Mark Gordon’s content

Entertainment One 31 July 2019 Update
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Entertainment One

Mark Gordon’s content

Key management retained

Media

31 July 2019

Price

445.2p

Market cap

£2,212m

£1:$1.23

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

433.2

Shares in issue

496.9m

Free float

95.4%

Code

ETO

Primary exchange

LSE (FTSE 250)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.0

(6.7)

23.6

Rel (local)

9.1

(8.9)

25.6

52-week high/low

483.4p

336.4p

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 events

Trading update

Late September 2019

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 (ETO) has reached a multi-year production agreement with Mark Gordon to develop and produce content. The continuing alignment of his efforts with the group’s objectives is good news and removes any residual uncertainty post last month’s press stories. We have now updated our forecasts for the bond refinancing; the reduction in forecast interest costs results in uplifts to PBT and EPS for FY20e and FY21e of 4–5%. ETO is currently trading at a discount of around 7% to peers, based on our sum-of-the-parts valuation.

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DIV

(p)

P/E
(x)

Yield
(%)

03/18

1,029

163.6

124.2

19.3

1.4

23.1

0.3

03/19

941

197.6

160.0

25.0

1.5

17.8

0.3

03/20e

1,150

235.0

198.9

27.0

1.6

16.5

0.4

03/21e

1,250

260.5

225.2

28.8

1.8

15.5

0.4

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

Mark Gordon focused on his key strength

Mark Gordon was appointed president and chief content officer, Film, Television and Music at the time of eOne’s purchase of the 49% minority stake in his eponymous company in January 2018. In June this year, there was trade press speculation that he was leaving the group, which was quickly denied. The new arrangement means that he will focus his time on developing and producing content ie the core talent that built his reputation, rather than on administrative and managerial aspects. Steve Bertram, eOne's president of Film and Television, takes these over, working with Peter Micelli, chief strategy officer, Film and Television and Nick Meyer, president, Film. The new multi-year deal ties in future premium content from the Gordon stable and cements eOne’s royalty deals from heritage series from The Mark Gordon Company, such as Grey’s Anatomy and Criminal Minds.

Bond refinancing reduces interest cost

In June 2019, eOne launched a new offering of £425m of senior secured notes out to 2026, to redeem its existing notes due in 2022 and repay the £52m term loan that part-financed the acquisition of Audio Networks in April 2019. The coupon on the new notes of 4.625% is considerably lower than that on the old notes (6.875%) and we have adjusted our forecasts to take this into account. FY20e PBT and EPS increase by 4%, while FY21e PBT and EPS rise by 5%. This is the only change to our numbers at this stage.

Valuation: Discount to peers

eOne’s share price has recovered from the setback around the time of the final results in June, when it briefly retrenched to 350p. Over the last 12 months, the share price has risen 23% as the content-based strategy has been better understood by the market. Our updated sum-of-the-parts analysis, based on EV/EBITDA averaged over FY20 and FY21e, implies a valuation of 476p/share (close to the 475p/share at the time of our last note in May), implying an unwarranted discount to peers of around 7%.

Exhibit 1: 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)

(32.1)

(31.0)

Exceptional finance items

(6.3)

0.0

0.0

(16.0)

0.0

Profit Before Tax (norm)

129.9

124.2

160.0

198.9

225.2

Profit Before Tax (FRS 3)

35.9

64.9

36.8

120.5

172.8

Tax (reported)

(12.3)

3.9

(21.5)

(26.5)

(38.0)

Tax (adjustment for normalised earnings)

(14.8)

(28.5)

(13.7)

(24.2)

(17.2)

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

102.8

99.6

124.8

148.2

170.0

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

23.6

68.8

15.3

94.0

134.8

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

515.6

557.7

EPS - normalised fuly diluted (p)

20.0

19.3

25.0

27.0

28.8

EPS - FRS 3 (p)

2.7

12.4

2.5

16.8

22.9

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)

(675.0)

(602.7)

Long term borrowings

(276.6)

(375.2)

(399.2)

(626.5)

(554.2)

Other long term liabilities

(180.3)

(148.1)

(158.7)

(48.5)

(48.5)

Net Assets

719.4

666.1

714.7

754.6

942.9

CASH FLOW

Operating Cash Flow

276.7

471.6

430.6

492.2

770.5

Net Interest

(24.3)

(26.9)

(37.3)

(32.1)

(31.0)

Tax

(18.4)

(32.5)

(25.8)

(26.5)

(38.0)

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)

(180.6)

73.3

Opening net debt/(cash)

298.8

338.8

433.2

481.6

662.2

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

662.2

588.9

ANALYSIS OF NET DEBT

Production finance

196.0

176.8

195.9

264.1

260.5

Net debt

142.8

256.4

285.7

398.2

328.5

Gearing (x)

0.9

1.6

1.4

1.7

1.3

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Entertainment One and prepared and issued by Edison, in consideration of a fee payable by Entertainment One. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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

General disclaimer and copyright

This report has been commissioned by Entertainment One and prepared and issued by Edison, in consideration of a fee payable by Entertainment One. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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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