Magix provides software solutions for the creation, design, presentation and archiving of digital photos, graphics, websites, video and music. Approx. 50% of their revenue is generated through their online shops. The rest is coming from hardware manufacturers and trading partners. Approx. 65% of revenue is generated in the German speaking countries, followed by Western Europe (25%) and the US (10%). Approx. 90% of sales are coming from private users. Based on the company’s information they are the market leader for multimedia software in Germany.
Distributions to shareholders
I have followed the company for quite some time now, as they have been using their large cash balance for substantial distributions to shareholders. On December 11th 2013, they announced another tender offer for 9% of outstanding shares at a share price of EUR 3.0, indicating that the management regards the current stock price as too low.
Below you can find an overview of the management’s distributions to shareholders over the last years (with fiscal years ending in September):
|Share buy back (in million euros)||1.1||5.5||2.7||0.0||0.0||2.4||0.3|
|Dividend (in million euros)||0.0||0.0||0.0||0.0||9.2||11.7||0.0|
|share price high||9.0||5.0||4.4||5.1||9.6||6.6||3.3|
|share price low||5.0||1.8||1.6||3.5||4.5||2.1||1.7|
|Outstanding shares in million||12.7||11.5||10.4||10.4||10.4||9.4||9.3|
They seem to make a good job in allocating capital. Whenever they believed the stock price to be below management’s estimation of intrinsic value, they repurchased stock otherwise they just paid out a dividend making use of their large cash pile. After the execution of the current tender offer the share count will be reduced by another 0.84 m shares.
It is important to note that management’s share in the company increased from 46.6% at the end of 2006 to 65.4% at the end of 2013. So from my perspective a company event might be a possible scenario over the long term.
Recently, Magix’s operating performance has been affected mostly by two factors:
First, in 2012 retail stores as the major sales channel for Magix’s products have been largely replaced by the company’s online stores. However, the decline in demand from stationary retail could not be compensated by online sales. As a consequence, revenue dropped significantly in 2012. This situation improved considerably in the first half of 2013, when sales growth from online sales outpaced the decline in stationary retail sales. Sales over the company’s online pages are currently generating 63% of revenue compared to only 46% in 2011. At the same time the stationary retail’s share in revenue is currently 31% compared to 48% in 2011.
For Magix, the point of sale does not determine whether the company’s products are competitive. So there is no difference if they sale their products in retail stores or over their internet platform apart from the need for efficient distribution logistics. Concurrently, there is no need to share profit margins with trading partners anymore and they might be able to make more use of marketing activities. So this could be beneficial for Magix. However, I am not sure whether additional distribution costs eventually eliminate these advantages.
Overall, this factor should not lead to a secular decline in sales, which is already observable in the H1 2013 numbers.
Second, the general decline in personal computer (PC) sales is also affecting Magix’s revenues as most of their software is running on PCs. However, the company has continuously expanded its product range to profit from the integration of other hardware tools.
For instance, they are now offering smartphone apps for free download. They will charge a small amount, if the customer decides to add additional features. Based on the company’s information most of Magix’s customers are older than 40 years and are relatively loyal. As prices for the software starts at EUR 40, many younger potential customers might not be willing to spend that much money or just download the software illegally. The new products for smart phones and tablets start at EUR 3 and are therefore also affordable for teenagers who so far might have been reluctant to pay for Magix’s software. As a consequence, the company might profit from a larger customer group in the future.
Overall, there is a general need for multimedia software which is independent from the hardware it uses. So the task for Magix is to offer their customers software which is usable on different tools. From my perspective, I believe the management is on a good way to get this transformation done.
Below you can find Magix’s operating numbers for the last six and a half years:
|in million euros||2007||2008||2009||2010||2011||2012||1H 2013|
|Operating CF before WC||3.3||4.7||6.6||8.3||5.2||1.7||1.7|
|FCF excl WC||-0.1||1.1||3.8||5.0||1.2||-1.8||0.1|
|FCF excl WC/share||-0.01||0.10||0.36||0.48||0.11||-0.19||0.01|
Revenue declined by 20.2% in 2012, but has stabilized in H1 2013. Net income in 2012 was positive due to a reversal of provisions. Otherwise net profit would have been negative. So after adjusting for this special item in 2012, we can see an improvement in profitability in the first half of 2013.
ROIC looks not extremely good, but ok (with invested capital defined as: fixed assets + non-cash working capital). ROE is flawed due to the high cash balance making up approx. 40% of assets.
Lately, cash flow generation has been strongly influenced by changes in working capital. In 2012 FCF has been positive due to a decline in working capital. Ignoring any changes in working capital the company burned cash in 2012, but is currently operating slightly cash flow positive.
With cash on the balance sheet of approx. EUR 17.0 m and a market cap of EUR 27.0 m, the current enterprise value is approx. EUR 10.0 m.
So the company is currently valued with an enterprise-value-to-sales-ratio of only 0.34x.
Based on historic profitability EV/EBIT multiples are very low.
Also, based on past cash flows the company looks cheap. On average, over the last six fiscal years Magix generated approx. EUR 1.5 m of FCF ignoring changes in working capital. This will lead to a 15% FCF yield, if you believe that the company is not in structural decline. Hence, the market might currently expect an ongoing depressed level of profitability. From my perspective to make this company an attractive investment a normalized FCF generation of roughly EUR 1.0 m is warranted (10% yield). Based on the assumption that the company’s products are still in demand from customers and that the decline in sales revenue is mostly due to the switch in sales channels, I believe that this is a realistic level of cash flow generation in the future.
With all the excess cash being distributed to shareholders being the best option, management is not fully following the best way to allocate capital. However, to be fair, they increased value for shareholders in the past by repurchasing a substantial amount of shares at low valuation levels. So far management has acted in the interest of all shareholders.
I do not believe that the current set back in sales will continue as I do not see any factors leading to a structural decline in demand for Magix’s products. From my perspective, a reversion to a cash flow generation level equalling to two-thirds of the last six years average justifies an investment. I believe that this is achievable for the management, which is highly incentivized to increase the value of their company due to their large ownership stake.
I will establish a 2% position for the portfolio with a share price limit of EUR 3.10. Liquidity is very low and it might take approx. 30 trading days to build the position assuming Wertart Capital trades one third of daily volume. Please click here for more information on WertArt Capital and the virtual portfolio.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always do your own research!