Shares in Videndum (VID), the premium hardware and software supplier to the content creation market, tumbled as much as 25% to 411p in early trading after the firm posted disappointing half year results and said it could breach its banking covenants.

The shares had already lost nearly 50% of their value this year as the firm has struggled with sales due to destocking by retailers and the US writers’ and actors’ strike which has impacted the production of new content.

‘MATERIAL UNCERTAINTY’ WITHOUT MORE CASH

For the six months to June, revenue was down 25% to £165 million, much worse than the firm envisaged at the time of its last trading update in May, due to the prolonged strikes in Hollywood and destocking by its retail customers who are ‘increasingly concerned about interest rates and working capital’.

The firm has executed self-help measures to reduce its cost base, but even so operating profits were down 53% to £15.2 million, as a result of which net debt to EBITDA (earnings before interest, tax, depreciation and amortization) rose to a higher-than-expected 2.9 times.

While it has cash on hand, and has ‘good relationships’ with its banks, reducing its leverage and recapitalizing the business ‘may require an equity raise’, the firm admitted.

Moreover, while leverage is within its covenant limits for now, it said there was ‘a plausible scenario where covenants are breached’, causing ‘material uncertainty that may cast doubt on the group’s ability to continue as a going concern such that it may be unable to realise its assets and discharge its liabilities in the normal course of business’.

The key unknown in all this is how long the writers’ and actors’ strike is likely to continue and how long the group takes to recover from both that and the general weakening of demand for its products.

WHAT DO ANALYSTS SAY?

Shore Capital analyst Tom Fraine suggested Vivendum was likely to see a recovery in demand next year, noting the news an agreement had been reached this week between US writers and the studios, but removed his Buy recommendation on the shares as the firm suspended guidance.

‘The company may have benefitted temporarily from a surge in content creation during the pandemic. November 2022’s update, which implied that volumes may have declined by a high-teen percentage, may have been a first signal that sales have begun to normalise’, commented Fraine.

The analyst also pointed to the cutback in content spending announced by Disney (DIS:NYSE) in the first quarter of this year, and the fact Netflix (NFLX:NASDAQ) and HBO, among others, were reported to have canceled a number of TV series in recent weeks.

LEARN MORE ABOUT VIDENDUM

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