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Entertainment One’s trading update to 23 September (ie most of H1) does not disclose figures, due to the Hasbro bid. The group is heavily weighted to H2. Family & Brands achieved flat revenues against prior period, despite a difficult trading environment. Film, TV and Music (FTM) revenues were slightly behind, with a strong music performance offset by unflattering comparatives in film and TV due to timing and mix. The independent library revaluation was $2.1bn at end March (2018: $2.0bn). The acquisition agreement with Hasbro, for 560p per share cash, is to be put to share-holders on 17 October, with the circular now available. Approval requires two-thirds of votes cast to be in favour. Our forecasts are withdrawn.
Entertainment One
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.
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.
Entertainment One (eOne) has announced the acquisition of Audio Network for £165m (cash-free, debt-free basis) alongside a share placing at 450p to raise c £130m. Audio Network’s business model meshes very neatly with eOne’s, adding both music resource and a substantial recurring revenue base while giving the group’s existing artists and catalogue new revenue-generating opportunities. The purchase price represents 15x LTM reported EBITDA and management indicates the deal would be earnings enhancing in its first year (FY20).
Entertainment One’s (eOne) year-end trading update indicates financial performance in line with expectations, with the groundwork in place for good progress across both Family & Brands and Film, Television & Music. The benefits of the transition towards production in film are clear, with better margin potential, a reduced risk profile and stronger free cash flow. Our EBITDA and EPS forecasts are unchanged and we have introduced numbers for FY21e, showing continuing progress. The intense competition between new and competing SVOD providers is driving a very healthy appetite for high-quality entertainment content.
Entertainment One’s interims are in line with expectations. Our FY19 and FY20 revenue forecasts are trimmed but we have lifted expected margins, leaving EBITDA and EPS broadly unchanged. This reflects the further mix shift to Family & Brands, where good momentum continues behind Peppa Pig and PJ Masks, especially in China. Film & TV is part-way through its transition from distribution to content production, with divisional EBITDA also impacted by an H2-weighted release schedule. The net effect was a group EBITDA margin of 14.8% (H118: 13.3%). Changing consumption patterns provide a strong backdrop to high-quality content providers such as eOne. We regard the shares as attractively priced on earnings and with regard to the portfolio valuation of $2.0bn.
Entertainment One’s (eOne’s) pre-close trading update confirms the group is trading well and is on track to meet full-year market forecasts. There is no change to our forecasts at this juncture. The group’s rights library has been independently reassessed and has increased to a value of US$2.0bn, from US$1.7bn at the time of the last valuation in March 2017. The group’s current market capitalisation is c £1.8bn (US$2.3bn). Recent strong share price performance has narrowed the discount to peers, but further positive news flow would allow additional upside.
Entertainment One’s (eOne’s) capital markets day (CMD) presentation highlighted its strong content and depth of management, with its independence allowing the luxury of platform agnosticism. With the major tech platforms building audience engagement to drive their broader business models, high-quality content remains a key differentiator that plays to eOne’s strengths. The strategy for Family & Brands is to focus on a tight portfolio, maximising merchandising and licensing opportunities. Recent strong share price performance has narrowed the discount to peers, but further positive newsflow would allow additional upside. Our forecasts are unchanged.
An excellent performance from Family & Brands and strong growth in Television offset declines in Film to deliver EBITDA growth of 11%, which is in line with forecasts. The group is in good shape entering FY19 and is on track to deliver to its five-year plan to double EBITDA by 2020. The shares are on a c 40% P/E and c 20% EV/EBITDA discount to global peers and we believe they offer good value.
eOne’s bolt on acquisition of Whizz Kid in the UK further builds on its expanding capabilities in the non-scripted television production segment. The £6.9m consideration paid for a 70% interest will be part funded utilising some of the excess proceeds of the recent placing and shares.
eOne’s FY18 trading update puts the group on track to deliver to expectations with continued excellent momentum in Family, a solid performance from Television and a better second half in Film.
eOne has announced the proposed acquisition of the remaining 49% of the Mark Gordon Company (MGC) for $209m, financed with a mixture of new equity and debt. We estimate that the deal will be slightly earnings accretive in its first year before an anticipated $7-10m of cost synergies. In our view it is a logical extension of the group’s strategy to build a diversified content business.
eOne’s H118 results delivered a 36% increase in EBITDA driven by an outstanding performance in Family with Peppa Pig making its mark in China and the rapid global roll out of PJ Masks establishing it as a global brand. Management has reiterated that the company is on track to deliver full year expectations; we have updated our forecasts for mix effects but leave our overall EBITDA forecast unchanged.
Operating performance across all Entertainment One (eOne) divisions is in line with management’s full year expectations, with the H1/H2 weighting expected to be broadly in line with last year. As the group’s business grows, so does its library valuation, which has increased by 13% y-o-y to $1.7bn, underpinning c 80% of the current EV.
An excellent performance in Television and Family and the recovery in Box Office in Film underpinned strong revenue and EBITDA growth in FY17 and the outlook for FY18 remains positive. The efforts that the group has made to move closer to the creative process in Film, and to diversify beyond Film, has greatly improved the financial and risk profile. We expect the ratings gap to peers to narrow.
Entertainment One (eOne) has announced that it will incur a one-off £47m exceptional charge related to the restructuring of one of its larger output deals and the accelerated restructuring of the Film division. On an underlying basis, EBITDA for FY17 is in line with previous guidance for strong growth and in line with our forecasts.
A strong performance from Television and Family and continued recovery at the Box Office in Film put eOne on track to deliver strong growth in reported revenues and underlying EBITDA in FY17, as expected. The divisional mix may be weighted more towards Television than we had forecast but overall, we do not make any changes to our estimates.
Strong performances across all Entertainment One’s (eOne’s) divisions underpinned 19% reported revenue growth in H117. With a significant proportion of its slate commissioned or contracted in Television, a good roster of films and strong momentum internationally in Family, the full year is on track to meet management’s expectations. We maintain our forecasts and believe the shares, trading at a considerable discount to peers, do not yet reflect the more balanced structure of the group, or its stronger operational performance.
Entertainment One (eOne) has had a strong first half operationally and, with a good pipeline in Television, Film and the ongoing roll-out of the Family brands internationally, is on track to deliver on its underlying full year expectations. The annual independent library valuation has been updated and has increased by approximately 50% to $1.5bn (£1.2bn), covering the greater part of eOne’s market value, leaving little in the rating for its extensive production and sales network.
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ETO GRI SDY VP/ IOM SGM PEB NCC BCA CCAP BDRX
Strong growth in Television and Family was boosted by acquisitions and offset a weak performance in Film, as forecast. Television and Family accounted for 61% of EBITDA, have excellent pipelines and, with a stronger film slate, FY17 should see strong growth across all divisions. We see plenty of scope for the significant ratings gap vs peers to close.
FY16 results are close to our forecasts with EBITDA a shade light (£2m) and Net Debt essentially in line on the back of lower than expected investment. Film (210 films) and TV (998 half hours) volumes were essentially inline. The outlook statement implies a more modest recovery in film than expected (220 films and £230m investment planned vs N1Se 250 films based on £250m investment) but still points to growth. TV is on track for c1175 half hours (inc 75 MGC) so this points to a further rapid expansion. While the Company has formalised its organic growth guidance it is happy with consensus at this point. The big expansion is based on a massive investment increase to c£500m in FY16 (£218m in FY16) and carries substantial execution risks and will result in large negative FCF. The shares fell in line with our view up to mid-April (from 167p to low 150’s) but then gained a boost up to almost 200p from (i) ITV bid rumours (formally denied by ETO) and (ii) some bid activity in the sector (not particularly relevant in our view). The shares are still retreating from the run and we expect the shares to continue to ease back to levels before. Our valuation and view is driven by the weak cash generation issue that looks likely to persist for the foreseeable future. The shares had traded down to the 130p at one point, which is essentially in-line with the underlying net library valuation we have estimated at 129p. We see this as a floor assuming the independent valuation of the library is robust. Our TP is 151p.
Bloomberg has reported that, according to persons with knowledge of the situation, ITV is pursuing a take-over of ETO and that they have had talks, but that no decision has been made. Both ITV and ETO declined to comment to Bloomberg and nor have either released a statement at this time. ETO has indicated it has a policy of not commenting on speculation unless it has a material effect on the share price. From our perspective we would be surprised if ITV would want to buy the whole of ETO. As a starting point the TV assets would be of interest to ITV, but Film is not its natural territory and this is a very significant size business. Even the TV assets may not fit correctly given ETOs shape/structure and with a large component of profit being derived from one children’s product (Peppa Pig). We clearly have concerns about ETO’s weak cash generation and we would question whether ITV investors would want to dilute the cash performance of ITV. While the shares may see a little short term benefit this is likely to wane rapidly if there is no supportive factual confirmation. Our view based on fundamentals remains unchanged at this time.
Entertainment One’s (eOne) acquisition of Renegade Entertainment, a leading producer of reality TV shows, is in line with its strategy to partner with the best creators in the industry. As well as complementing its TV production capabilities and relationships, eOne will capture the global distribution rights on new content. The $23m price for a controlling 65% interest looks sensible and, utilising some of the remaining proceeds of the FY15 rights issue, should be 2% earnings accretive in its first year.
ETO is acquiring a 65% stake for US$23m in Renegade 83, a reality TV production company. Puts and Calls have been issued for the 35% balance. ETO highlights the business has the following hit shows, Naked & Afraid, Naked & Afraid XL, Fit to Fat, 4400, The Kennedy Detail and Blind Date. Based on the available information the multiple is 6.8x historic EBITDA. Given the gap between EBITDA and PBT (US$5.2m vs US$2.9m) it is unclear whether the accounting is in-line with ETO’s and whether the multiple needs adjustment. ETO does say the transaction is expected to be earnings enhancing in its first year. The profile of likely EBITDA progress is unclear from the statement given the strong growth in EBITDA (2015 US$5.2m vs 2014 US$3.0). There is no 2014 revenue comp (2015 US$35.1m). The acquisition does help build on the TV business but does use up some more cash resources. At this stage the stock looks stuck between the Net library valuation and uncertainty of future cash generation.
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.
ETO has issued its Q3 trading update. It is indicating an in-line performance with consensus EBITDA of c£130m for FY16 and EPS of c19p. Net Debt will be higher at c£300m (£180m adjusted basis) vs N1Se £254m, but the company says it will generate some positive free cash flow (we have a £3m positive estimate), The weakening of sterling since the last update (November interims) has provided a tailwind. Group revenues on a constant currency basis are down 4% with the Film unit continuing to contract (down 14% reported basis) offset by Television (up 39% reported basis). The Company is seeking to provide some guidance for FY17 and FY18 that encompasses the plans for scaling MGC. Guidance is that investment is set to leap to close to £500m in FY17 (N1Se FY16 £260m) and grow another 10% in FY18. This will lift Net Debt further to c£330m (N1Se £265m). ETO has been struggling to get volume through in Film and has been working on how to boost volume through its MGC investment (TV focused) and has added some colour today. We will need to work through the detail of guidance in order to take a view on likely outturn. At this stage our forecasts go under review. Cash generation remains the major issue for ETO and the new plan, at first glance, looks likely to drain FCF.
Reuters reported that Livermore Partners has made a public call for change at the company after engaging with management. Livermore views the business as being overlevered and wants to see a slowdown in deal making and greater focus on cash flow. Livermore does not have a disclosable stake and we understand it to be well under the disclosable limit. If the company does not reverse its strategy within the next 12 months, Livermore has said it may push for a sale of the business. Given their current position we doubt Livermore can exert much influence although we do note that the CPPIB has now secured a board position after suffering a huge loss on the investment. The shares have continued to decline in line with our Sell rating. Until there is a clear plan with targets and goals that investors can assess there appears to be little opportunity for recovery.
Scott Lawrence is joining the board as a NED. He represents the Canadian Pension Plan Investment Board and their 19.8% stake in ETO. The investment has been an awful performer for the CPPIB and it is perhaps unsurprising that they should seek to help improve the situation. At this stage the business needs a clear strategy that explains how it will achieve its objective of doubling the size of the business by 2020 and create value for shareholders. We maintain our Sell rating at this stage.
The success of eOne’s strategy to partner with top content creators is demonstrated by today’s announcement of its involvement with Steven Spielberg’s new venture, Amblin Partners. It extends eOne’s existing output deal into new territories, but more importantly brings a close relationship and small equity stake in a new business with a promising raft of upcoming titles such as The BFG. We continue to see excellent upside in eOne’s share rating, as highlighted in our recent Outlook report.
Acquisitions leave Entertainment One with a more balanced portfolio, tilted towards higher-growth and higher-margin segments and the recent rights issue and refinancing provides headroom to continue to execute to strategy. The recent fall in share price and rating does not reflect the ongoing structural growth we expect from TV and Family, nor the cyclical bounce likely in Film next year, underpinning our forecast of improving cash generation in Film and declining corporate debt.
ETO has announced it is issuing £285m of 2022 senior secured notes at par with a coupon of 6.875%. Including fee amortisation the notes net cost is approximately 7.25%pa. This is higher than our existing assumption and as the gross debt will be maintained there will be a jump in the interest cost for FY17 and FY18. On a full year basis the P&L charge will be c£21.2m including fees for the notes and the a new £100m RCF. The impact in FY16 is modest (1.6%) but the impact in FY17 (8.6%) and FY18 (8.6%) is more substantial. As a consequence our three year EPS CAGR falls from +1% to -2%. Between FY16 and FY18 the CAGR is +1%. It’s not all bad news though and we flag that ETO has improved security around financing as the notes are covenant-lite and the Company has some capacity to acquire. We estimate that after allowing for c£70m of cash requirements the business has c£50-60m to invest in acquisitions (excluding the RCF). Suitable acquisitions are likely to be relatively expensive as the TV market is well bid at present. Nonetheless if invested, this could help offset the EPS downgrade by a few percentage points. With the financing executed it now seems reasonable to expect ETO to provide some insight into its plans for FY17 and beyond. It is unclear whether the Company will shrink investment further or seek to boost growth (see 24th November 2015 note “Looking for Goldilocks” for our assumptions). We expect the Company to provide some guidance around late January/early February alongside a trading update. Based on our revised TP of 181p the stock remains a Sell.
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ETO GRI SDG RENE
The interims highlighted the weakness of Film for a second year in a row. We had already flagged that it looked mature and ETO comments suggest the unit needs a Goldilocks environment to make progress. As a consequence we have cut Film revenues by over £100m and edged down our medium term margin expectations, but still see risks to the downside if volume does not recover. TV is expected to do the work on growth despite being the smaller division. After re-profiling our investment and growth assumptions our 3 year EPS CAGR drops to 1%. We have modified our SOTP valuation and reduce our TP to 185p from 205p. We have maintained our 20% discount for weak FCF generation but not discounted the Peppa Pig concentration issue. We expect our Sell rating to continue to perform.
Film very weak and TV very strong leading to a surprise for H1. Net debt is also lower albeit reflecting very low level of investment. Our forecast will need to be overhauled and we will be seeking more information at the analyst meeting. Company indicates on track for the year. Uncertainty around FY17 given very large cut to investment.
The Company has announced the completion of the 70% stake in Astley Baker Davies. This acquisition raises ETO exposure to the Peppa Pig property to 85%. Given ETO’s strategic options the acquisition was arguably the most logical step, however we estimate it has increased the level of exposure to this one property to c28% of group EBITDA. Investors should note we do not explicitly discount the concentration factor in our valuation. Our valuation does discount to a degree the weak group cash generation. We forecast negative free cash flow for each of the three forecast years (FY16 to FY18). This is uncomfortable in the context of leverage. At the earnings level we forecast a 3 year CAGR of just 5.7%. Even this modest growth is open to question given the difference between cash generation and income statement profits we have previously analysed at length. We reiterate our Sell rating.
ETO has agreed the acquisition of a stake in ABD to increase its exposure to Peppa Pig to 85% from 50%. To fund the purchase the company has announced a heavily discounted (44%) 4 for 9 rights issue at 153p. This raises a net of expenses £194m with £140m paying for the acquisition and the balance effectively going towards much welcomed debt reduction. We interpret the company’s indication that the extra funding is for flexibility to support growth as helping provide a better balance sheet position and unlikely to be used for acquisitions. We summarise our forecast adjustments in this note on an ex-rights basis. Free cash flow generation remains negative. We believe the shares are worth 205p ex rights and set this as our Target Price (from 265p) at this stage, leaving the stock as a Sell. The stock has fallen 18% since we turned seller at 311p.
Entertainment One’s (eOne) deal to increase its stake in Peppa Pig from 50% to 85% is excellent news, giving it more control over the brand’s international expansion. The £140m consideration values Peppa at £400m and will be funded by way of a £201m rights issue, with the surplus giving eOne greater flexibility to achieve its goal of doubling in size between FY15 and FY20. The strategic benefits of the deal justify the EPS dilution (5% in FY16) and the fall in the share price appears an overreaction, with eOne now only on an FY16e EV/EBITDA of 8.2 times.
ETO has announced the acquisition of a 70% stake in ADB that will in effect lift its stake in Peppa Pig from 50% to 85%. The cost is £140m and is being funded by a net of expenses £194m rights issue. The rights issue is heavily discounted at 153p or 44% to last nights close. The excess funds are to provide flexibility to execute group strategy. Given the lack of cash generation and level of leverage this looks like a step in the right direction for the balance sheet. Concentration exposure to Peppa Pig rises further to c31% of group EBITDA after adjusting for material minorities. This level of concentration is a clear risk. We believe that Peppa is more cash generative than the rest of the group’s activities and therefore arguably its cash performance is more important in funding ongoing activities. Based on available information at this point and using FY16 numbers as a base line we would expect EPS to fall to c19p (vs 23p). We put our forecasts and TP under review ahead of the investor call at 9am.
Entertainment One (eOne) has reported that its library is now valued at over $1bn (£650m) and that Q116 underlying trading was in line with management expectations, with Television growing particularly strongly. Adverse currency has prompted our 5% reduction in full-year estimates, but the share price reaction looks overdone with the FY16e EV/EBITDA now only 9.3x. eOne remains in pole position to satisfy the strong global demand for entertainment content.
ETO signals that Film has seen a week Q1 with pro-forma CER revenues down 9%. This is against the expectation of a rebound in the largest units trading activity for FY16 but is explained to a degree by the lag effect of lower volumes in home entertainment releases driven by lower prior year theatrical releases. ETO is guiding down on film volumes for the full year to c230 (vs 250 previously) due to timing of Q4 releases. The TV business has seen pro-forma CER revenues rise 32% which looks to be broadly in the right ball park. The company signals some headwind from currency and it seems likely that consensus EBITDA will drop below £120m given current rates. This update comes a week before the scheduled AGM. We remain Sellers of the stock based on valuation using our cash generation adjusted EV/EBITDA SOTP approach. Today’s news is likely to weigh on the stock along with concerns Marwyn will sell down more stock.
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