Results highlights: EBITDA growth driven by Family and Television
Revenue of £1,045m fell 4% year-on-year (y-o-y) (2% constant ccy) with a very strong performance from Family & Brands (+56%) and Television (+19%) mitigating declines in Film (-32%). While revenues were 3pp short of our forecasts due to a much weaker performance in Film, EBITDA of £177.3m was slightly ahead, increasing 11% y-o-y given the growth from higher-margin divisions. After absorbing a 15% increase in finance costs related to the 2016 refinancing (£29.3m), this growth flowed through to adjusted PBT at £144.4m and EPS of 21.9p, in line with forecasts.
Reported PBT of £77.6m includes share-based payments of £12.5m, a significant increase to FY17 (£5.0m) principally due to a higher award to the CEO, Darren Throop and the increase in the share price over 2017. It also includes one-off charges of £7.1m (FY17: £40.8m) relating largely to the re-shaping of the Film distribution business and £7.5m owing to adjustments to the fair value of financial instruments (£6.3m).
eOne invested £448m in content and productions, a 10% increase on the £408m invested in FY17 with the majority of the increase directed towards own productions: 64% of total investment. Overall, 40% of this was financed through production financing (which decreased to £118.7m at the year end), with the balance financed by eOne. The expanding production slate (£74m investment in content to amortisation gap) £21m working capital and catch up tax payments (£32m) weighed on corporate cash conversion, which decreased to 38% (FY17: 52%). Year-end net debt of £314.5m (1.8x EBITDA) was in line with our forecast and includes the £52m equity issue in March and £118m of acquisition payments for the balance of Mark Gordon Company (MGC). The board is proposing a full-year dividend of 1.4p per share, up 8% on FY17.
IFRS15 will primarily affect reporting in the Family & Brands division where the recognition of minimum guarantees will be spread over the life of the contract, rather than up front. Given the strong growth in licencing, in 2018 management indicate that this would have reduced revenues and EBITDA by £15.5m (to £1,029.0m) and £13.6m (to £163.7m) respectively. In FY19 the impact on underlying EBITDA is estimated at less than £2m as much of this unwinds.
Exhibit 1: Summary FY18 results
£m |
FY17 |
FY18e |
FY18a |
y-o-y change |
difference to forecast |
Television revenues |
452.7 |
498.0 |
539.0 |
19% |
8% |
Family revenues |
88.6 |
131.1 |
138.6 |
56% |
6% |
Film revenues |
594.2 |
507.0 |
402.2 |
(32%) |
(21%) |
Eliminations |
(52.8) |
(60.0) |
(35.3) |
(33%) |
(41%) |
Total revenues |
1,082.7 |
1,076.1 |
1,044.5 |
(4%) |
(3%) |
Television EBITDA |
62.8 |
65.2 |
72.0 |
15% |
10% |
Family EBITDA |
55.6 |
71.5 |
82.3 |
48% |
15% |
Film EBITDA |
52.7 |
50.0 |
35.1 |
(33%) |
(30%) |
Eliminations |
(10.9) |
(11.5) |
(12.1) |
11% |
5% |
Total EBITDA |
160.2 |
175.1 |
177.3 |
11% |
1% |
EBITDA margin |
14.8% |
16.3% |
17.0% |
15% |
4% |
PBT - adjusted |
129.9 |
145.7 |
144.4 |
11% |
(1%) |
PBT - reported |
35.9 |
85.6 |
77.6 |
116% |
(9%) |
EPS – adjusted (p) |
20.0 |
22.1 |
21.9 |
10% |
(1%) |
EPS – reported (p) |
2.7 |
11.6 |
14.4 |
433% |
24% |
Investment in content and productions |
408.1 |
473.0 |
444.6 |
9% |
(6%) |
Net debt |
187.5 |
300.2 |
314.5 |
68% |
5% |
IPF |
152.3 |
183.8 |
118.7 |
(22%) |
(35%) |
IFRS consolidated net debt |
339.8 |
484.0 |
429.8 |
26% |
(11%) |
Group gearing (x EBITDA) |
1.2 |
1.7 |
1.8 |
|
|
Source: eOne, Edison Investment Research
Family & Brands – excellent performance from PJ Masks and Peppa Pig: FY18 EBITDA increased 48%, with margins at 59.4% 3.4pp down on FY17 due to the very strong growth from PJ Masks, which has a higher royalty share included in gross margin, as well as infrastructure and brand management costs. Revenues from Peppa Pig (which accounts for c 65% of Family revenues) performed well across all categories, increasing by 21% overall. PJ Masks goes from strength to strength. Total retail sales were $1bn in 2017, not far short of the $1.3bn generated by Peppa Pig, and brand revenues increased 261% to £48.8m.
Television – strong year for drama: total investment in Television increased only modestly y-o-y and total half-hours of content delivered were down. However, the mix shifted towards higher-value scripted drama in the period and the delivery of some of the MGC projects in production last year, notably a higher volume of Designated Survivor and Youth & Consequences, resulted in a 15% increase in EBITDA to £72.0m.
Film – lower release volumes and restructuring: against a relatively strong comparison, which included the BFG and The Girl on the Train, Film division revenues decreased 32% and EBITDA 33%. Release volumes were down across all categories. Theatrical revenues decreased 41% with the number of titles released down to 85 (FY17: 102 individual releases). Lower volumes similarly affected sales within the home entertainment (-47%) and broadcast and digital categories (-25%) and production and international sales saw no production deliveries from Sierra in the period accounting for much of its 28% decline in revenues.
New segmental reporting: the acquisition in January of the final 49% of the MGC has enabled eOne to fully merge its film, television and digital businesses, mirroring the evolution of the industry, which increasingly shares talent and distribution partners across these once distinct segments. From H119, the group will have two divisions: FTD and Family & Brands (Exhibit 2). By merging the sales teams, integrating the support structures and finally streamlining the management structure, eOne expects to make annualised cost savings of approximately £13-15m by 2020 (equivalent to c 1pp of revenues).
Exhibit 2: New FTD division
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Outlook: Strong family, FTD integration
Management expects another strong year of revenue and EBITDA group from Family, with some reduction in overall margin due to mix effects generated by the rapid growth of PJ Masks. The integration benefits are expected to become more evident across FTD in the current year; budgeting 50% of the targeted £13-£15m 2020 cost savings, and with Film on a more stable footing, the increased investment in content over FY18 should also be evident in divisional growth.
Family: Management expects to have sold c 2,000 live licensing and merchandising contracts by the end of FY19 (1,500 in FY18) and we expect growth to remain strong in 2019 and 2020.
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Peppa Pig: in more mature markets, the brand is being refreshed with an additional 117 shows in production, with delivery beginning this financial year through to 2021, which should stimulate ongoing interest. There remains considerable scope for growth in China where it launched on CCTV in 2016 and where the brand continues to generate significant levels of exposure across VOD platforms, helping it to double its licencing deals. Furthermore, the brand remains relatively under developed in the US, Germany and Japan. The global partnership with Merlin Entertainments is a strong vindication of the brand’s evergreen status, two in-park attractions were opened in Germany and Italy and the first stand-alone attraction is expected to open in China during 2018.
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PJ Masks: the US is the main market but with the recent premiere on key VOD platforms in China (including Tencent, iQiYi and Youku), and other key markets yet to commence, there remains considerable growth potential for PJ Masks, which has already generated strong licencing interest and we believe could overtake Peppa Pig in terms of revenue contribution within three years. Season two started to air in the US in January 2018, and season three has been green lit for production.
FTD: eOne continues to scale its production activities, both organically and via acquisition (eg, the recent acquisition of Whizz Kid). Across the merged division, investment in content is expected to increase by c 21% to £529m with the increases largely directed towards television and own produced content, in line with the group’s strategy. We expect continued double-digit revenue growth from Television and, with an easier basis of comparison, a more stable performance from Film overall. The restructuring of the US distribution business delivered £10m of savings in 2018 and targeted £13-£15m of merger savings, of which c 50% are expected to be delivered in the current year, should also support the margins.
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Television: eOne is budgeting for over 1,000 half-hours of content to be acquired or produced, (FY18: 887) with a considerably raised FY19 budget for own production of £305m (FY18: £237m) against £45m acquired. The Rookie, a straight-to-series order by ABC and sold internationally by eOne, looks set to be a key new format for the group, and we are encouraged by the renewals of some of eOne’s newer formats (Burden of Truth S2, Private Eyes S3, Mary Kills People S3) along with the MGC Heritage series. ABC’s recent announcement that it would not commission a third season of Designated Survivor could leave a c £8-9m revenue gap (c 2% to EPS). It is possible that the format will be picked up by another broadcaster, or made up with other commissions; for now we make no change to our estimates. But with only 40% of the FY19 budget green lit or committed, there is less visibility to revenues this year (FY18: 60%).
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Film: management expects c 140 releases in FY19 (80 unique titles), broadly similar to 2018, with a release pipeline weighted towards its strategic production partners including Amblin and Makeready. In total, £100m is budgeted for acquired content including The House with a Clock on its Walls (Amblin), On the Basis of Sex (Participant), Backseat (Annapurna). The production budget is £70m across approximately 10 titles that are at various stages of production and development of which A Million Little Pieces, Official Secrets, Stan and Ollie and Nekromancer are likely to be released in the current financial year.
Forecasts: On track for 2020 target to double EBITDA
We present our divisional KPI forecasts on the new basis in Exhibit 3 below and show our forecasts in full in Exhibit 7. We update our FY19 forecasts taking account of the better performance of Family & Brands and Television relative to Film and along with the move to IFRS 15 (in forecasts, not historic figures); overall, we trim our FY19e EBITDA forecast by 2% and EPS by 4%.
In November 2014 the group unveiled its new strategy, to ‘double the size of the group in the next five years’, which we interpret to mean to double EBITDA by 2020. We believe eOne is on track to achieve this target. We introduce forecasts for 2020, which assume a 7% increase in content and production investment and continued strong growth from Family, which with the full benefit of the targeted £13-£15m cost savings, underpins our forecast EBITDA of £215m in 2020.
Exhibit 3: 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 |
> 1000* |
|
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) |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
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) |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
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.
Over the last three years, despite 18% CAGR growth in EBITDA, earnings progress has been held back (2% CAGR, Exhibit 4) due mainly to the dilutive impact of the December 2015 four for nine rights issue and refinancing of the debt. The group has now absorbed this dilution and over the next two years we expect more of the improved operational performance to translate to earnings growth. With the group on a steadier financial footing, with full operational control over key subsidiaries, there may be scope to refinance the £355m of bonds (costing 6.875%) which have their first call date in December 2018; the most recent £70m tranche were issued at 105.75% in February 2018.
Management is targeting net debt to EBITDA ratio of 1.8x in FY19; based on our EBITDA forecast, this would imply some caution related to working capital requirements and the investment to amortisation gap.
Exhibit 4: EBITDA and EPS trends
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Exhibit 5: Net debt trends (net debt / group EBITDA)
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Source: eOne, Edison Investment Research
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Source: eOne, Edison Investment Research
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Exhibit 4: EBITDA and EPS trends
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Source: eOne, Edison Investment Research
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Exhibit 5: Net debt trends (net debt / group EBITDA)
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Source: eOne, Edison Investment Research
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