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Published on 17/04/2018 2:26:47 PM | Source: Equirus Securities Pvt Ltd

Update On Prime Focus Ltd - Equirus Sec

Prime Focus (PRIF) is an independent and integrated media services provider, offering creative services, tech products & services, and production/post-production services to the media & entertainment industry. In the last decade, PRIF has expanded into 5 continents/19 locations via its strategic acquisitions (DNeg, Gener8, DAX), catapulting itself as a tier-1 player in the highly fragmented VFX industry. Its core creative services business (VFX + 3D conversion) and tech products & services business (media ERP software, CLEARTM) have grown 7x/31x over FY11-FY17. With structural growth drivers in place (rising VFX spends, higher outsourcing to India, increasing penetration of content management solutions), we estimate~12%/16%/86% revenue/EBITDA/PAT CAGR over FY17-FY20E. Initiate coverage with LONG and a SOTP-based Mar’19 TP of Rs 123.

Eyeing another Oscar! ‘WorldSourcing’ model to drive next leg of growth:

Creative Services division (~77% of revenues) is PRIF’s core business and boasts of 3 VFX Oscars in last 4 years. After the acquisition of Double Negative in Jul’14, it has become one of the largest independent VFX service providers in the world. Its current order book of >US$ 250mn, with marquee projects like Fantastic Beasts and Mission Impossible, offers strong revenue visibility. PRIF’s unique ‘WorldSourcing’ model offers a competitive edge, enabling it to extract location-specific tax advantages and labor cost arbitrage. As the share of VFX in production budgets is increasing due to its rising popularity, we expect a ~13%/17% CAGR in PRIF’s creative services revenue/EBITDA over FY17-FY20E.

Tech-enabled business to grow at a steady pace, with margin ‘surprises’:

PRIF has pioneered an ERP solution, CLEARTM, for the M&E industry to help clients manage the business of content more efficiently and lower their total cost of operations. It is on a non-linear growth trajectory (~31x growth over FY11-FY17) albeit on a smaller base. The next phase of growth would come from the Western market as the company has been expanding its sales force overseas. With growing demand for content management solutions for the M&E industry, we estimate the tech-enabled business revenue/EBITDA to grow at a ~11%/12% CAGR over FY17-FY20E.

Operating + financial leverage to have a multiplier effect on bottom-line:

Along with a ~225bps margin improvement over FY17-FY20E, PRIF would see a drop in debt levels with no large capex envisaged ahead. Also, most of ESOP costs and accelerated depreciation of intangibles would taper off by FY19, facilitating a ~86% PAT CAGR over FY17-FY20E. The stock is currently trading at an attractive FCFF yield of 8%/10% on our FY19/FY20 estimates respectively. Initiate coverage with LONG and a SOTP-based Mar’19 TP of Rs 123.

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