DEAG Deutsche Entertainment Aktiengesellschaft
Original-Research: DEAG Deutsche Entertainment AG (von Montega AG): Buy

Original-Research: DEAG Deutsche Entertainment AG – von Montega AG

Einstufung von Montega AG zu DEAG Deutsche Entertainment AG

Unternehmen: DEAG Deutsche Entertainment AG
ISIN: DE000A0Z23G6

Anlass der Studie: Update
Empfehlung: Buy
seit: 20.04.2020
Kursziel: 6,00
Kursziel auf Sicht von: 12 months
Letzte Ratingänderung: –
Analyst: Henrik Markmann

DEAG is well prepared for temporary effects of the Corona crisis

DEAG recently has published its 2019 annual report and confirmed the
preliminary financial key figures. A qualitative guidance for 2020 has been
announced under consideration of the effects caused by the “corona crisis”.

Sales and earnings slightly below our estimates: In the financial year just
ended, DEAG generated revenue of EUR 185.2m (-7.5% yoy). Consequently, the
company did not fully meet our expectations (MONe: EUR 205.0m) due to lower
consolidation effects of the acquired five companies and a slightly weaker
performance in Q4. We were, however, encouraged by the development of the
gross margin, which improved by 340 bp to 22.6% thanks to a stronger
business in Ticketing amongst others. The EBITDA margin also rose from 7.3%
to 7.6% despite higher personnel costs (average headcount 263 vs.
previously 200) as a result of the acquisitions and the extraordinary
income from the sales of RGL in the prior year (EUR 5.3m). Based on the
increase in D&A primarily due to right-of-use assets for leases from the
changed basis of consolidation the EBIT margin was down (4.2% vs. 5.3% in
the previous year). The consolidated profit before minority interest
amounted to EUR 0.6m and thus is well below the previous year (EUR 6.6m).
Alongside the lower operating earnings this is attributable to both higher
interest expenses resulting from the increased bond and a lower investment
income as well as higher tax expenses. Although the company has already
made purchase price payments in the amount of EUR 9.1m, liquid funds
increased to EUR 46.3m at the end of the year (PY: EUR 36.4m).

Prohibition of major events extended: The core regions Germany and the UK
have also prohibited major events since mid-March after DEAG’s third core
market, Switzerland, had already enacted this prohibition early in March.
To date, the company has postponed more than 850 events almost completely
to Q3/20 and Q4/20 and sporadically also to H1/21. Given the recently
extended prohibition for major events in Germany until end of August,
however, we assume that DEAG will have to postpone further events or even
cancel some of them. The other core regions, Switzerland and UK, have
similar prohibitions in place until May. However, we believe that the
restrictions will be extended in these countries as well. It must be noted
in connection with the cancelled events that DEAG has an extensive
insurance coverage when events have to be cancelled with “orders from
higher authorities“ (including COVID-19) which in individual cases does not
only cover the costs but also (part of) the profits.

The company initially had envisaged an increase in sales and EBITDA in the
lower double-digit ranges in the current financial year. Subject to the
further development of the “corona crisis“, however, management also does
not rule out a moderate or even significant decline in sales and EBITDA
though. We believe the effect should not be too negative in Q1 yet as the
operational development had not been affected until early in March
according to the management. We anticipate sales of EUR 24.5m (-3.8% yoy).
Conversely, the second and third quarter will be significantly affected by
the negative effects of the “corona crisis” on the live entertainment
industry. A cumulated sales contribution of between EUR 91.9m and EUR
125.9m as in Q2 and Q3 of the previous year should be lacking in the
current year for the most part. We expect to see a normalisation of public
life from the fourth quarter onwards which would also result in an increase
in demand for live entertainment.

Impacts on our valuation model: We have significantly reduced our
expectations for 2020 on the back of the extended prohibition of major
events until end of August. We anticipate a decline in sales by 35% yoy.
Although most of the costs are variable, DEAG should not succeed in
sustaining the pleasant margin level reached in 2019. Against this
backdrop, we expect an EBITDA margin of only approx. 5%. That said,
management has taken various actions to unburden the cost basis and to
preserve liquidity. For instance, the company has introduced short-time
work and negotiated an increase and a flexibilisation of the credit lines
with its principal banks. It has also applied for a low-interest loan from
KfW and has optimised debt services. Additionally, DEAG currently makes use
of deferred payments for taxes and social security. While DEAG had liquid
funds of almost EUR 50m as per 31 December, we consider the preventive
measures initiated by management to be reasonable during the current
crisis. As things stand at present, we expect revenue to increase
significantly again and margins to return to the previous level in 2021.

Conclusion: DEAG has successfully concluded the last financial year. Now
the company is facing major challenges because of the “corona crisis”.
However, the recently extended prohibition of major events in Germany
provides clarity regarding the operational development over the next few
months. The discussions with management have shown that the company is well
prepared for the significant decline in sales and earnings in our view.
Furthermore, this should only be a temporary problem and DEAG is expected
to return to its path of success from 2021. We believe the clearly
disproportionate price decline of the last weeks (-49.8% vs. CDAX -22.0%)
has already priced in a worst-case scenario so the current price level is
an attractive opportunity to buy in. Our price target is reduced to EUR
6.00 as a result of our revised forecast (previously EUR 6.60).



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About Montega

Montega AG is one of the leading independent and owner-managed German
research institutions with a strong focus on German SMEs. The Coverage
Universe includes stocks from the MDAX, TecDAX and SDAX as well as selected
second-line stocks and is constantly being expanded through successful
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investors and focuses on publishing research as well as on organizing
roadshows, field trips and conferences. The company addresses long-term
oriented value investors, asset managers and Family offices primarily from
Germany, Switzerland and Luxembourg. The analysts of Montega are
characterized by excellent and frequent contacts to the top management,
in-depth market knowledge and many years of experience in the analysis of
German small and mid-cap companies.

Die vollständige Analyse können Sie hier downloaden:
http://www.more-ir.de/d/20587.pdf

Kontakt für Rückfragen
Montega AG – Equity Research
Tel.: +49 (0)40 41111 37-80
Web: www.montega.de
E-Mail: research@montega.de

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