Entertainment One. Firing on all cylinders. Balance tilts towards higher margin segments. Strong slate across all divisions in the year ahead

Transcription

1 Entertainment One Firing on all cylinders Full-year results Media 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. Year end Revenue ( m) EBITDA ( m) PBT* ( m) EPS* (p) 03/ / /17e /18e DPS (p) Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Balance tilts towards higher margin segments FY16 results hold no major surprises: revenues increased by 2.2% with strong growth from Television (+31.2%) and Family (+9.5%) offset by a weaker Film performance (-6.6%) and acquisitions contributing 22m. EBITDA increased 20.3% on margins of 16.1%, up 2.4%, reflecting the shift in the mix of the business towards the higher margin divisions. Content investment of 219m was lower than forecast and consequently adjusted cash conversion improved to 62%. Consolidated net debt of 299m comprised 181m of corporate debt and 118m of production finance. The dividend increased by 9% to 1.2p. Strong slate across all divisions in the year ahead We expect eone to return to strong organic revenue growth in FY17. In Family, Peppa s international roll-out to some of the world s largest toy markets including the US and China continues, and newer brands such as PJ Masks are developing well. Television expects to deliver 10% more half hours of programming this year and the Mark Gordon Company (MGC) JV has started to aggressively ramp production. In Film, eone has one of its strongest cinema release schedules to date which should help it offset headwinds in home entertainment. We increase FY17 investment and revenue forecasts materially, but reduce EBITDA margin forecasts slightly reflecting a slightly lower TV margin than forecast in FY15 and the rebound in Film. We trim FY17e EBITDA (-1.6%) and EPS estimates (-1.9%). Valuation: Foundations for growth in place eone has diversified its earnings base towards the higher growth and margin Television and Family divisions, which have a lower risk profile and now account for approximately two-thirds of EBITDA. It is better placed to drive organic growth and is on target to double EBITDA from FY15 levels by With a corporate net debt/ebitda gearing ratio of 1.4x, forecast to decline further this year, it has the flexibility to continue to make bolt on acquisitions to support this strategy. Ahead of what should be a strong year across all divisions, we see plenty of scope for upside to the FY17 EV/EBITDA rating of 7.7x (adjusting for minority interests) and 9.4x P/E, which are at a 30-50% discount to peers. P/E (x) Yield (%) Price 24 May p Market cap 761m Consolidated net debt ( m) at 31 March 2016 Corporate net debt ( m) (excluding 118m production finance) Shares in issue 422.9m Free float 68% Code ETO Primary exchange LSE (FTSE 250) Secondary exchange Share price performance NA % 1m 3m 12m Abs (7.1) 30.2 (39.2) Rel (local) (2.4) 27.4 (30.6) 52-week high/low p p Business description Entertainment One (eone) is a leading international entertainment company that sources, selects and sells films and television content. Its library contains over 40,000 film and TV titles, 4,500 half-hours of TV programming and 45,000 music tracks. Next event Trading update Analysts August Bridie Barrett +44 (0) Jane Anscombe +44 (0) media@edisongroup.com Edison profile page Entertainment One is a research client of Edison Investment Research Limited

2 FY16 results: Strong TV and Family offset weaker film FY16 revenues increased 2.2% y-o-y to 802.7m, slightly behind our forecast of 815.0m with strong growth in TV (31.2%) and Family (9.5%) offsetting a weaker Film performance (-6.6%), as expected. Acquisitions (a full year of MGC, a further 35% share of Peppa via the acquisition of 70% of ABD, Sierra Pictures, 65% of Renegade and some smaller deals) contributed 22m to revenue growth. EBITDA of 129.1m increased 20.3% year-on-year (24% at constant currency), in line with our forecast (Exhibit 1). The EBITDA margin expansion (16.1% vs 13.7%) is due to the acquisition of 70% of ABD, which results in a lower royalty payment being made but does not impact revenues (eone has always acted as principal with respect to Peppa s distribution so has already fully consolidated 100% of Peppa s revenues) as well as the consolidation of the higher margin participations from MGC. Excluding acquisitions, EBITDA would have increased by c 7%. Adjusted PBT of 104.1m includes 20.6m of net finance charges (FY15: 14.8m), reflecting the higher average debt as well a higher interest rates following the December 2015 refinancing. Reported PBT of 47.9m also includes 16.6m of exceptional items related to the restructuring of the film division ( 12.1m) and acquisition fees ( 4.1m), along with 27.4m of amortisation of acquired intangibles. eone invested 218.5m in content, lower than in FY15 ( 280.8m) and our forecast of 270.0m, following the smaller film release slate, consequently with amortisation of content of 257.6m. Consolidated free cashflow was 65.0m. Exhibit 5 later in the report shows the breakdown of cashflows by division and by funding structure. Consolidated net debt of 298.8m was slightly down on FY15 ( 314.2m), with 226m of acquisition costs largely covered by the proceeds of the October 2015 rights issue ( 194m net of fees). This comprises 180.8m of corporate net debt and 118.0m of production finance (PF). Exhibit 1: Summary of FY16 results and variance to forecasts FY15 FY16 change Y-O-Y FY16 e Difference to forecast in m Difference to forecast in % Television revenue % % Family revenue % 68.0 (1.4) (2.1%) Film revenue (6.6%) (11.6) (2.1%) Inter segment (54.1) (62.0) 14.6% (50.0) (12.0) 24.0% Total revenues % (12.3) -1.5% Television EBITDA % 40.5 (1.3) (3.2%) Family EBITDA % % Film EBITDA (27.8%) 54.0 (1.2) (2.2%) Inter segment (7.4) (6.2) (16.2%) (8.0) 1.8 (22.5%) Total EBITDA % (0.4) (0.3%) EBITDA margin 14% 16% 16% Operating income % % Reported operating profit % 77.9 (2.9) (3.7%) PBT adjusted % % PBT reported % 57.9 (10.0) (17.3%) EPS adjusted, diluted (6.7%) (0.1%) EPS reported, diluted (11.9%) (7.6%) Other KPIs: Investment in content and production (280.8) (213.0) (24.1%) (270.0) 57.0 (21.1%) Net debt corporate (19.6%) (18.5) (9.3%) net debt production finance % % Net debt consolidated (4.9%) (15.5) (4.9%) Entertainment One 24 May

3 Divisional performance and outlook: Strong pipeline Exhibit 2: Revenue contribution FY16 vs FY15 Exhibit 3: EBITDA contribution FY16 vs FY15 m % % % FY15 FY16 Family TV Film 64% 28% 8% m % % % 39.2 FY15 FY16 TV Family Film 39% 32% 29% Television: Significant ramp in production pipeline Television revenues increased by 31.2% and EBITDA more than doubled to 39.2m driven by both a combination of strong organic growth and a full year impact of the FY15 acquisitions of MGC, Paperny and Force Four Entertainment. eone Television delivered 998 half-hours of programming (up from 752 in FY15) and the pipeline at both eone Television and in particular MGC remains very strong. eone Television expects to deliver over 1,100 half-hours of content in the coming year ( 110m investment budget, up 20%) with 61% of eone s FY17 budget already committed or greenlit. Furthermore, the ramp up in investment at MGC should start to deliver from the current year. Along with renewals and ongoing participations from MGC s existing series (Criminal Minds, Criminal Minds Beyond Borders, Grey s Anatomy, Ray Donovan and Quantico), two new series have been commissioned (Designated Survivor and Conviction) and the development pipeline is very active (60 shows in development for both traditional and digital networks) both in TV and film. Management expects c 100m of programme investment at MGC this year vs ( 7.6m in FY16) and c 70% of budget has already been committed. Family: Peppa s international roll-out continues Recognising the scale of the Family division, eone no longer reports this as part of Television. Revenues increased by 9.5% and EBITDA by 82% to 43.3m. For the largest brand Peppa Pig the core UK market remains solid, and eone continues to build its audiences and consumer strategy internationally. Peppa is now on air in all of the world s most important merchandising markets (excluding Japan) and after establishing its position as one of the top-rated children s shows on Nick Jr in the US, last year it launched a limited range of products in Walmart, Target and Toys R Us. US retail sales increased over 275% and royalty revenues increased 400% y-o-y and eone expects the expansion of its US merchandising range in the current year to continue to drive growth. A further 52 episodes of Peppa are being produced (taking the total to 260) and the brand is developing well in other key markets, notably, France and China, where Peppa debuted last year on the Chinese State Broadcaster CCTV, and via Youku and IQIYI (the leading Chinese video sites) generating c 250m views for Peppa monthly. Family s newer brands are also developing well. In the UK, Ben and Holly s Little Kingdom is performing strongly on TV and across digital platforms and is gaining momentum in Latin America. Since premiering on Disney last year, PJ Masks is consistently among its top three children s shows with a 29% audience share of two- to five-year olds and will be rolled out across all of Disney s c 30 Entertainment One 24 May

4 international markets this year with first merchandising in the US in time for the Christmas season. Production continues on 52 episodes of Winston Steinburger and Sir Dudley Ding Dong for delivery to ABC Australia and Teletoon Canada this year. Film: Restructured cost base, stronger slate this year Film revenues declined 6.6% y-o-y and EBITDA margins decreased to 9.5% from 12.3% in FY15, affected by a smaller FY16 release schedule (210 theatrical releases, down from 227 in FY15) and the headwinds already faced in home entertainment and digital as a result of a similarly poor theatrical performance in FY15. This was offset in part by a strong year for film production ( 60m revenues, a three-fold increase on FY15) with Sinister 2, Insidious: Chapter 3 and Eye in The Sky generating $181m of box office revenues globally during FY16. During last year, eone widened its network of partners, notably through its Amblin Partner venture and its strategic investment in Sierra Pictures. It has a strong cinema slate for the current year, with a particular focus on sourcing and distributing local content (220 planned, with content investment of 160m); Eye in the Sky continues, Spielberg s BFG and The Girl on the Train (both sourced via Amblin Partners), and David Brent: Life on the Road (eone production) which has secured US distribution via Netflix. This is likely to be mitigated in part by continued declines in home entertainment (a function of weak FY16 cinema releases and the ongoing shift to digital viewing). With a c 24-month revenue cycle from the release of a film in cinemas through to DVD, digital and TV, the weak cinema performance over the last two years should start to unwind in FY18. While FY17 is expected to be a much better year for Film, viewing habits continue to move to digital and in March 2016, eone announced a restructuring plan designed to align the Film division s cost structure with evolving digital viewing preferences, targeting 10m of annualised savings from FY18. New partnerships have been created with 20 th Century Fox Home Entertainment (outside the US) and Sony Pictures Home Entertainment (in the US), which will see eone withdraw from the logistics of DVD and Blue Ray activities to retail outside Canada. Furthermore, eone s international sales (outside its five core territories) will be handled by Sierra Pictures. Entertainment One 24 May

5 Exhibit 4: Summary divisional forecasts m March year end 2014/ / / /18 Revenues eone Television The Mark Gordon Company Music/ other Television revenues Television growth 12.0% 31.2% 49.9% 20.5% Family Family growth 10% 14% 18% Film distribution Film production Eliminations (9.7) (1.9) (3.0) (3.0) Film revenues Film growth -7% 6% 2% Inter segment sales (54.1) (62.0) (55.0) (60.0) Total revenues ,071.7 Revenue growth 2% 21% 10% Underlying EBITDA eone Television EBITDA The Mark Gordon Company EBITDA Music EBITDA Television EBITDA Family EBITDA Film EBITDA Group costs (7.4) (6.2) (6.4) (6.4) Total EBITDA EBITDA margin 13.7% 16.1% 15.7% 16.3% Cashflow and balance sheet improved cash conversion As the production financing (PF) facilities are short term, arranged on a production-by-production basis and non-recourse to the group, like many film and TV content producers in the industry eone considers these facilities akin to working capital, rather than debt. For the first time, eone has carved out the cashflow associated with these facilities to support a better understanding of the associated cash flows, and their funding by division is shown in Exhibit 5. This shows: The bulk of EBITDA ( 121.2m) was funded by the group, rather than PF facilities and for this business, adjusted cashflows were 75.6m a cash conversion of 62% (33% last year). The improvement was mainly a result of a positive IIC gap (investment in content less amortisation of content) in Film offset in part by 54m working capital outflow, a function of an increasing proportion of sales derived from digital platforms where cash receipts are spread over the life of a contract. Only 6% of FY16 EBITDA was financed with production financing and similarly, with a positive investment in content (IIC) gap in Film, cash conversion improved considerably. On a consolidated basis, adjusted cashflow was 101.6m (79% cash conversion) and after 226m of acquisition costs, largely covered by the proceeds of the October 2015 rights issue ( 194m net of fees), consolidated net debt was reported at 298m, slightly down on FY15 ( 314m). Net debt comprises 180m of corporate net debt and 118m of production finance. Gearing (excluding PF) was a very comfortable 1.4x EBITDA, down from 2.1x last year. We have increased our FY17 and FY18 consolidated net debt forecast by 6% to 361m, reflecting the significant ramp in production at MGC, where additional detail of its pipeline has been provided. Forecast changes are discussed in more detail in Exhibit 6. Entertainment One 24 May

6 Exhibit 5: Cashflow analysis by funding mechanism and division Group funded business Production finance funded business Consolidated cash flow m TV Family Film plc Total TV Family Film plc Total TV Family Film plc Total EBITDA (6.2) (0.3) (6.2) Production IIC gap 5.5 (1.5) (1.1) (2.6) Content IIC gap (7.7) (1.6) (3.2) (12.5) (7.7) (1.6) (3.2) 0.0 (12.5) Working capital (15.6) (13.3) (25.3) (54.2) (11.4) (7.4) (27.0) (12.8) (21.8) 0.0 (61.6) JV movements (4.5) (4.5) (0.5) (0.5) (4.5) 0.0 (0.5) 0.0 (5.0) Adjusted cashflow (6.2) (0.9) (6.2) Cash conversion 30% 62% 87% 62% 22% 300% NA 333% 29% 61% 133% 79% Capital expenditure (7.7) (0.9) (8.6) Tax paid (14.4) (3.3) (17.7) Net interest paid (10.2) (0.1) (10.3) Free cashflow One off items (20.7) (0.6) (21.3) Acquisitions net of production financing acquired (177.0) (49.0) (226.0) Net proceeds of share issues Dividends paid (4.0) (4.0) Foreign exchange 7.8 (0.8) 7.0 Movement 44.0 (28.7) 15.3 Net financing/ debt at the start of the period (224.8) (89.3) (314.1) Net financing/ debt at the end of the period (180.8) (118.0) (298.8) Forecast changes: Organic growth across all divisions We assume that the investment shortfall, relative to our estimates in FY16, moves into FY17 and we increase our forecast for total investment in content and productions to 450m (from 400m) this year and 490m next ( 420m), raising our revenue forecasts in recognition of the strong slate in Film and at MGC (Exhibit 5). However, we trim our EBITDA margin forecasts slightly for TV (to bring them into line with FY15), resulting in a slight reduction to our EBITDA forecast in FY17 and FY18. In summary, we expect the group to deliver organic growth across all its divisions in FY16, and forecast group revenues to increase by 21% including c 3% from the recent acquisition of Renegade, followed by 10% growth in FY18. We expect EBITDA margins to be slightly lower in FY17 owing to the change in the structure of MGC s new production arrangements and a better film slate. A higher forecast average share count (full year impact of the rights issue) and a higher finance charge mean that despite the better operational performance, we forecast adjusted diluted EPS in FY17 broadly flat to that reported in FY16. From FY18, EPS growth should again reflect operational performance. A summary of changes and divisional forecasts are presented in Exhibit 6 with full forecast at the back of this report. Exhibit 6: Summary forecast changes 2016e 2017e 2018e Forecast Actual Difference Previous New Change Previous New Change Revenues ( m) % % 1, , % EBITDA ( m) % % % EPS (p) % % % Corporate net debt % % % Production finance % % % Consolidated net % debt % % Source: eone (historic), Edison Investment Research (forecast) Entertainment One 24 May

7 Valuation: A diverse content group positioned for growth After a difficult 2015, the shares, which have been the subject of bid rumours from ITV (denied), have performed fairly well into the results, but on a 7.7x EV/EBITDA (adjusted for minorities) and 9.4x P/E, continue to trade at a 30-50% discount to peers. Evidence of delivery of the strong pipeline in television and film as well as ongoing roll out of Family brands this year should provide the catalyst to start to close this ratings gap. Although group revenues continue to be dominated by Film (64% in FY16), we believe that EBITDA, which is less subject to the lumpiness that can result from blockbuster release slates, is a better reflection of how the divisions are managed (for profit, rather than revenue). On an EBITDA basis, the acquisitions made over the last two years, together with eone s organic investments have firmly tilted the shape of the group towards the higher margin, higher growth Family and TV divisions (61% FY16 EBITDA) and we believe the group has a much better overall structure. The market for premium television content remains dynamic, and with the continued international rollout of eone s family brands, the group enters FY17 in a much stronger position to drive organic growth, and the greater diversity in the group s EBITDA should mitigate the impact of the more volatile Film division on earnings. eone is well placed to reach its target to double EBITDA by 2020 (from FY15 s level) organically. In addition, with a corporate net debt/ebitda gearing ratio of 1.4x, eone has the balance sheet flexibility to continue make bolt-on acquisitions to support its strategy. Exhibit 7: Summary peer multiple comparisons Company % revenues from film or TV Ccy Share price Market cap Sales ( m) Sales growth EBITDA margin EV/EBITDA (x) P/E (x) This This Next This Next This Next This Next Entertainment One * 100% GBP % 10% 14% 15% Walt Disney Co/The 80% USD ,887 56,272 7% 4% 31% 31% ITV PLC 50% GBP 2.1 8,530 3,174 7% 4% 30% 31% Lions Gate Entertainment 100% USD 20 2,968 2,295 (4%) 11% 6% 12% DHX Media Ltd 100% CAD 8.4 1, % 8% 35% 37% Constantin Medien 51% EUR % 3% 17% 19% 2.7** 2.5** Source: Edison Investment Research, Bloomberg. Note: *Adjusted for minorities, **does not include content amortisation so not consistent with peers. Priced as at 23 May Entertainment One 24 May

8 Exhibit 8: Financial summary m e 2018e Year end 31 March IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue ,071.7 Cost of Sales (642.3) (578.0) (610.1) (739.9) (814.5) Gross Profit EBITDA Operating Profit Amortisation of intangibles (36.0) (22.2) (27.4) (33.0) (30.0) Exceptional items (22.1) (17.9) (16.6) (7.5) 0.0 Share based payment charge (2.7) (3.4) (5.7) (4.0) (4.0) JV tax, finance costs, dep'n (1.6) Operating Profit Net Interest (11.8) (14.8) (20.6) (25.0) (22.9) Exceptional finance items 3.9 (1.4) (6.5) Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax (reported) (1.5) (2.7) (7.7) (15.5) (22.5) Tax (adjustment for normalised earnings) (18.4) (16.8) (16.2) (12.1) (10.5) Profit After Tax (before non-controlling interests) (norm) Profit After Tax (before non-controlling interests) (FRS3) Non-controlling interests (3.7) (12.6) (14.0) Average Number of Shares, Diluted (m) EPS - normalised (p) EPS - FRS 3 (p) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except) (%) BALANCE SHEET Non-current Assets ,009.7 Intangible Assets (incl Investment in programmes) Tangible Assets Deferred tax/investments Current Assets Stocks Investment in content rights Debtors Cash Current Liabilities (449.2) (488.3) (568.7) (565.1) (579.1) Creditors (401.1) (398.7) (470.7) (467.1) (481.1) Short term borrowings (48.1) (89.6) (98.0) (98.0) (98.0) Long Term Liabilities (168.6) (319.6) (413.6) (417.4) (400.5) Long term borrowings (155.9) (295.9) (309.1) (312.9) (296.0) Other long term liabilities (12.7) (23.7) (104.5) (104.5) (104.5) Net Assets CASH FLOW Operating Cash Flow Net Interest (10.7) (13.4) (31.0) (25.0) (22.9) Tax (5.9) (10.8) (17.7) (15.5) (22.5) Capex (4.2) (4.8) (8.6) (9.0) (9.5) Acquisitions/disposals (6.1) (104.3) (226.0) (5.2) 0.0 Investment in content rights and TV programmes (281.4) (280.8) (218.5) (475.0) (500.0) Proceeds on issue of shares Dividends 0.0 (2.9) (4.0) (5.3) (6.0) Net Cash Flow (44.1) (145.1) 9.1 (62.1) 16.9 Opening net debt/(cash) Movements in exchangeable notes Other including forex 23.5 (4.0) Closing net debt/(cash) ANALYSIS OF NET DEBT Total debt Net production finance Adjusted net debt Entertainment One 24 May

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