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.
In Family & Brands, both Peppa Pig and PJ Masks are well-placed into the new trading year, with the former launching its seventh series and the latter its third, initially on Disney Channel North America, then more widely, with series four to follow. Ricky Zoom is launching on Chinese SVOD provider YouKu in the summer, then worldwide, with licensing and merchandising in CY20. FY19 retail sales growth was constrained to 6% due to some caution over the health of the Chinese consumer market. However, the content launches have established strong traction with viewers and we would expect a stronger retail ramp up through FY20e. For Film, TV & Music, the group now has a more focused and targeted film slate and a strong pipeline. TV also has a robust pipeline of new scripted series and renewals for both scripted and unscripted titles, with over 60 projects in development with a range of network partners. The acquisition music company, Audio Network (see our flash note), completed in mid April 2019, so will contribute for nearly all of FY20e.
The proliferation of channels and consequent competition for viewers is sustaining the high demand for quality content and eOne is investing to generate the fuel for future profitability. Management anticipates 83% of its FY20e spend will target own content rather than acquired. This will be heavily weighted to TV, where guidance is for FY20e spend of £350m, up from £213.3m in FY19. £95m is earmarked for film.
eOne’s share price has performed well in CY19 and is up by 29% ytd as the value of its content investment strategy and its platform-agnostic positioning has been recognised by the market. Nevertheless, there is a valuation discrepancy, with the current price putting the group at a c 3% discount to relevant peers on an EV/EBITDA basis averaged over FY20 and FY21e. Our updated SOTP analysis implies a valuation of 475p/share vs 440p/share before.