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Should I buy Beyond International? (ASX: BYI)

2013-10-24T01:08:53+00:00

One of my favourite small cap companies, Beyond International (ASX: BYI) has announced a joint venture with Seven Network, owned by Seven West Media (ASX: SWM). Beyond Productions will join forces with Seven to create new programs for the North American market.The JV will be called 7Beyond and is based in Los Angeles.

Seven currently produces more than 700 hours of content per year, and has consistently produced better ratings than the other free-to-air networks, the Nine Entertainment Company and Ten Network Holdings (ASX: TEN).
Beyond International currently has four business segments:

Mea Culpa: In the past, I have had concerns that the company’s foray into digital marketing represented a loss of focus on the most profitable activities. Not for the first time, I was overly pessimistic.

7Beyond is a combination of two TV production companies that excel in reality television (think Mythbusters, Selling Houses Australia, Border Patrol and My Kitchen Rules). The content will be co-produced, with profits shared, but it will be distributed in the US Beyond Distribution. Beyond has refocused on its core competencies, and I have made a fool of myself. One doesn't need a crystal ball to back experienced and honest management with a substantial stake in the company. This is one of the main criteria I look for, and I'm aghast at myself for being overly concerned with the Digital Media side project.

Beyond International has achieved an average ROI of well over 15% since 2005, and has never dropped below 10%. At $2 it trades at a PE of about 13. However, now that 7Beyond is in the works, it seems highly likely that profits will grow over the coming years. As well as a share of the profits of production, the additional content will strengthen Beyond Distribution, adding to revenues but also expanding the company's offerings to customers. This may well mean that content licensees pay more attention to the Beyond Distribution network.

Mikael Borglund and the team qualify as honest and competent management. Borglund has been selling shares on market recently, but he retains a major holding. In comparison, the chairman, Ian Ingram has continued to make large on-market purchases.

I wrote this article for the Motley Fool a few days ago when shares in Beyond were trading at about $1.80. I did so because they pay me, which I appreciate. Now shares are above $2. I believe that they still represent good value, although I generally don't think share purchases should be rushed. If you would like to be notified when I write an article for them that is relevant to a company you follow, please let me know.

I'm working on a new valuation of Beyond International shares, and will update this article immediately before I send the next newsletter. Suffice it to say (for now), I think history has shown that I was previously undervaluing this company.

The Author has no financial interest in Beyond International. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

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Content creators Beyond International (ASX: BYI) 2013 Financial Year Results

2013-08-27T02:08:17+00:00

Beyond International (ASX: BYI) have reported results that were slightly worse than my expectations. The core businesses remain strong, but the digital acquisition has floundered. I sold my shares in Beyond at $1.50, although they last traded at $1.66. I believe the company has no margin of safety, and is potentially overvalued at the current price. The company has no debt and has cash of over $10 million. This article may seem negative to some... but really, it's because I'm holding Beyond up against high standards. This is a well run company.

Beyond International has four business segments. Three of them fall squarely within the organisation’s circle of competence: they achieve a high return on investment, they are growing, and the most important business, production and copyright, earns significant foreign revenue (and thus stands to benefit in FY2014 from the lower Australian dollar.) As I wrote previously, due to hedging the company is yet to benefit from this. This business is highly likely increase profits further in Australian Dollar terms because of the more favourable exchange rate.

Pleasingly, the Board brought the dividend up to 4c per share. I think that this is sustainable (assuming they don't buy any more Digital Businesses). It seems like the appropriate thing to do and demonstrates their good judgement. The dividend is, however, unfranked.

The problem with Beyond International is their Digital Marketing businesses. Beyond paid over $2 million for these “assets” and they have thus far only lost the company money. I can understand why the company wishes to diversify in this way, but so far the strategy has not worked.

When I spoke to CEO Mikael Borglund, he expressed confidence in the team working in the Digital Marketing business. At the time, when I was considering selling my shares, I spoke to a friend of mine who runs a (much, much smaller) competitor to Beyond’s Digital Design and Web-business (First). Whereas the board of Beyond seem to have precisely zero experience in building a business like First, my friend has done just that, achieving a ridiculously attractive return on investment (at this early stage). If I had a chance to invest in his business, I would. He simply doesn't need the capital because he is in a business that should have very low capital requirements. My friend did not think First looked like it was particularly attractive to potential clients. He saw no significant product differentiation at First. He didn't think business at First would improve. Having said that, he does have high professional standards (and it shows).

I have enormous respect for Borglund and his team. They are probably running the most attractive media business available on the ASX, although I also think Prime Media (ASX:PRT) is a decent investment. Their skill, knowledge and market position in their core businesses is unparalleled in Australia, and this gives their business an edge. However, I do not believe they have been able to attract the necessary talent to run their new acquisition. Perhaps I am simply impatient, but I believe something is going wrong there. Most likely, they are overpaying their employees. This is an understandable error. The situation arises because the best in that business can simply set up their own businesses as the capital requirements are so low. What is required is intelligence, tenacity and a very strong work ethic (much easier to summon when you are starting your own business).

There is an opportunity to run this business well: but it requires taking a risk on personnel. I have enormous respect for the value of experience; in most industries (such as my own) youth is an obvious disadvantage. In digital design it is an advantage. If only the board could find entrepreneurial talent like themselves to run the Digital Marketing businesses. The digital business should be a cash cow, as are the businesses built by the long-serving team at Beyond. Instead, it is a turnaround play. I wonder what would happen if First were staffed by a group who were in their twenties, grateful for the opportunity and all remunerated on minimum wage plus generous performance incentives?

Earnings before Interest, Tax and Foreign Exchange Adjustments, by Segment

As the above graph shows, Beyond had a great half in its two better businesses. Although Home Entertainment was down, they have shown they can continue to operate this profitably despite the changing consumer behaviour (namely, the move towards acquiring content in digital form). I expect this business to get worse over time, but I think it is still valuable. More than offsetting this decline, the Production and Copyright segment had another good half, as did the Distribution business. I think that both these segments should be able to remain steady (albeit lumpy) or grow, even as the way people access content changes.

Beyond International Earnings per Share by Half

I've adjusted my buy price for Beyond. I'd now buy it between $1.05 - $1.20, reflecting the boost I expect from the lower Australian dollar. It's worth noting that at these prices the company is undervalued in my opinion (which is why I would buy). In retrospect, I was too hasty to sell my shares earlier this year, but as I said then, I had other uses for the capital. I no longer assign value to the Digital Marketing business. Therefore, if that started to be profitable, my buy price would increase. On the other hand, if the Digital Marketing business doesn't improve, one would have to consider assigning a negative value to it.

The Author has no financial interest in Beyond International. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

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Introduction to Beyond International: valuation of a quality small cap (ASX:BYI)

2013-06-13T02:38:51+00:00

Beyond International has a long history of profitably producing niche television shows and effectively managing the copyright of those shows. The company also buys the rights to programs it doesn’t produce, and sells them into new markets. These activities account for most of Beyond’s profits, and I believe that this is where the company has a competitive advantage: a rare mix of knowledge, experience, networks and intellectual property. However, the company has four revenue streams.

TV production and copyright

Produces programs commissioned by networks and buys the rights to externally produced television programs (or series). Manages the copyright of those programs. Ideally, that means selling the right to broadcast them.

Film and Television distribution

Distributing Content (on behalf of producers).

Home entertainment

Selling DVDs to the masses (and now also some digital sales).

Digital Marketing

They call the four businesses BeyondD. Website creation, internet marketing, internet advertising businesses, and greatsites.com.au.

My Analysis of Beyond International

Because of the multiple revenue streams, I find Beyond International a difficult company to understand. However, looking at the company as a whole, it’s clear that in the last few years it has been the production and copyright segment that has grown earnings. While earnings from this core segment are not on a clear growth path, production and copyright reliably earns at least $2 million every half by my rough estimation. It’s not entirely accurate to consider the after tax earnings of this business in isolation from the other businesses, because all the business segments are interrelated, and obviously certain costs are shared between the businesses. However, for the sake of assigning a value to this segment, I’ve estimated the average after tax earnings per half to since 2007 to come in at over $3.2 million. I prefer to underestimate the value of a company than overestimate it. Notably, earnings from half to half seem to vary considerably, presumably depending on the success of individual programs. Hit shows such as Mythbusters and Selling Houses Australia clearly make a significant individual contribution to Beyond, over the years.

The earnings of the distribution business are pretty flat, perhaps growing slightly. The Home Entertainment division has been declining, which shouldn’t be a surprise to anyone, given that content is increasingly accessed over the internet. Management have not been caught flat-footed, however, and have begun digital sales, although they are currently not making a significant contribution to the bottom line. To me, this business is a “melting ice cube,” and it’s anyone’s guess as to how quickly it will melt. In the meantime, the company has recently purchased a suite of internet marketing businesses, which they have branded BeyondD. The jewel in that crown, I think, is First, a company that essentially designs, builds and maintains websites. This is a business with significant tailwinds, and while I am unable to assign it much value at the moment, if the management team is able to turn it around, that will be a serious boon to the company.

Readers should realise by now that much depends on management. Of key importance is to continue to buy and produce successful, profitable programs, on budget and on time. Additionally, shareholders must trust management to grow the new digital businesses, as they are not yet realising their potential, or justifying their purchase price. I’d be worried if management made another acquisition before bedding down BeyondD.

In light of the importance of management, I spoke to CEO Mikael Borglund recently. I began to realise how Beyond has grown over the years, and I couldn’t help suspecting that it is the networks and capabilities of the entire board that make this a quality company. Indeed, the board and management seem to have the right skills to guide the company. Directors’ interests are suitably aligned with shareholders and I believe that salaries are reasonable. As long as they focus on good customer relationships, and profitable operations, shareholders are likely to be rewarded in the long term. Between them, management and the board own almost 40% of the company. The chairman, Ian Ingram recently spent $2.3 million buying shares in Beyond at $1.26. I wonder when he'll have enough to be satisfied.

It’s probably worth noting that although Beyond earns a significant amount of revenue in $US, contracts are hedged, so in the short term, the company is not going to benefit from the falling Australian dollar. However, if the Australian dollar stays around 95c, shareholders can reasonably expect the impact will be immaterial. My understanding is that in the longer term, a lower Australian dollar should assist the company.

At any rate, the company is in fine health. At 31 December 2012, it had over $8 million in cash, and no bank debt. It has been paying a 3c per half, unfranked dividend. This is completely sustainable, although the company has signalled an intention to use cash for acquisitions, rather than to return it to shareholders. It’s impossible to say whether they might raise the dividend, but they could. In any event, a 6c dividend at a price of $1.50 represents a 4% yield, which isn’t too shabby.

I sold my shares in Beyond International very recently, because I have personal reasons for wanting cash. Also, because I conservatively value Beyond International at about $1.17 per share. The company is firmly on my radar because I believe it is a well-run business, with good economics, and a strong return on capital. I believe it has a reasonable edge, and, to put it simply, it satisfies most criteria on my investment checklist (especially if you consider successful TV series revenue to be somewhat like recurring revenue.) I look forward to reading the annual report. Readers should note that I have valued the BeyondD business at about $300,000, as I am not assuming growth at this stage. This is the likely flaw in my valuation, and should I be proved wrong, the share price will probably move well beyond $1.50. Ha! Trading at under PE 10, I'd say the shares are close to fair value. If they are again offered for a discount, I might grab some.

Historic and Forecast Earnings Per Share for Beyond International

The forecast EPS is based on 10% growth for the full year (the low end of guidance)

The Author does not have a direct interest in shares of Beyond International. The Author is not aware of any indirect interest in BYI.

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