English visual effects studio DNEG plans to go public by merging with SPAC. We decided to disassemble the company's business, to understand, does it make sense to invest in special effects.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
What do they earn
DNEG (NASDAQ: AKIC) is a computer visual effects studio headquartered in London..
In its current form, DNEG has existed since 2014.: then two visual effects studios Prime Focus and Double Negative decided to merge into one.
Pay attention to, that the same people work at DNEG, as in these companies, it would be logical to take into account all the work in her track record, made by them separately before uniting.
The company did computer effects for a bunch of Hollywood blockbusters.. Here is a far from complete list of DNEG works: "Inception" and "The Dark Knight", latest Bond and Venom movies, Dune and Blade Runner 2049, Justice League, the latest "Matrix" and "Ghostbusters" and many others. A full list of the company's work can be viewed on the DNEG Wikipedia page..
The main source of data about the company for us will be its presentation to investors. However, can't say, so that the presentation tells us a lot about the internal structure of her business: no segment data, although it is known, that the company not only makes special effects for movies, but also engaged in virtual media entertainment.
There is no breakdown by geography of the company's revenue. But that's just not a problem., because film production is often an international effort. For example, the film adaptation of the novel "White Tiger" was made with the participation of American producers, though movie Indian. Known, that the company is profitable, - let its margin not stagger the imagination.
DNEG will enter the exchange through a merger with SPAC Sports Ventures Acquisition, which is already listed on the exchange. After the merger, Sports will change its name to DNEG. Expected, that the merger will close sometime in the first half of this year.
Financial performance of the company, million dollars
| 2019 | 2020 | 2021 | |
|---|---|---|---|
| Revenue | 320 | 369 | 306 |
| Profit | 25 | 2 | 14 |
| Total margin as a percentage of revenue | 7,81% | 0,54% | 4,57% |
Arguments in favor of the company
Change of course. The coronavirus crisis has dealt a severe blow to the film industry and led to a drop in income in this area due to the postponement of screenings, seating restrictions, disruption of the filming schedule.
The crisis also had a negative impact on DNEG: some projects were postponed, and since the company receives money for the implementation of the contract as certain results are achieved and only 10-20% of the amount is paid in advance, this means, that if the work on the film is frozen, the company will not see the expected revenue. The execution time contracts themselves can take as 3 months, so 2 years - and therefore the stoppage of work on many projects could not but hit DNEG. But I think, that the current crisis in the film industry harbors the seeds of future prosperity for DNEG. Here's why.
Already from the analysis of the October box office, it was clear, that blockbusters from well-known series with a large fan base will soon begin to dominate the structure of film production, because they have the best chance of payback.
The crushing success of the new "Spider-Man" in theaters at the level of the best results of the "pre-pandemic" era only confirmed the correctness of this thought..
So what can be expected in the future, that studios would make more blockbusters — and, respectively, rely on visual effects masters, which are needed for such films. After all, the conditional "Avengers" attract viewers clearly not due to an exquisite script and witty dialogues..
The hell of an endless pandemic will encourage studios to rely more and more on visual effects, even for non-complex scenes., but in principle to create most of the film. Coronavirus compliance protocols are already adding big costs to the film's production.
For example, to the 165 million budget of the new part of the "Jurassic World" measures to ensure the safety of filming participants added almost 9 million. But even these costs are nothing compared to the possibility of stopping filming and postponing it., here the costs of studios can be estimated at many tens of millions of dollars. So most of the film will be made without "living people", the better it will be for the film itself and its sponsors. It seems to me, this will give impetus to the development of DNEG's business.
King Content. Another powerful trend is the rise in the cost of producing content for streaming services.. Production there is subject to the same principles., as in film studios, so the motivation to use visual effects as much as possible from the same Netflix is no less, than Warner Bros..
Top for your money. Indirect indicator of the quality of work: the company has six "Oscars" for visual effects, and five of them from the last seven ceremonies. It seems to me, this allows DNEG to stand out from the background of numerous competitors, and there are really many.
Stability. Most of the company's revenue comes from old customers., and in general it is so stable, How stable can revenue be in the film business?. Moreover,, according to DNEG, she has orders for a year in advance.
Promising. The company built extremely optimistic revenue and EBITDA growth forecasts: until 2026, the average annual growth rate of revenue should be 17%, and adjusted EBITDA 26%. Forecasts look extremely optimistic, but, mindful of favorable conditions, there is some truth in DNEG forecasts. Again, this can turn the head of inexperienced investors and help pump up quotes..
DNEG revenue from regular customers as a percentage of the company's total revenue
| 2019 | 2020 | 2021 | |
|---|---|---|---|
| 7 major studios | 82% | 84% | 85% |
| Other studios | 12% | 12% | 12% |
Revenue from the largest studios for a certain number of years, million dollars
| Number of years | Revenue | |
|---|---|---|
| Disney, Disney+, 20th Century Studios | 18 | 400 |
| Warner Brothers, HBO Max | 17 | 280 |
| Sony Pictures | 21 | 200 |
| Universal Studios, Peacock | 22 | 165 |
| Paramount, Paramount+ | 22 | 150 |
| Legendary | 14 | 150 |
| Netflix | 5 | 95 |
Until it took off. Shareholders usually react to the news of a SPAC merger by buying shares, if a, certainly, consider the purchase worthwhile. But this time around, Sports Ventures shares have not changed in price and are still cheaper. 10 $. This means, that investors were not enthusiastic about the news..
Considering all the positives, these stocks may later attract the attention of investors, and then the quotes will grow strongly - after all, the company's prospects are not yet included in the price of its shares.
It's also worth noting, that the capitalization of the company will be approximately 1.7 billion - approximately 4,2 its annual revenue, which looks modest. As for P / E DNEG, then with the current assessment of the company based on the results of 2021, its P / E amounted 125, what, certainly, lots of.
But, Firstly, the company is distinguished from other IT start-ups by the very fact of having a profit. And secondly, over time, I would expect the margins of her business to increase: 2021 after all, it was a crisis year for the company..
Something about games. The company plans to develop the gaming segment, And, given the growth of the gaming market, i would expect, that this line of business she will grow. Especially, as we remember from the merger of Weta with Unity, movies and games are increasingly intertwined.
Can buy. In absolute terms, DNEG will be inexpensive - less than 2 billion, in relative terms, the world has seen even more shameless startups, on which the buyer was nonetheless, — вроде Zendesk. It seems likely that DNEG will be bought by one of its big clients, or even one of the professional software giants., from Autodesk to Adobe.
The buyer of DNEG may be one of the major media companies - Apple or even Microsoft. The first is developing its streaming service, and the second is the gaming business. The capacities of DNEG may well be redirected to other areas of media or even combined with them.. Especially since, by average M&A standards among game companies, the value of DNEG is just a drop in the ocean..
What can get in the way
Debts. The company goes public, to pay their considerable debts. But I think, that her bookkeeping will soon get heavier anyway. There are many studios in the field of visual effects, big and small, and I'm afraid, that DNEG will be actively spent on expansion.
Such companies will cost a lot of money. So I'd be prepared for that, that DNEG will have to borrow money, - and this will have to be done in the face of an increase in the cost of loans.
Bhai Bhai. DNEG employs 4,783 of its 6,700 employees in India. Various problems arise from this.: from purely intra-Indian political upheavals to a possible war of this country with Pakistan and China. But the most visible reason seems to be the rising cost of famous Indian coders.: in India, there is a shortage of programmers and the range of salary growth in some cases is in the range of 50-100%. You have to be mentally prepared, that DNEG will suffer costs.
antifragility. The company operates in four time zones in 11 objects: United Kingdom, Canada, India and USA. It relies heavily on seamless data exchange: every day its computers create 700 terabytes of content and 30 terabytes of content are sent daily around the globe through the company's internal systems. Probably, there will be an inevitable degradation of the service level of the cloud infrastructure, which will be expressed as an increase in the number of prolonged failures of length 30 minutes or more, there were such last year 189% more, than in 2020. Therefore, you should be mentally prepared for, that disruptions of this nature would adversely affect DNEG's business.
Not cheap. As I said above, P / E is big, and that will contribute to stock volatility.
Not so stable. The film industry is still taking the first steps in the context of an eternal pandemic, and therefore force majeure is possible with the cancellation or postponement of projects. In general, this is not uncommon in the film business, even in calmer times.. The late Carolco spent 1993 10 million for the preparation of the filming of Verhoeven's "Crusade" - this is almost 19.5 million in modern money. The amount was almost 10% from the entire budget of the film, but filming was canceled anyway. So you gotta be ready for it, that DNEG's revenue growth forecasts may not come true - but due to the fault of the studios, not DNEG itself. The film business is generally characterized by eccentricity and disorganization - it is not for nothing that the concept of production hell appeared there..
Lie down with the SPAC. I really want to believe that, that the company chose the path of entering the stock exchange through SPAC only for reasons of economy and convenience. But this way of entering the exchange is also often chosen by fraudulent companies.. This risk should be considered.: it can happen like this, that the company actually cheated shareholders.
Resume
The main character of the series "Get a Shorty" bandit Miles Daly decided to become a film producer, because since childhood he loved cinema. Because he loved cinema, who grew up in Northern Ireland during the Civil War and the cinema was the only place, where the opposing sides reconciled and did not throw stones and Molotov cocktails at each other.
In these turbulent times, investing in companies like DNEG looks like a good way to make money on art, uniting people: the creators from DNEG have created a lot of vivid impressions for us, including the best moments of Nolan films.
But even without this, DNEG looks like a very interesting and promising company., despite the high price and some speculativeness in its forecasts. So even if you don't believe in "the most important of the arts", then DNEG may still be of interest to you. Hope, these shares after the merger of DNEG with SPAC will quickly appear on the St. Petersburg Stock Exchange and we will be able to make an idea for them: right now they look undervalued from all perspectives.
