making a splash

Entertainment One 2 March 2016 Update

Entertainment One

Peppa making a splash

Trading update

Media

2 March 2016

Price

149.9p

Market cap

£499m

Adjusted net debt (£m) at December 2015, excluding production finance

209

Shares in issue

333.2m

Free float

68%

Code

ETO

Primary exchange

LSE (FTSE 250)

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

(3.4)

(30.2)

(43.1)

Rel (local)

(6.2)

(26.9)

(36.2)

52-week high/low

326.3p

130.0p

Business description

Entertainment One is a leading international entertainment company that sources, selects and sells films and television content. Its library contains over 40,000 film and TV titles, 4,500 half-hours of TV programming and 45,000 music tracks.

Next event

Full year results

April 2016

Analysts

Bridie Barrett

+44 (0)20 3077 5700

Jane Anscombe

+44 (0)20 3077 5740

Entertainment One is a research client of Edison Investment Research Limited

Entertainment One’s (eOne’s) positive trading update points to a building pipeline in TV and continued strong development of the Peppa Pig franchise. The film release slate is improving and margins will be supported by a restructuring of the division, which targets £10m of savings by FY18. We see considerable upside potential from the shares, which have been under pressure over the last six months following a dilutive rights issue and refinancing and persistent weakness in Film.

Year end

Revenue (£m)

EBITDA (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/15

785.8

107.3

88.8

20.8

1.1

7.2

0.7

03/16e

815.0

129.5

104.0

19.4

1.2

7.7

0.8

03/17e

912.5

150.0

119.8

19.1

1.3

7.9

0.9

03/18e

979.0

173.1

143.7

23.1

1.4

6.5

0.9

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

Television and Family remain strong

For the nine months to December 2015, revenues decreased 3% and EBITDA was up 15%, broadly as expected. Television and Family revenue grew 39% while Film was down 14%, affected by a weaker release slate over the last couple of years. In Family, the Peppa Pig franchise continues to experience very strong growth, particularly in the US where retail sales increased by c 275% in 2015. Television delivered c 60% more half-hours of content y-o-y. Adjusted net debt was £209m and is expected to fall further to c £180m by the year end.

Positive outlook, supported by Film restructuring

Management expects FY16 earnings and free cash flow to be in line with consensus estimates and has a confident outlook for the year ahead. The prospects for Peppa Pig remain strong both in the US and across Asia and Television has an excellent and expanding pipeline. With a stronger release slate penned in Film, the year ahead should also be better and management’s planned restructuring will support margins longer term, aiming to generate annualised savings of £10m by FY18. We are altering the mix of our forecasts, increasing investment in content and revenues and skewing EBITDA more towards Television and Family. We make little change overall to EBITDA, although we trim EPS slightly next year for a higher interest charge and minority interests.

Valuation: Stronger growth profile not captured

Following recent acquisitions and last year’s financing, the balance and structure of the group is stronger and the growth profile looks more secure; the higher growth divisions now contribute more than half of pro-forma EBITDA and the group looks on track to deliver on its strategy to double EBITDA by 2020. With a forecast year-end gearing ratio of 1.4x EBITDA, eOne has the financial flexibility to continue to execute on its buy-and-build strategy. The shares are on a FY17 P/E of 7.9x, offering good value compared to peers and an attractive entry point into a balanced global content group.

Trading update highlights

Family – Peppa Pig makes a splash over the pond

Following the acquisition of a further 35% in ABD group in October 2015, eOne now has full control of the growing Peppa Pig franchise and we forecast the Family division to account for c 36% of FY16 pro-forma EBITDA. As highlighted in our December 2015 report A balanced content portfolio, we believe there is a considerable growth opportunity in the Peppa brand, which, while maturing in the UK, is at a fairly early stage of exploitation in many of the world’s other largest toy markets. Over the last year the merchandising offer has been ramped up in the US, which has seen particularly strong performance with retail sales increasing by 275% in 2015. Management indicates the opportunity in the US remains significant in the year ahead and also expects a strong performance from the markets in South East Asia and China. We are also encouraged by the strong showing of Family’s newer programme PJ Masks, which is one of the top three shows on Disney Junior in the US and number one in France. Like Ben and Holly’s Little Kingdom, this brand is fairly small but shows promise and is being rolled out in other markets with first merchandising deals organised.

Television – very strong pipeline

eOne’s Television pipeline looks very promising. In the first nine months of the year, it has purchased and increased the number of half-hours of content produced or acquired by c 60% to 679, from 421, and expects to reach its target of 1,000 half-hours (excluding Mark Gordon’s productions) in the full year.

The pipeline from Mark Gordon is developing well. From 30 in September 2015, it now has over 50 active television projects in development, and its first production under joint ownership (where eOne leads the international sales), Designated Survivor starring Kiefer Sutherland, has been commissioned straight to series by the ABC network with production starting in the coming weeks. ABC has also ordered a pilot of an MGC legal drama, Conviction. To fund this development, the MGC will be using interim production financing (IPF). IPF is an efficient way to fund television production and is common practice in the industry.

At its recent television sales event in London, eOne previewed some of its new programming including its new comedy You Me Her (for AT&T and DirecTV’s Audience Network and HBO Canada), drama Private Eyes (CTV, Canada), thriller Cardinal and family drama and thriller Designated Survivor to name a few. This preview event was the first of its kind for eOne and the scale of the event is in itself evidence of the significantly larger television pipeline. The international flavour of the productions was also notable, with many scripts and sets conceived from the outset to appeal to both US and international audiences.

Film – restructuring to generate £10m of annualised savings

The market for independent films was particularly difficult in 2015 owing to an unprecedentedly strong slate from the majors, with a number of tent-pole films released including Star Wars, Spectre and Jurassic World. In FY15, eOne released 157 films to cinema (191 in 2014) and 427 films to DVD (vs 528). Fewer releases and the underperformance of some titles were the main drivers of the 14% reduction in revenues for the nine months to December 2015. We expect some improvement in Q416, which includes the release of The Divergent sequels, Allegiant and London has Fallen, double Oscar winner Spotlight, and an ongoing improvement of the release slate over the coming year. At its interim 2016 results, management suggested it would have “the best theatrical film slate in its history”. Since then it has entered into two strategic relationships, in line with its strategy to partner to bring in the best content and production skills. In December 2015, it announced it has expanded partnership with Steven Spielberg, Participant Media and Reliance Entertainment via the Amblin Partners venture (refer to our December report eOne partners with Spielberg’s Amblin for more detail). eOne will handle the distribution of Amblin’s films in its five territories – titles slated from this venture in FY17 include The BFG (directed by Spielberg) and adaptations of novels The Light Between Oceans and The Girl on the Train. During December, it also made an investment in Sierra Pictures, whereby Sierra will handle all of eOne’s international film sales outside eOne’s territories, and will gain access to Sierra’s titles in its direct markets. Sierra is a US independent producer and distributor (recent co-productions include The DUFF, Triple 9 and Age of Adaline).

In addition, eOne has announced a restructuring of its Film division, which it expects to yield £10m of annualised savings by the end of FY18 (representing 1.5-2% of Film division revenues), initially driven by a streamlining of its DVD and Blu-ray activities through a partnership with 20th Century Fox and via the outsourcing of its international sales activities as outlined above.

Forecasts: Changes to the mix

Following the recent deals with Sierra and Amblin, we are increasing our FY16 forecast adjusted net debt by £20m and now expect year-end adjusted net debt (excluding production debt) of £180m, roughly in line with management’s expectation of an FY16 year-end gearing ratio of 1.4x EBITDA.

Given the new partnerships, the strengthening pipeline in Television and a seemingly better Q416 box office performance, we think the outlook for the top line has improved. We are increasing our forecast revenues and consequently our forecasts for investment in content (and interim production finance). We have also changed the mix of our EBITDA forecasts, but make little change overall in FY16 and FY17 as we understand the newer partnerships are lower margin, and a larger theatrical slate will mean lower margins given the upfront nature of P&A costs. In FY18 we factor in £7m of restructuring savings (we forecast an exceptional restructuring charge of £5m in FY17). Our higher net debt forecast means these changes are amplified at the EPS level.

Exhibit 1: Summary forecast changes

2016e

2017e

2018e

Previous

New

Change

Previous

New

Change

Previous

New

Change

Revenues (£m)

765.0

815.0

6.5%

839.2

912.5

8.7%

905.8

979.0

8.1%

EBITDA (£m)

129.5

129.5

0.0%

153.8

150.0

-2.5%

169.1

173.1

2.4%

EPS (p)

19.8

19.4

-1.9%

20.5

19.1

-6.9%

23.1

23.1

0.1%

Adjusted net debt (£m)

159.5

180.1

12.9%

128.9

145.1

12.6%

71.9

72.4

0.7%

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2014

2015

2016e

2017e

2018e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

823.0

785.8

815.0

912.5

979.0

Cost of Sales

(642.3)

(578.0)

(619.4)

(693.5)

(744.1)

Gross Profit

180.7

207.8

195.6

219.0

235.0

EBITDA

92.8

107.3

129.5

150.0

173.1

Operating Profit

90.2

103.6

124.0

144.0

166.6

Amortisation of intangibles

(36.0)

(22.2)

(25.0)

(25.0)

(25.0)

Exceptional items

(22.1)

(17.9)

(15.0)

(5.0)

0.0

Share based payment charge

(2.7)

(3.4)

(4.0)

(4.0)

(4.0)

JV tax, finance costs, dep'n

0.0

0.1

(2.1)

0.0

0.0

Operating Profit

29.4

60.2

77.9

110.0

137.6

Net Interest

(11.8)

(14.8)

(20.0)

(24.1)

(22.9)

Exceptional finance items

3.9

(1.4)

0.0

0.0

0.0

Profit Before Tax (norm)

78.4

88.8

104.0

119.8

143.7

Profit Before Tax (FRS 3)

21.5

43.9

60.0

85.8

114.7

Tax (reported)

(1.5)

(2.7)

(11.6)

(17.2)

(22.9)

Tax (adjustment for normalised earnings)

(18.4)

(16.8)

(11.8)

(9.8)

(9.4)

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

58.5

69.3

80.6

92.9

111.4

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

20.0

41.2

48.4

68.7

91.8

Non-controlling interests

0.0

0.0

(7.3)

(11.4)

(12.1)

Average Number of Shares, Diluted (m)

318.7

333.4

377.3

427.3

429.4

EPS - normalised (p)

18.4

20.8

19.4

19.1

23.1

EPS - FRS 3 (p)

5.5

11.0

10.5

13.6

18.8

Dividend per share (p)

1.0

1.1

1.2

1.3

1.4

Gross Margin (%)

22.0

26.4

24.0

24.0

24.0

EBITDA Margin (%)

11.3

13.7

15.9

16.4

17.7

Operating Margin (before GW and except) (%)

11.0

13.2

15.2

15.8

17.0

BALANCE SHEET

Non-current Assets

366.0

538.4

734.6

771.4

779.5

Intangible Assets (incl Investment in programmes)

343.1

473.9

580.9

620.7

632.3

Tangible Assets

5.5

6.1

54.9

57.8

60.7

Deferred tax/Investments

17.4

58.4

98.8

93.0

86.5

Current Assets

559.9

634.3

578.4

665.7

740.9

Stocks

47.2

52.0

52.0

52.0

52.0

Investment in content rights

230.1

221.1

211.1

232.1

232.1

Debtors

243.7

289.9

300.3

361.6

406.8

Cash

38.9

71.3

15.0

20.0

50.0

Current Liabilities

(449.2)

(488.3)

(484.8)

(517.5)

(520.1)

Creditors

(401.1)

(398.7)

(395.2)

(427.9)

(430.5)

Short term borrowings

(48.1)

(89.6)

(89.6)

(89.6)

(89.6)

Long Term Liabilities

(168.6)

(319.6)

(247.2)

(277.2)

(274.5)

Long term borrowings

(155.9)

(295.9)

(223.5)

(253.5)

(250.8)

Other long term liabilities

(12.7)

(23.7)

(23.7)

(23.7)

(23.7)

Net Assets

308.1

364.8

581.1

642.5

725.8

CASH FLOW

Operating Cash Flow

264.2

271.9

309.5

430.6

513.9

Net Interest

(10.7)

(13.4)

(20.0)

(24.1)

(22.9)

Tax

(5.9)

(10.8)

(11.6)

(17.2)

(22.9)

Capex

(4.2)

(4.8)

(8.5)

(8.9)

(9.4)

Acquisitions/disposals

(6.1)

(104.3)

(173.0)

0.0

0.0

Investment in content rights and TV programmes

(281.4)

(280.8)

(270.0)

(400.0)

(420.0)

Proceeds on issue of shares

0.0

0.0

193.0

0.0

0.0

Dividends

0.0

(2.9)

(3.3)

(5.3)

(6.0)

Net Cash Flow

(44.1)

(145.1)

16.1

(25.0)

32.7

Opening net debt/(cash)

144.5

165.1

314.2

298.1

323.1

Movements in exchangeable notes

0.0

0.0

0.0

0.0

0.0

Other including forex

23.5

(4.0)

0.0

0.0

0.0

Closing net debt/(cash)

165.1

314.2

298.1

323.1

290.4

ANALYSIS OF NET DEBT

Total debt

165.1

314.2

298.1

323.1

290.4

Net production finance

54.0

89.3

118.0

178.0

218.0

Adjusted net debt

111.1

224.9

180.1

145.1

72.4

Source: Historics – company accounts, Forecasts Edison

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Germany

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United Kingdom

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245 Park Avenue, 39th Floor

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