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Zinc Media looks expensive based on latest financials

By Gary Newman | Monday 20 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Small AIM outfit Zinc Media (ZIN) released its interim results last week and trumpeted that it is continuing to move in the right direction, but I would question whether the turnaround is happening fast enough to make the shares attractive.

The company produces TV shows as well as short film campaigns for leading manufacturers, and has recently exited from all but one of the publishing businesses that it was involved in, as that sector in general has continued to decline and was draining resources.

Zinc owns a number of production companies which make TV and radio shows worldwide, including Reef Television which it acquired back in 2015, and has shifted its focus to higher value series for international broadcasters in an effort to turn the business around and make it profitable.

The latest set of interims show that it has finally made a positive EBITDA for the first time in a number of years, albeit only £74,000 for the six month period – but still an improvement on the £139,000 negative earnings for the same period in 2015.

The company had been reporting some sizeable losses, with a nearly £6.4 million loss recorded for the full year up to the end of June 2016, although that was largely down to the impairment and amortisation of intangible assets, plus losses from discontinued operations within the publishing side of the business.

The move towards an outright focus on the TV side of the business will mean that around 80% of total revenue for FY2017 should come from there, and taking into account programmes already commissioned, that already accounts for around 77% of forecast revenue for the year.

It is of course worth remembering though that you would expect many of these programmes to be commissioned well in advance, so this type of revenue model isn’t unusual and means that the company sees itself as online to hit its targets. It is also essential to carry this forward and keep a steady stream of commissions continuing into the next financial year as well.

One cause for concern here had been the level of debt that was due to be repaid, but the company has managed to restructure that – also raising £800,000 by way of a placing, plus a further £400,000 in new loans. All of the short and long term loans were restructured into one lump of £3.3 million that will be settled in one payment (including all the interest) on December 31 2020, and this wiped out all of the short term obligations. It will also help improve profitability shorter term as finance costs were £146,000 as at the last interims.

Currently the market cap stands at over £7 million, and the share price of 1.2p is roughly double what it was at the end of November 2016, and based on the business as it is at the moment I think it is hard to justify such a high valuation.

It did have around £1.6 million in the bank at the end of 2016, so shouldn't need to raise any further cash for the foreseeable future, especially if losses continue to narrow or even turn into a profit - although in a few years time it will have to repay the loans.

Net assets currently stand at just over £2.5 million, with a big chunk of the £13 million odd total assets being made up of goodwill and intangibles, with just £277,000 in property and equipment and a further £494,000 in inventories, so it is hard to justify the current market valuation on a net asset value basis either.

Of course the company has potential going forward, but until it is able to show that it can actually make a net profit from the current business model, then it is hard to factor any of that into today's valuation.

Certainly at the current share price I wouldn’t be rushing to buy, and for anyone who is interested in the business and sees potential – it isn’t an easy sector to make money from – I would be tempted to wait at least to see if the next set of financials prove that it is indeed progressing in the right direction.

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