Bloomsbury reports strong half-year, boosted by early purchasing from customers

On the 27th October, Bloomsbury Publishing plc published their unaudited interim results for the six months ended 31st August 2021. In these results, Chief Executive Nigel Newton stated that Bloomsbury had delivered "excellent" results in the half, with year-on-year revenue growth of 29% from the comparable period in 2020. In this article, I will provide more information on the company whilst delving into their financial results over the past five years, including their recent interim report and their annual report to Y/E 2021, to evaluate whether I think their strong performance will withstand post-pandemic and whether they are worthy of consideration for investment.


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History


Bloomsbury Publishing is a global publishing house based in the UK and listed on the London Stock Exchange. It was established in 1986 and is the original publisher and custodian of the Harry Potter series, which is still a large part of its success story to the present day.


Business Model


Bloomsbury plc is split into two main divisions, consumer and non-consumer. In Bloomsbury’s last annual report to Y/E 2021, the consumer arm of the business accounted for 64% of revenues (at £118.3 million), whilst the non-consumer arm accounted for 36% of revenues (at £66.8 million).


The consumer side of the business includes:

  • Adult Trade (fiction, non-fiction and cookery)

  • Children’s Trade (fiction, non-fiction, picture books, pre-school titles and activity books)

Bloomsbury makes money in their consumer segment through royalties made on their published books. In the adult and children’s trade divisions, Bloomsbury will accept manuscript submissions from prospective authors with literary agents. An author’s agent will recommend their author’s manuscript to commissioning editors that work at Bloomsbury. Then, if the commissioning editor working for Bloomsbury is interested in the manuscript, Bloomsbury will bid for the rights to that manuscript. The author and their agent will review all bids (if multiple bids have been made from different publishers) and will then decide which publishing house to go with. The author will sign a publishing agreement with the publisher, and will usually receive an advance on royalties and then further royalties once sales have bypassed the figure of the advance. The publisher makes money per-sale of the book, and this is an agreed rate of commission as a percentage of the final sale price.


In their adult trade division in Y/E 2021, frontlist titles (books which were published during that year), such as fiction work Piranesi by Susanna Clarke, performed well. From their backlist (books published in prior years), The Song of Achilles by Madeleine Miller was a bestseller and non-fiction Why I’m No Longer Talking to White People About Race by Reni Eddo-Lodge was also a bestseller.

The bulk of Bloomsbury’s turnover each year comes from its backlist, with repeat sales on its older titles and services, of which Bloomsbury has a back catalogue of over 50,000 active titles and digital services.


In their children’s division, the Harry Potter series remains a shining light in the company’s portfolio of titles, with sales of the series growing 7% in Y/E 2021. According to the UK’s Nielsen Bookscan, Harry Potter and the Philosopher's Stone was ranked as the 3rd bestselling children’s book that year, 23 years on from its initial publication — an incredible feat for the series. A further phenomenon in the children’s division are the works of author Sarah J. Maas; her series’ Throne of Glass and A Court of Thorns and Roses are both based on successful children’s stories Cinderella and Beauty and the Beast, and are often touted by the company as significant growth drivers in this division.


Bloomsbury’s non-consumer division produces books and resources mainly in the academic and professional sectors. The academic division specialises in the arts, humanities, social sciences, law and business and management.


Their non-consumer division also comprises Bloomsbury Digital Resources. BDR was conceived in 2015, and its products cover a range of disciplines in the humanities, social sciences, visual arts and performing arts. In terms of BDR, revenue is generated predominantly via annuity-based income. BDR played a large role in Bloomsbury’s success in the Y/E 2021, with the division achieving growth of 49% from the prior year with £12.4 million in revenue.


BDR benefited greatly from the shift to online learning during the pandemic, with a 73% increase in customer base in the academic sector. Now that in-person teaching has returned, it will be interesting to see how many institutions choose to renew their subscription to this service. In Bloomsbury’s recent interim report, the company were hopeful with regards to renewals, stating that Bloomsbury Digital Resources grew by 44% in the period, with a further statement clarifying their positive position going forward: “[t]he focus on our online academic digital resource strategy means we are well placed to continue to benefit from the accelerated shift by academic institutions to digital products to support hybrid learning”.


This image shows Bloomsbury's two operating divisions: their consumer and their non-consumer division. It explains that their consumer division puvlishes trade books for both adults and children in print, ebook, and audio book formats, and sells these books globally. The consumer division in the Y/E 2021 made £14.2 million in profit before taxation, amortisation of acquired intangible assets and other highlighted items and it made £188.3m in revenue. Their non-consumer division comprises the Academic & Professional, Special Interest and Education publishing subdivisions within Bloomsbury. The non-consumer division made £5.4m in profit before taxation, amortisation of acquired intangible assets and other highlighted items. The non-consumer division made £66.8m in revenue.
Source: Bloomsbury's Y/E 2021 Annual Report

Recent Performance

The image shows a table that is comparing Bloomsbury's results in the half year 2021 to the comparable first half year in 2020. Revenue grew by 29%; profit before taxation and highlighted items grew 220%; profit before taxation grew 265%; diluted earnings per share, excluding highlighted items grew 210%; diluted earnings per share grew 263%; net cash grew by 1%; and interim dividend grew by 5%.
Source: Bloomsbury's Interim Report for Half Year ending August 2021

The financial table above is taken from Bloomsbury’s interim report. As you can see, their revenue growth from the comparable period in 2020 was 29%. As explained by their CEO, part of this growth was due to customers ordering stock earlier than in previous years, as retailers and online booksellers must ensure that they have sufficient stock for Christmas due to potential supply chain problems. This is explained further in the Risks section of this article below.


In terms of performance for each business segment, the consumer segment’s revenue grew by 29% to £62.9 million, from £48.6 million in 2020. There was also strong growth in their non-consumer segment, with revenue growth of 27% to £37.7 million, up from £29.7 million in 2020. In terms of profit, consumer profit before taxation and highlighted items increased by £5.6 million to £8.4 million (from £2.7 million in 2020) and in their non-consumer segment, profit before taxation and highlighted items increased by 220% to £4.6 million (2020: £1.4 million).


Breaking the non-consumer segment down further, Bloomsbury Digital Resources’ revenue was up 44% to £8.0 million (£5.6 million in 2020) with a profit of £2.8 million (£1.2 million in 2020). In the report, the company stated they were on track to achieve their five year BDR ambition for revenue of £15 million and profit of £5 million for Y/E 2022. This is good news for the business, as they have previously stated they want to focus more on digital growth in their non-consumer segment so that they are able to offset some of the challenges that could arise in their consumer segment, as revenues in this area can be a lot more volatile. See the Risks section below for more on this.



Future Growth Drivers

The image shows two columns; the left column is titled 'Priorities' and the right column is title 'Delivered 2020/2021'. The left column shows that 'Investing for growth' in three key areas is part of Bloomsbury's priorities going forward. These three key areas are acquisitions, Bloomsbury Digital Resources and new content. Another priority is maintaining a strong balance sheet and the final priority is dividends supported by good cash cover. On the right, it shows that in the acquisitions category, Bloomsbury acquired Red Globe Press for £3.7m and that their two previous acquisitions were integrated. In Bloomsbury Digital Resources, their capital expenditure was £1.1m compared to £1.2m the year prior. In new content, £11.1m was invested in author advances in the year compared to £11.6m the year prior. In maintaining a strong balance sheet, the company had cash of £54.5m at 28 February 2021. And in supporting dividends by good cash cover, the final dividend of 7.58p provided cover of 2.1x. The special dividend in that year was 9.78p.
Source: Bloomsbury's Y/E 2021 Annual Report

Bloomsbury plans to grow in scale via investing in three key areas of the business (as shown in the image above) acquisitions, Bloomsbury Digital Resources and new content.


Bloomsbury’s expectations for Y/E 2022 are revenues of £193.4 million and profit before taxation of £19.3 million. The CEO has stated that long term revenue goals for the company stand at £200 million. In Bloomsbury's annual report presentation, Nigel Newton explained that Bloomsbury wish to remain a medium-size publisher, but want to be “a large and powerful medium-sized publisher that can withstand the vicissitudes of fortune through scale”. This quote from the CEO regarding the “vicissitudes of fortune” that can affect Bloomsbury's performance indicates the tumultuous nature of the publishing industry, as generating popular titles and bestsellers can be a difficult game. Bloomsbury has stated that they are aiming to grow their non-consumer segment in order to offset the potential risk of an underperforming consumer segment affecting their financials in future years.


In terms of recent acquisitions, they have recently acquired Red Globe Press for £3.7 million, paid for using the company’s free cash flow. RGP specialises in titles for higher education students, particularly in the humanities and social sciences and business and management. RGP generated £9.6 million of revenue in the year ended 31 December 2020, and profit before tax of £1.1 million, with gross assets of approximately £0.8 million. This signifies a fantastic acquisition; although at the small end of the scale, Bloomsbury paid only three times profit before tax for RGP, which is extremely good value. Bloomsbury also stated that there are opportunities for profit enhancements following the integration of RGP into Bloomsbury. In the remaining nine months of Bloomsbury's financial year ending 28 February 2022, RGP is expected to contribute approximately £6.0 million of revenue and £0.4 million of profit before tax, prior to integration and acquisition costs. RGP was acquired to support Bloomsbury’s wider goal of driving their non-consumer business, which is key to their long-term growth strategy.


Bloomsbury has also recently completed the acquisition of Head of Zeus, the independent publisher of genre fiction, narrative nonfiction and children’s books. Bloomsbury acquired HoZ for £7.35 million, again purchased using their free cash flow. HoZ generated £8.6 million of revenue in the year ended 31 December 2020, and profit before tax of £0.3 million, with net assets of £4.6 million. This is also another small bolt-on acquisition, and is in line with their strategy to invest in new content for their consumer division.


Risks


As stated in the section above, the consumer side of Bloomsbury’s business can face many challenges. Firstly, the consumer division’s revenues rely primarily on successful authors and bestselling books. Although, of course, having a great workforce in terms of marketing, illustration and editing plays massively into how successful a book is when it comes to market (and Bloomsbury places a large onus on hiring the best people and in fostering a positive culture — Glassdoor ratings for the company currently stand at 3.9/5), writing and producing a bestselling book is a tricky game.


A further risk to performance is supply chains; having written a bestselling book, large quantities of copies need to make it safely from distribution centres to book stores without severe delays impacting the journey and therefore the sales. Bloomsbury’s titles are distributed in Australia, New Zealand and Rest of World via Macmillan Distribution (MDL), which is based in Swansea. In the US, Canada and Latin America, Bloomsbury’s distributor is MPS Virginia, which is also part of Macmillan publishers. Bloomsbury currently does not distribute to Europe due to increased export costs as a result of the Brexit agreement.


The first problem that Bloomsbury may face is the shortage of shipping containers. According to an article in the NY Times, publishing professionals are saying that a shipping container, which can hold roughly 35,000 books in transit, which used to cost them about $2,500, can now cost as much as $25,000.


Worker shortages are also slowing down operations at warehouses and distribution centres, particularly in the US. Covid has exacerbated staffing issues at many US distribution centres, as some workers get sick and are told to quarantine. These problems with distribution and labor shortages compound one another, which results in far longer wait times for books to reach bookstores.


This could be an issue for Bloomsbury, as according to its Y/E 2021 annual report, 64% of its revenues come from overseas.



This image shows that in Bloomsbury's Y/E 2021 the US accounted for £53.9m in revenue.
Source: Bloomsbury's Annual Report Y/E 2021
This image shows that in Bloomsbury's Y/E 2021 the UK accounted for £117.4m in revenue and India accounted for £2.7m in revenue.
Source: Bloomsbury's Annual Report Y/E 2021
This image shows that in Bloomsbury's Y/E 2021, Australia accounted for £11.1m in revenue.
Source: Bloomsbury's Annual Report Y/E 2021

Bloomsbury’s interim report stated that its first half revenues of £100.7 million have been boosted by retailers and online booksellers ordering earlier in the year in order to ensure they have sufficient stock for Christmas given these potential supply chain problems. Hopefully, these orders will offset any potential problems with stock over the Christmas period. However, Bloomsbury’s results for the second half of the year may therefore not be as boosted as its first half.


The table shows the breakdown in Bloomsbury's revenues between print, digital and rights and services. For the year ended 28 February 2021, print accounted for 75% of Bloomsbury's revenues and combined revenues from digital and rights and services accounted for 25% of Bloomsbury's revenue.
Source: Bloomsbury's Annual Report Y/E 2021

Looking at the above table, you can see that 25% of Bloomsbury’s revenues come from licensing (rights and services) and digital sales. Given that both of these revenue lines require no supply chain management, this may go someway to offset the potential risk of supply chain damage to Bloomsbury’s print business. However, at 25%, this offset would be marginal in comparison to the large print business that could be affected as a result of supply chain issues.


Financials

The image shows Bloomsbury's results from 2016-2021. The table shows their revenue, their revenue growth, their gross profit, their gross margin, their operating profit, their operating margin, their debt to equity ratio and their ROCE.
Source: The Twenties Trader

Looking at the financials for Bloomsbury, and starting with the top line, you can see revenue growth has averaged 8.6% for the years 2016 to 2021. Whilst Bloomsbury isn’t growing revenues at a rapid pace, I think 8.6% is pretty impressive compared to the industry (see table below for comparison to Pearson and Scholastic Corp, both listed publishing businesses), and Bloomsbury has done well to grow consistently over the period (allowing for a fallow year in 2020, where results were affected by the imposition of government lockdowns and retail closures).

The table shows the 5 year average revenue growth (%), gross margin (%), operating margin (%) and ROCE (%) for Bloomsbury, Pearson and Scholastic Corp. Average revenue growth for Bloomsbury was 8.6%, gross margin was 53.3%, operating margin was 7.8% and ROCE was 8.2%. Average revenue growth for Pearson was -6.6%, gross margin was 51.3%, operating margin was 11.3% and ROCE was 7.3%. Average revenue growth for Scholastic Corp was -4.7%, operating margin was 0.5% and ROCE was 1%.
Source: The Twenties Trader

In terms of profitability, Bloomsbury’s gross margin has held nicely around the 53% over the medium term period above, showing that Bloomsbury has some level of pricing power and ability to navigate yearly cost or demand fluctuations with their pricing strategy.


At first glance, the company’s operating margin (one of my critical requirements for investment) doesn’t seem to be anything to write home about with a mean average of 7.9%. However, in comparison to other listed companies in the publishing sector, Bloomsbury is performing well.


Considering the balance sheet, Bloomsbury is also in great shape, with a net cash balance of over £40m and a debt to equity ratio of 0.54, which is very low and highly manageable. (Debt to equity takes into account both current and non current liabilities, compared to shareholder equity. Thus a business in net cash can still have ‘debt’ in this equation).


Lastly, return on capital employed (ROCE), which is a critical metric for quality investors, has averaged 8.2% over the last five years, which again, isn’t incredible, but ample enough.


Valuation and Summary


In summary, I think Bloomsbury today looks like an excellent little business. It has a strong track record of producing results, some good financial metrics (but room for improvement here) and produces quality content in an industry that should continue to exhibit strong levels of demand for years to come.


Dig a little deeper and Bloomsbury also has some fantastic qualities in terms of management, and I would classify it as a well run business. Small bolt-on acquisitions (at good value prices), good employee satisfaction ratings and a sensible strategic vision to diversify the business into different categories all point to credible management. What’s more, under the current remuneration policy, Executive Directors are required to build up a shareholding in the Company equal to 200% of their salary (“Shareholding Guideline”) to align their interests with that of Shareholders.


In terms of valuation, Bloomsbury trades on a forward P/E ratio of 20 times forecast earnings in 2022, which I would say is an undemanding price for the business given its reliable track record, solid back catalogue of titles (Harry Potter) and peer leading financial metrics. The shares have gone on a bit of a tear since the pandemic, up 80% since Covid lows, given the potential for some of the recent revenue growth to be a ‘pull forward’ of early Christmas stocking. I think there could be value in waiting to see how the Bloomsbury story unfolds in early 2022 before buying the shares. I’d opt to remain on the sidelines for now, but keep a keen eye on Bloomsbury going forward.


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At the time of writing, The Twenties Trader did not own shares in Bloomsbury Publishing plc.


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