Videndum faces a content creation recession

Video hardware company Videndum (VID) is focusing on efficiency. Despite facing cost inflation, adjusted operating expenses fell £1.6mn on an organic, constant currency basis. In total, costs were up 8.7 per cent to £138mn. Not bad given global inflation was running at about 10 per cent last year.

As well as cutting costs, Videndum pushed through its own price rises. These more than offset the cost increases, which meant the adjusted operating margin rose 160 basis points to 13.3 per cent. Freight and raw material inflation were the main reason for the cost increases last year, but these have already started to fall dramatically.

However, a key reason why freight costs are falling is that economies are slowing down. Videndum warned that s weakening consumer outlook is impacting its media solutions business. Retailers it sells to have been destocking inventory as they predict lower demand from influencers. The media solutions division, which accounts for around 50 per cent of group revenue, saw constant currency revenue decline 7 per cent.

The production solutions business has been more robust. Organic constant currency revenue increased by 6 per cent, and production is more profitable, with adjusted operating margins of 22.8 per cent, meaning growth will push up group margins. Customers include subscription TV channels Netflix, Amazon Prime and Disney Plus.

Next year might be difficult. Broker Shore Capital noted Disney’s plan to cut back programming costs as a potential headwind. Shore also thinks the pandemic caused a temporary surge in content creation, which will fall back. It has Videndum trading on a forward price/earnings ratio of just 11.2.

We agree in the short term, but think Videndum’s price is a good entry point. The margin improvement shows how popular its product is and, although we are in a content recession, demand for video will bounce back. Buy.

Last IC View: Buy, 1,431p, 11 Aug 2022