Content creation and ownership

Entertainment One 21 May 2019 Update
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Entertainment One

Content creation and ownership

Full year results

Media

21 May 2019

Price

460.4p

Market cap

£2,284m

Net debt (£m) as at 31 March 2019 including production finance

433.2

Shares in issue

496.0m

Free float

95.4%

Code

ETO

Primary exchange

LSE (FTSE 250)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

06

11.1

69.2

Rel (local)

(1.4)

12.4

58.4

52-week high/low

483.4p

278.8p

Business description

Entertainment One is a global independent studio specialising in the development, acquisition, production, financing, distribution and sales of entertainment content. Its rights library, valued at US$2.0bn, is exploited across all media formats, and includes more than 80,000 hours of film and television content and approximately 40,000 music tracks.

Next event

AGM

TBA

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5700

Entertainment One is a research client of Edison Investment Research Limited

Entertainment One’s full year results showed strong growth in underlying EBITDA, +21%, broadly in line with market and our estimates. The Family & Brands division is benefiting from the higher margins from advertising and streaming video on demand (AVOD and SVOD), with underlying EBITDA up 28%. Film, TV & Music’s performance reflects the completion of the transition in film and the shift in mix toward TV, with an improvement in underlying EBITDA margin from 11.6% to 14.6%. Our revised forecasts show the positive impact of the recent Audio Network acquisition (and the boost from IFRS16), diluted at the EPS level by the additional shares.

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

1,029

163.6

124.2

19.3

1.4

23.9

0.3

03/19

941

197.6

160.0

25.0

1.5

18.4

0.3

03/20e

1,150

235.0

192.0

26.0

1.6

17.7

0.3

03/21e

1,250

260.5

214.2

27.3

1.8

16.9

0.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong slates for FY20e

In Family & Brands, both Peppa Pig and PJ Masks are well-placed into the new trading year, with the former launching its seventh series and the latter its third, initially on Disney Channel North America, then more widely, with series four to follow. Ricky Zoom is launching on Chinese SVOD provider YouKu in the summer, then worldwide, with licensing and merchandising in CY20. FY19 retail sales growth was constrained to 6% due to some caution over the health of the Chinese consumer market. However, the content launches have established strong traction with viewers and we would expect a stronger retail ramp up through FY20e. For Film, TV & Music, the group now has a more focused and targeted film slate and a strong pipeline. TV also has a robust pipeline of new scripted series and renewals for both scripted and unscripted titles, with over 60 projects in development with a range of network partners. The acquisition music company, Audio Network (see our flash note), completed in mid April 2019, so will contribute for nearly all of FY20e.

Investment in production

The proliferation of channels and consequent competition for viewers is sustaining the high demand for quality content and eOne is investing to generate the fuel for future profitability. Management anticipates 83% of its FY20e spend will target own content rather than acquired. This will be heavily weighted to TV, where guidance is for FY20e spend of £350m, up from £213.3m in FY19. £95m is earmarked for film.

Valuation: Priced below peers

eOne’s share price has performed well in CY19 and is up by 29% ytd as the value of its content investment strategy and its platform-agnostic positioning has been recognised by the market. Nevertheless, there is a valuation discrepancy, with the current price putting the group at a c 3% discount to relevant peers on an EV/EBITDA basis averaged over FY20 and FY21e. Our updated SOTP analysis implies a valuation of 475p/share vs 440p/share before.

Investment underpins future growth

FY19 results: Growth drivers in place

Within the Family & Brands division, the strongest revenue growth was from the broadcast and licensing activities, ahead by 144% y-o-y. Underlying divisional EBITDA margin increased from 57.3% to 61.2%, as a greater proportion of the content was distributed through AVOD and SVOD channels where higher margins are achievable than through more traditional routes to market. As indicated above, retail for the key children’s brands is yet to fully ramp up in China and we expect this to accelerate through H220 and FY21.

Peppa Pig has 117 further episodes currently in production, taking the total to 381. New clothing and toy licences are in place in the US, while Merlin Entertainment’s new model Peppa Pig World of Play has outperformed initial expectations and will roll out beyond current locations in Shanghai, Dallas and Michigan. The 15-year anniversary in the UK in 2019 will prompt events and brand awareness. PJ Masks is still very strong in North America, Australia and Germany, with Chinese expansion also fuelling revenue growth assumptions for FY20e. It has SVOD deals worldwide with Netflix and with Mango TV in China, where it also airs with YouKu, iQYI and Tencent. Cupcake & Dino has just started airing its second series of 13 episodes, with the first series having gone out on Netflix globally, Teletoon in Canada and Discovery in Brazil.

Across the Family & Brands division, the group is expecting to have around 1,800 licensing and merchandising contracts in place by the year-end. Guidance is for divisional EBITDA margin for FY20e to be in the 55-60% range (we are modelling 59.2%) as the mix changes and additional investment costs are borne. We expect it to start rising in FY21e as the revenue grows and these costs are recouped.

For Film, TV and Music, FY19 revenues reduced as a function of the deliberately lower film distribution slate, discussed in previous notes. There was also an impact from the decline in the home entertainment market, where there was an impairment taken for the write-down of some film distribution assets, as set out at the half year results. In FY20, all home entertainment activities are being brought together under the auspices of Universal Pictures Home Entertainment.

With these changes now out of the way, we anticipate a return to growth in revenues as the scripted and unscripted TV business ramps up. Over 1,200 half hours of TV are expected to be produced or acquired in FY20, up from 1,142 in FY19, with around 35% already committed or greenlit.

The group expects to have a theatrical release of around 50 unique films, moving towards a run rate of 35–40, with a growing proportion stemming from eOne’s own productions.

The acquisition of Audio Network looks to be mutually beneficial, bringing scale and operating synergies as well as revenue opportunities, for example from using Audio Network’s library assets. The proprietary publishing platform that it has brought to the group also has potentially wider application.

Exhibit 1: KPI summary

2015

2016

2017

2018

2019

2020e

FT&M - Investment in acquired content (£m)

165.9

119.9

180.5

144.5

121.9

85.0

FT&M - Investment in Productions (£m)

113.0

92.8

222.3

287.8

252.3

458.0

Family & Brands - investment in content and production (£m)

1.9

5.8

5.3

9.6

13.5

10.0

Total content and production investment (£m)

280.8

218.5

408.1

441.9

387.7

553.0

% in own productions

40%

42%

54%

65%

65%

83%

Half hours produced/ acquired (Television)

752

998

1023

939

1142

>1200

No. Theatrical releases

227

210

172

144

No. unique Theatrical releases

162

175

102

85

57

50

B. O per release

1.4

1.2

2

1.4

Box office (£m)

308

259

337

208

Family licences

600

847

1,083

1,500

>1,600

c1,800

Family retail sales ($bn)

1

1.1

1.5

2.4

% pipeline green lit - TV

61%

60%

40%

Library valuation ($bn)

0.8

1.5

1.7

2.0

Revenues

FT&M (£m)

729

741.2

996.8

911.1

788.4

979.4

Growth

2%

34%

-9%

-13%

24%

Family (£m)

60.8

66.6

88.6

123.9

158.5

177.5

Growth

10%

33%

40%

28%

12%

Inter company (£m)

(4.0)

(5.1)

(2.7)

(6.0)

(5.7)

(7.0)

Group revenues (£m)

785.8

802.7

1,082.7

1,029

941.2

1,150.0

Revenue growth

2%

35%

-5%

-9%

22%

EBITDA

FT&M EBITDA (£m)

90.9

92

115.5

105.9

115.2

146.0

FT&M EBITDA margin

12.5%

12.4%

11.6%

11.6%

14.6%

14.9%

Family EBITDA (£m)

23.8

43.3

55.6

71

97.0

105.0

Family EBITDA margin

39.1%

65.0%

62.8%

57.3%

61.2%

59.2%

Intercompany eliminations (£m)

(7.4)

(6.2)

(10.9)

(13.3)

(14.6)

(16.0)

Group EBITDA (£m)

107.3

129.1

160.2

163.6

197.6

235.0

Group EBITDA margin

13.7%

16.1%

14.8%

15.9%

21.0%

20.4%

Source: Company accounts FY15-19, Edison Investment Research. Note: ^Company guidance for FY20e.

Change in estimates

The FY19 results to March have come in broadly in line with the market (and our) forecasts. We have revisited our forecasts in light of the statement and we have also incorporated the Audio Network acquisition, which completed after the year end. FY20e figures will be reported under IFRS 16 and our new estimates also now reflect the impact of that accounting standard, which we anticipate will lift group EBITDA by around £9m. This will be countered by an increase in depreciation of a similar amount. There will also be a rise of around £2.5m in interest costs

The additional shares issued in the placing accompanying the acquisition, plus those taken by vendor management, as well as shares issued as a result of the exercise of options, results in a trimming of the EPS figures, despite the higher EBITDA and PBT estimates.

Exhibit 2: Revisions to forecasts

Year end March

EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2019

24.5

25.0

+4

159.5

160

-

195.0

197.6

+1

2020e

27.9

26.0

-7

183.0

192.0

+5

215.0

235.0

+9

2021e

30.5

27.3

-10

200.5

214.2

+7

236.0

260.5

+10

Source: Company accounts, Edison Investment Research. Note: FY19 ‘Old’ = prior estimate, ’New’ = actual.

Management guidance is for a net debt: EBITDA ratio of 1.6x, including the impact of Audio Network and the changes from the application of IFRS16. This compares to the FY18 leverage of 1.7x, which was itself slightly better than earlier guidance.

Underlying free cash flow for FY19 was positive at £12.4m, reflecting the improvement in underlying EBITDA. Our modelling suggests a further good step up in FY20e with the growth in EBITDA to around the £35m level.

Valuation

As previously, we have separated out the Film & TV and Family & Brands valuations for our peer-based SOTP analysis. This derives a combined valuation of 475p/share based on an average of FY20e and FY21e EV/EBITDA multiples, which is around 3% above the current market price and an increase of 8% from our 440p/share valuation at the time of our update note in April. This reflects our higher earnings estimates for eOne and increase in the peer group multiples for FY20 and the newly-available multiples for FY21. When we carried out this exercise in April, Family stocks were on 12.6x FY20e EV/EBITDA (now 13.1x), while Film & TV multiples have increased from 11.4x to 12.4x.

Exhibit 3: Peer multiple SOTP valuation

2020e

2021e

FTD - EBITDA (£m)

146

159

Family - EBITDA (£m)

105

117

Group costs (£m)

(16)

(16)

Multiples:

FTD multiple (x)

12

11

Family multiple (x)

13

12

Average (x)

13

11

EV:

FTD (£m)

1,814

1,697

Family (£m)

1,370

1,440

Group costs (£m)

(204)

(184)

Total EV (£m)

2,980

2,953

Minorities (£m)

(179)

(177)

Corporate debt (£m)

376

315

Implied equity value (£m)

2,425

2,461

Shares in issue (m)

516

516

Implied value per share (p)

471

478

Implied value if production finance is also treated as debt (p)

449

456

Source: Edison Investment Research

Exhibit 4: Financial summary

£m

2017

2018

2019

2020e

2021e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

1,082.7

1,029.0

941.2

1,150.0

1,250.0

Cost of Sales

(822.9)

(731.8)

(617.4)

(759.0)

(825.0)

Gross Profit

259.8

297.2

323.8

391.0

425.0

EBITDA

160.2

163.6

197.6

235.0

260.5

Operating Profit (before amort. and except.)

155.3

160.0

193.9

231.0

256.2

Amortisation of intangibles

(41.9)

(39.6)

(39.0)

(36.2)

(36.2)

Exceptional items

(40.8)

(7.1)

(68.0)

(10.0)

0.0

Share based payment charge

(5.0)

(12.6)

(16.2)

(16.2)

(16.2)

JV tax, finance costs, dep'n

0.0

0.0

0.0

0.0

0.0

Operating Profit

67.6

100.7

70.7

168.6

203.8

Net Interest

(25.4)

(35.8)

(33.9)

(39.0)

(42.0)

Exceptional finance items

(6.3)

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

129.9

124.2

160.0

192.0

214.2

Profit Before Tax (FRS 3)

35.9

64.9

36.8

129.6

161.8

Tax (reported)

(12.3)

3.9

(21.5)

(28.5)

(35.6)

Tax (adjustment for normalised earnings)

(14.8)

(28.5)

(13.7)

(20.4)

(16.9)

Profit After Tax (before non-controlling interests) (norm)

102.8

99.6

124.8

143.1

161.7

Profit After Tax (before non-controlling interests) (FRS3)

23.6

68.8

15.3

101.1

126.2

Non-controlling interests

(11.9)

(14.9)

(3.6)

(9.0)

(9.3)

Average Number of Shares Outstanding (m)

432.7

447.6

473.6

515.7

558.0

EPS - normalised, fully diluted (p)

20.0

19.3

25.0

26.0

27.3

EPS - FRS 3 (p)

2.7

12.4

2.5

18.2

21.4

Dividend per share (p)

1.3

1.4

1.5

1.6

1.8

Gross Margin (%)

24.0

28.9

34.4

34.0

34.0

EBITDA Margin (%)

14.8

15.9

21.0

20.4

20.8

Operating Margin (before GW and except) (%)

14.3

15.5

20.6

20.1

20.5

BALANCE SHEET

Non-current Assets

1,019.0

953.1

975.4

1,209.4

1,221.4

Intangible Assets (incl Investment in programmes)

909.9

830.2

876.9

1,109.6

1,120.4

Tangible Assets

72.8

87.6

59.8

60.8

61.5

Deferred tax/Investments

36.3

35.3

38.7

39.0

39.5

Current Assets

884.1

851.6

933.4

917.5

979.5

Stocks

48.6

39.6

11.7

11.7

11.7

Investment in content rights

265.5

248.0

254.0

247.7

248.3

Debtors

436.6

444.8

553.3

608.1

668.5

Cash

133.4

119.2

114.4

50.0

51.0

Current Liabilities

(726.8)

(615.3)

(636.2)

(697.3)

(655.3)

Creditors

(726.3)

(614.9)

(635.3)

(645.3)

(655.3)

Short term borrowings

(0.5)

(0.4)

(0.9)

(52.0)

0.0

Long Term Liabilities

(456.9)

(523.3)

(557.9)

(654.6)

(590.8)

Long term borrowings

(276.6)

(375.2)

(399.2)

(606.1)

(542.3)

Other long term liabilities

(180.3)

(148.1)

(158.7)

(48.5)

(48.5)

Net Assets

719.4

666.1

714.7

775.0

954.7

CASH FLOW

Operating Cash Flow

276.7

471.6

430.6

521.5

770.5

Net Interest

(24.3)

(26.9)

(37.3)

(39.0)

(42.0)

Tax

(18.4)

(32.5)

(25.8)

(28.5)

(35.6)

Capex

(3.5)

(3.2)

(5.0)

(5.0)

(4.0)

Acquisitions/disposals

(9.6)

(118.5)

(11.7)

(178.8)

0.0

Investment in content rights and TV programmes

(181.3)

(437.4)

(380.6)

(553.0)

(608.0)

Proceeds on issue of shares

(19.2)

52.0

0.1

137.3

0.0

Dividends

(8.3)

(13.0)

(13.4)

(14.7)

(16.2)

Net Cash Flow

12.1

(107.9)

(43.1)

(160.2)

64.7

Opening net debt/(cash)

298.8

338.8

433.2

481.6

641.8

Movements in exchangeable notes

0.0

14.5

0.0

0.0

0.0

Other including forex

(52.1)

(1.0)

(5.3)

0.0

(0.0)

Closing net debt/(cash)

338.8

433.2

481.6

641.8

577.1

ANALYSIS OF NET DEBT

Production finance

196.0

176.8

195.9

271.1

267.5

Net debt

142.8

256.4

285.7

370.8

309.6

Gearing

0.9

1.6

1.4

1.6

1.2

Source: Company accounts, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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