Building content for a changing landscape
The CMD presentations were built around the newly reconfigured segments, with Music (which is reported as part of FTD) given its own slot. No new financial information was disclosed and there is no change to our forecasts, which are consistent with the company’s guidance of the group doubling EBITDA over the course of FY15-20, on 10-15% organic revenue growth.
All three elements of the presentation emphasised the migration to a content-led strategy, with ownership of global rights giving the group the flexibility to sell or license to the most appropriate buyer territory by territory.
Film, Television & Digital (FTD): Moving to pure content
Steve Bertram, President, FTD, quoted the head of content licensing at an undisclosed tech platform (therefore one of Facebook, Apple, Amazon, Netflix or Google) as saying: “We definitely worry about a future, a future world that’s vertically integrated, where access to content is limited, particularly with Disney and Fox off the table and Comcast expected to follow soon”. The sheer scale of these platforms, which are both customers of traditional media and its competitors, is driving demand for content – particularly premium content, although each platform has a different approach. Apple’s ethos is that content should appear in context on the large screens in an Apple store, aggregating content owned by others; Facebook is experimenting with different concepts that are relevant to the conversations it has with its users; Netflix is generating its own content as well as buying in, planning to release 700 original series, films and specials in 2018.
The engine behind the growth is the rapid share gains of SVOD (streaming video on demand), growing at a reported 20% CAGR. The competition between the platforms is driving the requirement for premium content and, despite the proliferation of non-linear distribution channels, there is still a tendency for the audiences to gravitate towards particular hits such as Grey’s Anatomy or Game of Thrones. This is driving a trend to high production values, with some series budgets as high as £10-15m per episode. The real underlying competition is to grab and maintain audience attention.
eOne’s business model means it is not tied to any one channel, network or platform and can sell to whichever partner provides the most advantageous opportunity. It cited recent high-profile commissions including:
■
Designated Survivor (now with Netflix, which had the international distribution rights when previous series were originally with ABC; reconfigured for its new home in conjunction with Kiefer Sutherland);
■
Nutcracker and the Four Realms (developed in-house then taken and sold to Disney); and
The presence of such a highly regarded industry figure as Mark Gordon (President & Chief Content Officer, FTD) as a ‘hands-on’ chief content officer is clearly a draw for other talent, particularly for those who might feel constrained at more traditional studios and content providers.
Music: Eclectic and global
Music is the area of the business most likely to be overlooked, being reported within FTD, but which has nevertheless been growing strongly and represents US$66m of FY18 gross revenue (5% of group) and US$8.3m of EBITDA (4% group). Chris Taylor, Global President, Music, described how it derives its income from four strands: records (including streaming), publishing, artist management and live events, with a broad range of genres covered, from rap to heavy metal.
The key to driving continuing growth here (in line with guidance for the group at 10-15% CAGR) is signing up high-quality talent across those genres. eOne should gain from not imposing the artistic constraints often imposed by the major labels on one side and by having the in-house expertise and established routes to market globally that an indie may struggle with. Artists may also be attracted by cross-pollination opportunities across the group. Examples cited included ICE (Season 2), where 28 eOne songs were used, and PJ Masks, where the music for the live tour was produced and published in house. The group’s extensive video capabilities are also an attraction, such as producing documentaries about artists to help drive audience engagement and hence other income streams.
Family & Brands: Growing the core brands
Olivier Dumont, President, Family & Brands, identified the key issues facing family entertainment and brand licensing companies currently as including:
■
The squeeze on shelf space with retail retrenchment, particularly the failure of Toys R Us, which led to a 9% reduction in the US toy market in July.
■
Discoverability in face of the proliferation of distribution channels.
■
Sensitivity to the use of data in relation to children/GDPR.
■
Counterfeiting in merchandise.
There are also key positive trends:
■
The SVOD companies spending heavily on children’s content.
■
The opening up of the Chinese market, with 70 million pre-school children (16 million in the US).
■
Video and brands driving engagement on social media.
■
New consumer tech, such as home speakers.
eOne has chosen to focus its efforts on driving a small number of key brands, while keeping tight control over the number and quality of licences to avoid over-exposure. This gives a lower-risk option to nervous retailers. For the networks and SVODs, there are also advantages to sticking with known properties and this is part of the reason for the longevity of Peppa Pig, which now has a slate of 256 five-minute episodes and three 15-minute specials, with 117 more five-minute episodes in production. PJ Masks has also been racking up, with two series totalling 104 x 11-minute episodes with Series 3 (52 episodes, cost £8.2m) in production and Series 4 in development. Series 3 will be broadcast by Disney and Channel 5 in Q419.
Ricky Zoom has Series 1 in production (52 x 11 minutes, at a cost of £8.1m) plus Series 2 in development. Both PJ Masks and Ricky Zoom are being produced in France, where significant subsidies are available (35-40%) and will be broadcast in Q219. The location of production is directed towards those places where the most advantageous support is offered.
As well as the linear broadcast and the digital opportunities (VOD, games, apps), the brands are monetised through retail, live events and publishing. For Peppa Pig, the group has a global relationship with Merlin Entertainments for standalone attractions, standalone theme parks and for themed areas within other Merlin attractions. This is planned to extend to Shanghai and Beijing in 2019, taking advantage of the rapid build of awareness in China. On the merchandising front, eOne has an agreement with Alibaba on counterfeit goods, which has ensured that over 95% of branded product sold is genuine. PJ Masks will also start to be broadcast on terrestrial TV this month, with merchandising being launched later in the year.
Traditional broadcasters remain attractive partners for their ability to promote brands, but each territory is evaluated to determine the most appropriate partner. The same goes for the licensing partners/toy manufacturers.
Our numbers as per the new segmentation were set out in our May update, repeated here:
Exhibit 1: KPI history and forecast
KPI summary |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
FTD - investment in acquired content (£m) |
165.9 |
119.9 |
180.5 |
150.7 |
145.0 |
130.0 |
FTD - investment in productions (£m) |
113.0 |
92.8 |
222.3 |
290.0 |
384.0 |
446.0 |
Family - investment in content & production (£m) |
1.9 |
5.8 |
5.3 |
9.6 |
13.5 |
15.0 |
Total content and production investment (£m) |
280.8 |
218.5 |
408.1 |
450.3 |
542.5 |
591.0 |
% budget invested in in own productions |
40% |
42% |
54% |
64% |
71% |
71% |
Half hours produced/ acquired (Television) |
752 |
998 |
1023 |
939 |
> 1,000* |
|
No. theatrical releases (Film) |
227 |
210 |
172 |
144 |
140* |
|
Box office ($m) |
308 |
259 |
337 |
208 |
|
|
Family licences |
600 |
847 |
1083 |
1500 |
2000* |
|
Family retail sales ($bn) |
1.0 |
1.1 |
1.5 |
2.4 |
|
|
% TV pipeline green lit at start of financial year |
N/A |
N/A |
61% |
60% |
40% |
|
Library valuation ($bn) |
0.8 |
1.5 |
1.7 |
|
|
|
Revenues (£m) |
|
|
|
|
|
|
FTD |
729 |
741.2 |
996.8 |
911.9 |
1,060.0 |
1,190.0 |
Growth |
|
2% |
34% |
-9% |
16% |
12% |
Family |
60.8 |
66.6 |
88.6 |
138.6 |
158.6 |
174.5 |
Growth |
|
10% |
33% |
56% |
14% |
10% |
Inter company |
-4 |
-5 |
-3 |
-6 |
-10 |
-11 |
Group revenues |
785.8 |
802.7 |
1082.7 |
1044.5 |
1208.6 |
1353.3 |
Revenue growth |
|
2% |
35% |
-4% |
16% |
12% |
EBITDA (£m) |
|
|
|
|
|
|
FTD EBITDA |
90.9 |
92 |
115.5 |
107.1 |
115.5 |
133.9 |
FTD EBITDA margin |
12.5% |
12.4% |
11.6% |
11.7% |
10.9% |
11.3% |
Family EBITDA |
23.8 |
43.3 |
55.6 |
82.3 |
90.4 |
95.1 |
Family EBITDA margin |
39.1% |
65.0% |
62.8% |
59.4% |
57.0% |
54.5% |
Intercompany eliminations |
-7.4 |
-6.2 |
-10.9 |
-12.1 |
-12.5 |
-14.0 |
Group EBITDA |
107.3 |
129.1 |
160.2 |
177.3 |
193.4 |
215.0 |
Group EBITDA margin |
13.7% |
16.1% |
14.8% |
17.0% |
16.0% |
15.9% |
Source: eOne, Edison Investment Research. Note: *Company plan.
We have separated out the FTD and Family valuations for our peer-based valuation. This shows a valuation of £4.30 based on FY19e, around 10% ahead of the current market price (£3.77 at the time or our last note in May). Further news on commissioning should act as a catalyst for upgrades, moving this target ahead.
Exhibit 2: Peer multiple valuation
£m |
2018 |
2019e |
2020e |
FTD – EBITDA |
107 |
116 |
134 |
Family – EBITDA |
82 |
90 |
95 |
Group costs and depreciation |
(16) |
(17) |
(19) |
Multiples: |
|
|
|
Entertainment multiple (x) |
18.2 |
12.6 |
11.2 |
Family multiple (x) |
16.8 |
13.7 |
12.5 |
FTD EV |
1950 |
1461 |
1496 |
Family EV |
1380 |
1241 |
1189 |
Group costs |
-275 |
-224 |
-225 |
Total EV |
3056 |
2478 |
2461 |
Minorities |
-214 |
-173 |
-172 |
corporate debt |
315 |
315 |
274 |
Group equity |
2527 |
1990 |
2015 |
shares in issue (m) |
460.7 |
462.9 |
465.1 |
Implied value per share (£) |
5.49 |
4.30 |
4.33 |
Implied value if PF is also treated as debt (£) |
5.24 |
4.05 |
4.08 |
Source: Edison, Bloomberg. Note: Prices at 14 September 2018.
Exhibit 3: Financial summary
|
|
£m |
2016 |
2017 |
2018 |
2019e |
2020e |
Year end 31 March |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
|
|
802.7 |
1,082.7 |
1,044.5 |
1,208.6 |
1,353.3 |
Cost of Sales |
|
|
(610.1) |
(822.9) |
(793.8) |
(918.5) |
(1,028.5) |
Gross Profit |
|
|
192.6 |
259.8 |
250.7 |
290.1 |
324.8 |
EBITDA |
|
|
129.1 |
160.2 |
177.3 |
193.4 |
215.0 |
Operating Profit |
|
|
124.7 |
155.3 |
173.7 |
188.9 |
210.0 |
Amortisation of intangibles |
|
|
(27.4) |
(41.9) |
(39.6) |
(37.0) |
(37.0) |
Exceptional items |
|
|
(16.6) |
(40.8) |
(7.1) |
(7.0) |
0.0 |
Share based payment charge |
|
|
(5.7) |
(5.0) |
(12.6) |
(13.5) |
(14.0) |
JV tax, finance costs, dep'n |
|
|
(1.6) |
0.0 |
0.0 |
0.0 |
0.0 |
Operating Profit |
|
|
73.4 |
67.6 |
114.4 |
131.4 |
159.0 |
Net Interest |
|
|
(20.6) |
(25.4) |
(29.3) |
(34.0) |
(32.9) |
Exceptional finance items |
|
|
(6.5) |
(6.3) |
(7.5) |
0.0 |
0.0 |
Profit Before Tax (norm) |
|
|
104.1 |
129.9 |
144.4 |
154.9 |
177.0 |
Profit Before Tax (FRS 3) |
|
|
47.9 |
35.9 |
77.6 |
97.4 |
126.0 |
Tax (reported) |
|
|
(7.7) |
(12.3) |
0.6 |
(22.4) |
(29.0) |
Tax (adjustment for normalised earnings) |
|
|
(16.8) |
(14.8) |
(28.5) |
(8.6) |
(6.4) |
Profit After Tax (before non-controlling interests) (norm) |
79.6 |
102.8 |
116.5 |
123.9 |
141.6 |
Profit After Tax (before non-controlling interests) (FRS3) |
40.2 |
23.6 |
78.2 |
75.0 |
97.1 |
Non-controlling interests |
|
|
(3.7) |
(11.9) |
(13.7) |
(10.5) |
(11.5) |
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
|
379.8 |
432.7 |
447.6 |
480.9 |
486.3 |
EPS - normalised (p) |
|
|
19.4 |
20.0 |
21.9 |
23.6 |
26.8 |
EPS - FRS 3 (p) |
|
|
9.8 |
2.7 |
14.8 |
13.9 |
18.2 |
Dividend per share (p) |
|
|
1.2 |
1.3 |
1.4 |
1.5 |
1.6 |
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
24.0 |
24.0 |
24.0 |
24.0 |
24.0 |
EBITDA Margin (%) |
|
|
16.1 |
14.8 |
17.0 |
16.0 |
15.9 |
Operating Margin (before GW and except) (%) |
|
15.5 |
14.3 |
16.6 |
15.6 |
15.5 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
Non-current Assets |
|
|
890.7 |
972.7 |
936.9 |
977.0 |
964.3 |
Intangible Assets (incl Investment in programmes) |
|
808.2 |
870.6 |
805.4 |
855.5 |
854.3 |
Tangible Assets |
|
|
60.1 |
72.8 |
104.3 |
104.8 |
104.8 |
Deferred tax/Investments |
|
|
22.4 |
29.3 |
27.2 |
16.7 |
5.2 |
Current Assets |
|
|
752.0 |
928.3 |
899.1 |
924.1 |
942.6 |
Stocks |
|
|
51.1 |
48.6 |
39.6 |
39.6 |
39.6 |
Investment in content rights |
|
|
241.3 |
269.8 |
253.4 |
262.6 |
266.1 |
Debtors |
|
|
351.3 |
476.5 |
486.9 |
546.9 |
586.9 |
Cash |
|
|
108.3 |
133.4 |
119.2 |
75.0 |
50.0 |
Current Liabilities |
|
|
(568.7) |
(679.4) |
(691.5) |
(697.0) |
(707.0) |
Creditors |
|
|
(470.7) |
(574.6) |
(514.7) |
(520.2) |
(530.2) |
Short term borrowings |
|
|
(98.0) |
(104.8) |
(176.8) |
(176.8) |
(176.8) |
Long Term Liabilities |
|
|
(413.6) |
(464.6) |
(438.7) |
(434.5) |
(346.5) |
Long term borrowings |
|
|
(309.1) |
(368.3) |
(375.6) |
(371.4) |
(283.4) |
Other long term liabilities |
|
|
(104.5) |
(96.3) |
(63.1) |
(63.1) |
(63.1) |
Net Assets |
|
|
660.4 |
757.0 |
705.8 |
769.5 |
853.4 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
298.8 |
425.3 |
470.9 |
587.7 |
725.6 |
Net Interest |
|
|
(10.3) |
(24.3) |
(26.2) |
(34.0) |
(32.9) |
Tax |
|
|
(17.7) |
(18.4) |
(32.5) |
(26.9) |
(29.0) |
Capex |
|
|
(8.6) |
(3.5) |
(3.2) |
(5.0) |
(5.0) |
Acquisitions/disposals |
|
|
(226.0) |
(9.6) |
(118.5) |
(5.0) |
0.0 |
Investment in content rights and TV programmes |
|
(218.5) |
(373.6) |
(437.4) |
(542.5) |
(580.0) |
Proceeds on issue of shares |
|
|
194.5 |
(19.2) |
52.0 |
0.0 |
0.0 |
Dividends |
|
|
(4.0) |
(8.3) |
(13.0) |
(14.3) |
(15.7) |
Net Cash Flow |
|
|
8.2 |
(31.7) |
(107.9) |
(40.0) |
63.0 |
Opening net debt/(cash) |
|
|
314.2 |
299.7 |
339.7 |
433.2 |
473.2 |
Movements in exchangeable notes |
|
|
0.0 |
0.0 |
14.5 |
0.0 |
0.0 |
Other including forex |
|
|
6.3 |
(8.3) |
(0.1) |
0.0 |
0.0 |
Closing IFRS debt/(cash) |
|
|
299.7 |
339.7 |
433.2 |
473.2 |
410.2 |
ANALYSIS OF NET DEBT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production finance |
|
|
118.0 |
152.3 |
118.7 |
148.8 |
136.6 |
Net debt |
|
|
181.7 |
187.4 |
314.5 |
324.5 |
273.6 |
Gearing |
|
|
1.4 |
1.2 |
1.8 |
1.7 |
1.3 |
Source: Company accounts, Edison Investment Research
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