cents in FY18, while diluted earnings per share were 2.02 cents in FY19 versus a loss per share of 6.81 cents in FY18. The company also increased the number of freelancers in the current period.

Share Price Performance

Daily Chart as at October-09-19, before the market closed (Source: Thomson Reuters)

On 9th October 2019, Zoo Digital Group PLC shares were trading at GBX 73.04 at the time of writing before the market close (at 3:01 PM GMT), down by 1.96% against the previous day closing price. Stock's 52 weeks High and Low are GBX 144/GBX 43. The company’s stock beta was negative 0.25, reflecting the negative movement of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The group is domiciled in the United Kingdom with operations in the United States and over 88 per cent of its revenues come from overseas customers. The group’s risks are around managing the cash flow and exchange rate fluctuations. The political climate in the United States and in the United Kingdom are currently challenging due to the uncertainty around Brexit negotiations and trade tariff issues. The main operational risk is managing any unexpected peaks or troughs in production orders and ensuring that the appropriate levels of the resource are available to provide the quality of services expected by the customers. The main financial risks faced by the group are in relation to foreign currency and liquidity.

As the company operates in multiple geographies, its profits can be impacted negatively due to foreign exchange rate fluctuations. The company’s P/E, P/CF, and EV/EBITDA multiple are significantly higher as compared to the industry multiple, reflecting overstretched valuations. Currently, the stock is trading near the 52-week mid, suggesting that the upside potential might be limited, and the company can face stiff resistance at the current level.

Based on the above rationale and support from valuation done using the above method, we have given a “Sell” recommendation at the closing price of GBX 74.50 (as on 8th October 2019) based on 1.84x NTM EV/Sales (approx.) on FY20E sales (approx.).
 
*The “Sell” recommendation is valid for the current price as covered in the report (as on 9^th October 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters. All USD figures have been converted into GBP; USD: GBP - 0.817609).

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