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Elliott Auckland
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Independent adviser on investment (both listed and private) into Russia, exchange rates, economic conditions and the general political situation. Main focus is on the consumer sector in Russia. Active trader in Russian equities, bonds and Ruble.
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  • Trading Ideas For 1 To 2 Weeks

    I've pulled my short of ARM (NASDAQ:ARMH) with decent profit, they are failing to break below support and there is significant options movement indicating a higher move.

    Ultimately I think the market goes risk on, and thus the high valuation will not be punished and the recent pull back will be seen as a buying opportunity.

    Long ARM. I have a 2 week PT of 570p - London listing (about 15% above current price). ARMH

    Long Home retail at 80p now, looks like a trading buy. (about 25% trading upside to former support 100p). OTCPK:HMRLF (has a US listing as well, but I know the London shares in terms of trading; also is where the major moves take place as its a London stock)

    Long All European banks are hitting trading lows, they all look ready for a trading bounce also. I am long term bullish on Italian banks, as Draghi mentioned today Italy has made remarkable progress and is on the right path.

    STD OTC:UNCIF OTC:BMDPF OTC:SCGLF . Unicredit and Banca Monte Dei Paschi pose least short term headline risk

    Other interesting short term trading names include Long Apple which is at a lower end of a current range. Long Green Mountain Coffee been hammered on cut growth forecasts but now on extremely cheap valuation and still growing (is down 45% on the day after results last night) AAPL GMCR

    Mako is pressing on support in its new trading range which is around $40, currently at $40.8. Has trading upside to its highs of $45. (about 10%). MAKO

    Unfortunately the stock has been on a small run, but Disney's new film Avengers looks set to be huge, after its international sales are mind blowingly impressive. However, there still could be a 3-5% move off the back of strong box office numbers and risk on. DIS

    Disclosure: I am long ARMH, OTC:UNCIF.

    Additional disclosure: I may open a long position in Home Retail in the next 72 hours.

    May 03 11:47 AM | Link | Comment!
  • Untouchable Gaumont

    Gaumont ticker: GAM FP is mainly a film and TV producer and distributor. It has a catalogue of films dating back 50 years of mostly French films, with which it owns all/most of the distribution rights to. It also owns a 34% in a joint-venture (JV here-in) with Pathe, which covers most of France and other international destinations such as the Netherlands. To the non-francophone viewer Gaumont's most well known film might be The Fifth Element or Leon. To the French reader, 2011's blockbuster hit Untouchables will now be by far the film most associated with Gaumont.

    Intouchables is at the heart of my long position on Gaumont. The film about a friendship of a handicapped millionaire and a young man from the banlieue of Paris was released in November 2011, and has since reached a box-office of $247million, mostly driven by the success in France and in part Germany. Although the % of each ticket that goes back to Gaumont is unknown, using their 2011 sales report it is around €2,50. (€55mn cinema distribution / 22mn tickets sold). On top of that, the French cinema industry has a forced re-investment tax. For each ticket sold the government in its CNC vehicle takes €0,50 per ticket and this money although is the company's can only be used for future financing. Gaumont also benefits through its cinema JV division, where it will take 34% of the profits that the cinemas recognise, this could be anywhere up to €3,00 (about €1,00 for Gaumont). Thus the total recognition of a ticket of any film (in France) should be around the €4,00 per ticket, and mostly €2,50 internationally. But how this appears on the Income statement is not as transparent, given the CNC tax and the Income from affiliates (the JV) neither of these will appear on the top-line revenues.

    The box-office is one of many important phases for the rights owner. Typically, Gaumont will look to break-even on the film at box-office in France and then launch the product through the following cycle: International, DVD release, TV release (on-going), Internet download, re-makes and sequential films. These sections produce the profit. However, due to the enormous success of Intouchables (which broke-even in the first 2 weeks of box-office) this has lead Gaumont to enjoy very early profits on the film in phase 1 - this has been in part realised in the 2011 results; Q4 revenues from the French cinema divison were up 651%. This gave Gaumont a much needed boost after a very difficult year for the French film industry, and first three months for Gaumont (Q3 revenues were down 43% YoY), to end up with a full year profit of €26,6m, after a small first half loss of €0,56m. The film is moving into its second phase, since 2011, it has debuted into Germany where it has been hugely successful making $57mn in box-office so far. It has recently been released in Italy and made $5mn in its first 2 weeks. In France alone $16mn in 2012 from continuing cinema sales.

    The large profits will come from the next phases, most notably the release of Intouchables into the anglophone world; the US and UK. Having made a deal with US producer Weinstein a re-make of Intouchables is under way, while a dubbed/subtitled version of Intouchables will hit the US/UK shores in the coming months. Given the film has already reached break-even, any revenue at this point equates to pure profit.

    The other source of large profits, underscores the power of their existing catalogue. Whenever a TV channel shows one of Gaumont's films, they will even cost-free revenues. The "premiere" on TV as can be expected will gain the most viewers and thus profits. But for big box-office hits like Intouchables, recurring success's on TV cannot be ruled out.

    While quantifying all these phases is difficult, from a phone call with Gaumont's CFO, I was told that a rough guide to a films contribution to earnings is as such:

    1/3 in Year 1 - Box-office domestic. International

    1/3 in Year 2 - DVD, TV, internet download

    1/3 from Year 3-Infinity - DVD, TV, Internet download.

    In terms of Intouchables we are only 6months into year 1, where not all of the major international markets have been reached.

    So, how should one price Gaumont? This is a very difficult job, given the fairly erratic film industry, which is very much driven by product. On an earnings basis, we will be able to see the follow through effects of Intouchables having a major effect through till 2013, before tapering off. 2011 saw an EPS of 6.23, up 116% vs. 2010. 2012 however should be even better as H1 will be up dramatically vs. the poor loss of €560,000 in 2011. The international expansion, and TV/DVD domestic sales will be major drivers for H1 2012. One can expect the profit from this period to be well above the €2-4mn average that Gaumont have seen over the years in this period. If we give a conservative €10mn profit for H1, then trailing earnings will be €36mn or 8.43 EPS. Even a very modest 10x multiple would value Gaumont at €84,30. Historically Gaumont has traded between 10-25x trailing earnings.

    But given the success of Intouchables cannot be guaranteed with other future films of Gaumont in 2/3 years time when the effects start to wear off, then perhaps a Balance sheet approach is far more appropriate. As of 2011, Gaumont reported a book of €255mn, or €60 a share. Historically Gaumont has traded on a premium to book value between 1.1-1.5x book. So, if we take the conservative 1.1x book, then that gives us €66 per share. However, the book is seriously understated, after 10 years of exsistence Gaumont have depreciated the film to 0 on their balance sheet - even though some of their most profitable films from the catalogue are more than 30 years old! and have 0 valued on the Balance sheet. What is even more understated about the balance sheet is, the value they place on year 1 of the film. Intouchables for example, I believe to be valued at its cost of production around €10-15mn euros, and will be depreciated to 0 over 10 years. Even though, the film has a current box-office of €200mn, and will see this figure expand dramatically as it hits the next phases of the film business life cycle.

    Gaumont is currently valued at €46.75 at the time of writing, it has no analysts because the free float (around 10% of the company/ €20million) does not warrant the time of analysts for the revenue it might produce brokers. If we use ultra-conservative figures, current EPS (despite the H1 causing a major drag on the E) of 6.23 and the low range of Gaumont's PE 10x, we arrive to a share price of 62,30. Similarly if we use a conservative book value (the one published but we know if larger!) €60 euros a share, and use the lowest in the average range of book value to share; 1.1x book then we achieve €66 euros.

    One can of course be more aggressive in their valuation of the company (which I am personally), I feel the book is more rightly valued at €300-350mn, €70-82 per share and on a 1.3x multiple (middle of the range), then a value of €91-€107 is appropriate. Or, by earnings, using the trailing earnings of my forecast for H1 and H2 2011 combined = Annual EPS of 8.43 and a middle of the range PE of 17, then Gaumont could be valued at €143.31.

    This film is one aspect of many that make Gaumont fantastic, in the future I will write about their new division Gaumont International Television which has had a bright start signing deals with Netflix and HBO in the US. But I feel the company has strong upside, and although is small is very rewarding. On current multiples:

    0.78x book value
    7.25x 2011 Earnings
    2.7% dividend yield (up 333% from 2010).

    Apr 27 3:08 PM | Link | Comment!
  • Gaumont Continues With A Strong Q1 - Revenues increase by 50%

    2011 was a mixed year for Gaumont, after having 3 terrible quarters where revenues plunged over 30%, they turned it around with hit Intouchables ending up the year with record profit despite poor figures from most segments of the group. I had some worries about 2012, wondering whether the weakness shown in the first three quarters would continue as a structural trend, or whether it was purely cyclical in nature.

    2012 Q1 turned out to be a blockbuster quarter, for what is usually the weakest in the year. Revenues were up 53% from the depressed 16.2million to 24.8million. Although, Q1 showed the continued success of Intouchables (which reached 15million viewers abroad, and an additional 2.5million domestically) the core business excluding effects of Intouchables picked up dramatically: Sales of films to Television channels were up 142% and sales from Gaumont Pathe archives division were up 100%.

    The Annual Report for 2011 came out earlier this week. It highlighted several positives for 2012, most notably being Intouchables. However, one aspect unforeseen by myself was that the cartoon division incurred all its production costs in 2011 (and thus being loss making) while the showing and sales will be benefiting 2012. This alongside the continued success of recently developed US based Gaumont International Television - which has already signed two deals with Netflix and NBC. Gives 2012 the potential to be even bigger than 2011, with the core business returning to normal levels, Intouchables still having a positive effect and small pluses coming from several segments such as International TV and cartoon.

    The shares are still trading lightly in the 44-48 euro range, valuing them on around 7x 2011's Earnings with a 2.8% dividend (which has yet to go ex-dividend). They are 0.76x book value, which as discussed previously is well understated. While Gaumont do not give Q1 profits, I believe the profits to be fairly large given the lack of investments into films this year and the nature of the revenues received (sales of existing films to tv are without cost). It seems likely that Q1 profit was somewhere in the region of 10-14million Euros, setting 2012 up for an even bigger year - given that Q1 is usually a period of break-even.

    Apr 27 3:07 PM | Link | Comment!
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