Entertainment One. Doubling up. Executing on the ambitious growth strategy. Increases to estimates. Valuation: FY17e EV/EVITDA only 10.

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1 Entertainment One Doubling up Final results analysis Media We believe that eone is well on track to meet its November 2014 target of doubling in size by FY20, principally through organic growth notably by expanding TV production, continuing Peppa Pig s international roll-out and leveraging the Mark Gordon (MGC) joint venture augmented by selective acquisitions. FY15 results were slightly ahead of consensus and the consolidation of MGC will provide greater transparency. Increased investment underpins a 6.6% increase in our FY17 normalised EPS and our FY17e EV/EBITDA is only 10.1x, 14% below the peer group average. 2 June 2015 Price 326p Market cap 964m US$1.54/C$1.91/ 1.41/ Net debt* ( m) at 31 March *including production net debt of 89m. Shares in issue 295.7m Free float 68% Year end Revenue ( m) EBITDA* ( m) PBT* ( m) EPS* (dil) (p) 03/ / /16e /17e DPS (p) Note: *Normalised, excluding one-off items, share based payments and amortisation of acquired intangibles but after charging content amortisation. P/E (x) Yield (%) Code Primary exchange Secondary exchange Share price performance ETO LSE N/A Executing on the ambitious growth strategy Since the new strategy was announced (see our 9 December Review), eone has acquired a 51% stake in The Mark Gordon Company (MGC) for 86m, which is a key platform for both US and international growth. Although not specifically quantified, we have interpreted the strategy as a goal to exceed 200m of EBITDA and c 45p of adjusted EPS in FY20. Most of the growth will come in Television and Family and we estimate that perhaps 75% will be organic, with small deals and partnerships more likely than another large acquisition, although one should not be ruled out. Increases to estimates We have increased FY16e EBITDA by 7m to reflect the consolidation of MGC (from 19 May 2015), and FY17e by 16m. We now expect investment in content and productions to be around 400m in FY17 (last published 330m), with a greater focus on TV and film production and new opportunities provided by the MGC joint venture. We believe that eone s target average ROI is 25-30% and while growing production debt lifts our overall debt forecasts, this is appropriate for a growth company with such a successful track record. Adjusted net debt should fall slightly in FY16 and beyond and coverage ratios are very comfortable. Valuation: FY17e EV/EVITDA only 10.1x eone shares have traded between 268p and 360p since the start of 2014 as the business has shifted to the second leg of its development, with Film maturing and Television now the bigger growth driver, in line with industry trends. eone has a consistent record of delivery and a low risk profile given its broad portfolio of entertainment content. We believe it has set out a clear path to strong growth, which is not yet reflected in the rating. The shares stand at a 14% discount to the peer group average based on FY17 EV/EBITDA estimates and 34% based on P/E, whereas we consider a premium could easily be justified. % 1m 3m 12m Abs Rel (local) week high/low 360.0p 268.4p 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 events Trading update Interim results Analysts September November Jane Anscombe +44 (0) Fiona Orford-Williams +44 (0) media@edisongroup.com Edison profile page Entertainment One is a research client of Edison Investment Research Limited

2 Television and Family now driving growth eone has an impressive record of growth in EBITDA and EPS. Since 2010 group revenues have doubled, underlying EBITDA has more than trebled and adjusted diluted EPS has doubled. Up to FY14 most of the growth came from Film eone s original focus as returns flowed from prior year content investment. The acquisition of Alliance Film in January 2013 was transformational for the business and has delivered material synergies. The Film business is now mature in its main markets (UK, Canada) with low single-digit revenue growth expected, albeit with medium-term scope for margin increases due to increasing economies of scale and the ongoing shift towards digital. While there is scope for geographic expansion of the Film division via acquisitions and partnerships (especially in the US through MGC), the main driver for growth towards the FY20 growth target comes from Television and Family, with strong demand for content from digital platforms. Family EBITDA doubled in FY15 and Peppa Pig now generates $1bn of retail sales worldwide, which eone believes it can double over the next five years. Exhibit 1: Impressive record of EBITDA and EPS growth m FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e Pence/share EBITDA (LHS) EPS (RHS) Source: Entertainment One, Edison Investment Research estimates Exhibits 2 and 3 show the shift in our expected EBITDA mix between FY14, when Film contributed 75% of EBITDA, and FY16e when the proportion drops to c 55%. We expect TV production and sales EBITDA to rise from 12.4m in FY14 to 19.0m in FY16e (and to have doubled to 25.0m by FY17e), with Family growing even more strongly, up from 10.3m to 26.0m between FY14 and FY16e. When MGC was acquired in January 2015 we expected it to be equity accounted, with only eone s share of post-tax income brought into EBITDA (see our Update note dated 7 January) but the shareholder agreement has now been modified and the business will be consolidated from 19 May 2015, which will give a clearer picture of progress in this important new segment. Exhibit 2: Mix of FY14 EBITDA of 93m Exhibit 3: Mix of FY16e EBITDA of 126m Family & licensing 10% Music 2% Family & licensing 19% Music 1% TV prod'n & sales 13% MGC 11% Film 55% Film 75% TV prod'n & sales 14% Source: Entertainment One, Edison Investment Research eone is continuing to invest heavily in content and production, with the latter financed with interim production finance rather than corporate debt, as described below. We have increased our forecast FY15 investment in content rights and productions from 315m to 360m (as indicated by eone in Entertainment One 2 June

3 its release), and for FY16 from 330m to 400m. The MGC stake gives a much bigger platform for US-based expansion than before and we believe there is now also some shift in growth strategy to focus on organic growth rather than acquisitions, although that is not to say that eone will not seize attractive acquisition opportunities if they present themselves. eone looks to access content through as many routes as possible to put through its distribution network: own production; firstlook/book/output deals; partnerships and JVs; plus acquisitions that meet the group s strict criteria (the right management team, culture and price). eone provided detailed segmental cash flow data with its final results (see Financials ). We have increased our overall total net debt forecasts but continue to expect a reduction in adjusted net debt (corporate debt) with all the growth coming in interim production finance, which is secured on known future income per production (pre-sales, grants and tax credits) and thus is a low-risk and efficient way of financing working capital. Film division FY16 recovery after a tough FY15 During FY15 eone continued to strengthen relationships with independent studios and producers including multi-year first look deals with, for example, Rumble Films and Hammer. It made one acquisition in the year Phase 4 Films (for 11.9m in June 2014), which brought in strong North American home entertainment relationships and allowed it to rationalise its US film operations. In May 2015 it brought together its small film production unit (acquired with Alliance) and international film sales activities into eone Features, now reported separately (Exhibit 4). eone continues to seek corporate partnerships or acquisitions in Latin America and South-East Asia and in parts of Europe to expand its international distribution footprint. Exhibit 4: Film division results and estimates m FY13 FY14 FY15 FY16e FY17e FY18e Theatrical Home Entertainment Broadcast / digital Other Film distribution eone Features Eliminations 0.0 (9.4) (9.7) (10.0) (10.0) (10.0) Film division revenue Film distribution eone Features Eliminations 0.0 (1.3) (0.7) (1.0) (1.0) (1.0) Film division EBITDA EBITDA margin % 9.5% 10.8% 12.3% 11.0% 11.0% 11.0% Source: Entertainment One, Edison Investment Research Film distribution After a very strong FY14, boosted by the full year inclusion of Alliance Films (acquired in January 2013) and associated synergies, FY15 was a challenging year for film distribution, with revenue down 13% to 581m (down 12% pro forma, like-for-like at constant currency). The global box office was weak in 2014 (US down 5.2% and UK down 2.7%, source: Box Office Mojo, Rentrak) but eone also suffered from underperforming titles and a lower number of releases (227 vs 275 in FY14). Theatrical revenues fell by 38% (pro forma 34%). Home entertainment (DVD/Blu-ray) revenues continued their structural decline, as expected, down 13% (15% pro forma), with the US home entertainment rationalisation more than offsetting a 30m maiden revenue contribution from Phase 4. Broadcast and digital sales were broadly flat (down 3% or 2% pro forma) against a tough FY14 comparative; they accounted for 37% of the film distribution total, up from 33% in FY14. The Other category includes third-party distribution sales, airlines and hotels. Entertainment One 2 June

4 We expect FY16 theatrical sales to recover broadly back to FY14 levels and have pencilled in c 5% growth thereafter with about 250 releases a year. As an indicator, the US box office is currently up 3.5% helped by successes such as Furious 7 (Universal, $1.5bn worldwide box office). The global box office is expected to have a good year in FY16 with forthcoming blockbusters including Jurassic World, Mission Impossible 5 and Mad Max as well as the final Hunger Games film (Mockingjay 2), the next Bond film, Spectre 007, and Star Wars Episode VII. Such tentpole titles draw people back into the cinema-going habit. We assume that home entertainment sales continue to decline at 10-15% per annum, although eone hopes for a better FY16 and the decline is more than offset by our forecast strong growth in broadcast and digital sales, helped by new deals with Foxtel in Australia and Shomi in Canada. DHX Entertainment recently noted that over 35 new subscription video on demand (SVOD) services have been launched in Canada alone since the beginning of 2014 (source: DHX presentation). Despite the fall in film distribution revenues in FY15, EBITDA increased by 3% to 73.7m (up 1% pro forma). The lower number of releases required lower minimum guarantee (MG) payments and print and advertising costs (eone is also able to flex the latter based on the expected performance of each title). Moreover, since these items are expensed on theatrical release, margins on the other windows are much higher. Thus the film distribution margin of 12.3% (FY14: 10.8%) was above average and we expect it to be about 11.0% through FY16-18 (although there is upside risk here as high-margin digital/broadcast sales replace low-margin DVD/Blu-ray sales). Moreover, with content investment expected to level out at c 200m pa over the next three years, underlying cash generation should improve significantly (see Financials below). eone Features eone Features enables eone to source content earlier in the production process, giving it better access to more territories and greater potential upside. It aims to produce and finance six to eight films annually and will only take on films with strong international potential. The risk profile is similar to its traditional distribution model since it only produces titles that all its territories would have bought on the open market anyway. International pre-sales, grants and tax relief typically cover c 85% of the investment (a similar ratio to TV production). eone had a major film production success in FY14 with Insidious: Chapter 2, which took $162m at the box office. The two FY15 releases (Suite Francaise and Woman in Black; Angel of Death) took $62m together (still a respectable total). Thus eone Features revenue declined by 30% in FY15, to 20.9m and normalised EBITDA fell to $0.1m from $3.5m. eone has already made additional profits from these titles through its film distribution channels. eone Features currently has four films in production or pre-release, including Insidious: Chapter 3 (US release date 5 June) and is also selling worldwide rights to a number of titles including Spotlight. eone is rapidly increasing investment in this segment: from only 0.4m in FY14 to 26.2m in FY15 and a planned 40m in FY16m. We expect this to flow through to strong growth in revenue and EBITDA going forwards, albeit with some fluctuations depending on the success of individual titles. However, the number of titles is still small compared with the c 250 pa releases by film distribution, where results fluctuate much less because of the portfolio effect. Television division growing strongly eone has built the leading independent television production and sales business in Canada and its strategy now is to build on that success to expand in the US, UK and Australia. It made two acquisitions in July/August 2014: Paperny Entertainment and Force Four Entertainment, both Canadian TV production companies specialising in non-scripted programmes, acquired for a combined 21.1m. In January 2015 it acquired 51% of The Mark Gordon Company (MGC) for Entertainment One 2 June

5 86.3m (with the opportunity to buy the remaining 49% after an initial seven-year term). This is an extremely important joint venture for eone: not only does it provide a US platform for growth but it is also likely to act as a territorial hub for partnerships with other creative producers. Production and sales Television production and sales revenue increased by 33% in FY15 (27% pro forma) to 148.4m or by 23% excluding an 11.6m contribution from the two acquisitions. eone has been very successful in getting its series renewed on leading US and Canadian TV and cable channels such as ABC, AMC and CTV. The value of a series increases with each renewal because of increased international and home entertainment opportunities. For example, during FY15 eone delivered seasons five and six of Rookie Blue and of Haven, which are now in the process of being sold into the US syndication markets (although it is a long sales cycle). Overall TV Production delivered 572 half-hours of programming in FY15, up from 507 in FY14. This included 215 half-hours from Paperney and Force Four (their non-scripted output commands a lower price per hour than eone s drama output but the margin is similar). eone expects to deliver over 850 half-hours of programmes in FY16 including season five of Hell on Wheels and season four of Rogue. Hence we expect continued strong growth in both revenue and EBITDA from TV production and sales, as shown in Exhibit 5. Exhibit 5: Television division results and estimates m FY13 FY14 FY15 FY16e FY17e FY18e Production and sales Mark Gordon (MGC) N/A N/A N/A Family & licensing Music Television division revenue Production and sales Mark Gordon (MGC) N/A N/A N/A Family & licensing Music Television division EBITDA EBITDA margin % 5.4% 14.9% 18.3% 19.5% 19.5% 18.8% Source: Entertainment One, Edison Investment Research The Mark Gordon Company (MGC) Mark Gordon is an extremely successful US TV producer whose successes include the longrunning TV series Grey s Anatomy and Criminal Minds, as well as feature films such as Speed and Saving Private Ryan. Overall, MGC s content portfolio comprises eight TV series and 40 feature films; two new shows are currently in production (Quantico and Criminal Minds: Beyond Borders). For the last 10 years MGC had partnered with Disney s ABC channel MGC s ideas were produced by the broadcaster (who then owned most of the content rights) and MGC received an overhead contribution and back-end participation fees. The ABC partnership has now ended (although they continue to own the rights over existing shows) and the new JV with eone gives MGC a broader creative remit and allows it to move further up the value chain by creating a new independent studio that will finance and produce films, network TV, cable and digital content (both Mark Gordon projects and those of other producers). The JV will retain the content rights to new shows, which eone will monetise through its international distribution network (see our Update note dated 7 January). Mark Gordon is CEO (tied in for seven years) and the entire staff has remained in place at its Los Angeles base. The partnership model is one that has worked well for eone in Canada and we originally expected the JV to be equity accounted. For example, board decisions such as the green-lighting of new projects need to be unanimous. However, as of 19 May 2015 both parties have agreed to allow Mark Gordon to focus on the creative side of the business and let eone manage the business Entertainment One 2 June

6 planning process. The shareholder agreement has been modified to reflect this and under IFRS 11 this means that MGC will now be fully consolidated and we show it as a separate line in Exhibit 5. This also means that there will be greater transparency over the JV s performance than we had expected. MGC s FY15 EBITDA was 17.8m and although revenue is not disclosed we believe that margins are very high and estimate FY15 revenue of some 35m. We expect strong growth in revenue in FY16 and beyond but a dip in FY16 EBITDA to 16.0m as the as the venture begins to invest in new content. The return on that investment should start to flow through to EBITDA by FY18 (when we see upside to our forecast). Family and licensing The Family division materially outperformed our original expectations in FY15, with revenue up 71% to 60.8m and EBITDA of 23.8m (FY14: 10.3m). Our Update report dated 21 May 2014 forecast FY15 EBITDA of 12.0m, although this was revised upwards during the year and post very strong Christmas 2014 trading. The roll-out of Peppa Pig across international markets (including SE Asia and Latin America) has delivered profits earlier than we expected (broadcast deals give brand exposure but most of the profits come from licensing and merchandising). Peppa Pig now has over 600 licensees globally, 180 broadcast territories and 250 live broadcast agreements. Retail sales of $1bn ( 650m) are more than three times the level of four years ago. An illustration of Peppa s global awareness is that over 3 million paid apps have been downloaded globally, and on YouTube the US, Mexico, Brazil and Russia all deliver a greater number of page views than the UK. eone believes it can double retail sales to $2bn. For example, US retail sales are just beginning to take off (Walmart stores recently began selling a range of Peppa products and Target stores will carry them later in the year) and Peppa is soon to launch in China, broadcast by the main state broadcaster, CCTV and with a small initial licensing programme. eone is continuing to develop a portfolio of other children s brands of which Ben & Holly s Little Kingdom is the most advanced, with international toy launches in Australia, Spain and Italy. Winston Steinburger and PJ Masks are currently in production with broadcast launches planned later in FY16. We expect these developments to restrain Family EBITDA growth in FY16, but with strong growth again in FY17. Music eone Music is small in a group context but is one of the larger independent music labels in North America and has consistently delivered 1-2m of EBITDA (depending on its mix of releases) with high cash conversion. Historic revenues have been 18-20m (of which we believe at least 80% are digital) but the adoption of IFRS11 means that a number of joint ventures will be consolidated in FY16, lifting revenues to c 38m on our estimates (Exhibit 5) but with little effect on EBITDA. Financials Exhibit 6 shows the half-yearly split of results: eone typically earns around two-thirds of EBITDA in the second half year, as was the case in FY15. The final results were slightly ahead of market consensus and very close to our estimates (Update report dated 2 February) with normalised EBITDA at 107.3m and normalised diluted EPS at 23.5p (Edison estimates 107.0m and 23.2p respectively). Revenue of 785.8m was slightly ahead of our estimate of 770.0m. We have discussed the divisional trends in the business sections above. Overall, FY15 proved to be a weak year both for the film industry generally and for eone Film, although its 14% fall in revenue was offset by higher margins to leave normalised EBITDA only 1% lower. By contrast the Television division had an excellent year in FY15 with revenue up 37% and normalised EBITDA up 68%. Entertainment One 2 June

7 Exhibit 6: Half yearly results and estimates Years to March FY14 FY15 FY16 FY17 FY18 m H1 H2 Year H1 H2 Year Year e Year e Year e Film revenue (Exhibit 4) Television revenue (Exhibit 5) Other/inter-group (12.4) (17.1) (29.5) (15.3) (19.1) (34.4) (45.0) (50.0) (55.0) Revenue , ,110.0 Film EBITDA Television EBITDA Operating EBITDA Operating EBITDA margin 8.4% 14.9% 12.0% 11.8% 16.6% 14.6% 14.4% 14.6% 14.8% Group costs (2.4) (3.7) (6.1) (2.6) (4.8) (7.4) (8.5) (9.0) (9.5) EBITDA (normalised) Normalised EBITDA margin 7.8% 14.1% 11.3% 11.0% 15.6% 13.7% 13.5% 13.7% 14.0% Depreciation/amortisation (1.1) (1.5) (2.6) (1.7) (2.0) (3.7) (5.5) (6.0) (6.5) Net financing charges (6.1) (5.7) (11.8) (6.5) (8.3) (14.8) (17.0) (16.0) (16.0) Normalised PBT Normalised PAT Non-controlling interest 0.0 (0.3) (0.3) (4.7) (5.0) (5.2) Normalised EPS (diluted) 5.6p 15.5p 21.0p 7.8p 15.8p 23.5p 25.5p 29.0p 32.5p Average shares (diluted) (m) Source: Entertainment One, Edison Investment Research We have made two main changes to our forecasts for FY16 and FY17. Firstly, we are now consolidating Mark Gordon (MGC) with c 16m of EBITDA in FY16 and FY17, whereas we previously only brought eone s net after tax share into EBITDA (assumed to be 5.0m in both years). Secondly, we have increased our estimate of investment in content and productions (see cash flow below). This partly underpins our increased revenue estimates (now 935m and 1,020m for FY16 and FY17 respectively versus a rather cautious 858m and 893m previously). Excluding the MGC adjustment our underlying FY16 EBITDA estimate is broadly unchanged. Our overall FY16 EBITDA of 126.0m is flat on the proforma FY15 result (including 100% of MGC) due to the increased investment that is taking place across the group and return to a more normal 11% margin in Film. The benefits of this come in subsequent years and we have increased our FY17 estimates, with 11% growth in EBITDA to 140m (previously 6% growth). We provisionally forecast a similar 11% growth rate in FY18 but will formally introduce FY18 estimates later in the year. To reach the 200m target in FY20 organically eone would need 14% growth in both FY19 and FY20, but in practice we assume there will also be some contribution from acquisitions. The underlying increase in our estimates is evidenced by our normalised EPS estimates, up 1.2% in FY16 and 6.6% in FY17 (Exhibit 7). Our interest charge is slightly lower than before (since most of our increased investment is through production finance, where interest is capitalised and amortised against EBITDA) and we now assume a 22.5% normalised tax rate (as in FY15) versus 23.0% previously. Our forecasts are detailed in Exhibit 12. Exhibit 7: Changes to estimates EPS (p) PBT ( m) EBITDA ( m) Old New % chg. Old New % chg. Old New % chg. FY16e FY17e Source: Edison Investment Research. Divisional analysis of adjusted free cash flow (FCF) Entertainment One s results presentation gave a more detailed analysis of cash flow than previously. eone monitors divisional cash flow before financing and thus the increase in interim production finance ( 35.3m in FY15) is backed out of its adjusted FCF calculation. Exhibit 8 shows the divisional adjusted FCF in FY15 of 41.0m and reconciles it to the increase in total net debt of 149.1m (which is mainly due to acquisitions). Entertainment One 2 June

8 Exhibit 8: Divisional cash flow reconciliation m EBITDA* Investment Amortisation Acquisition adjustment Working capital Production finance incr. Adj FCF FY15 Adj FCF FY16e Film distribution 73.7 (151.3) (33.0) (19.1) eone Features 0.1 (26.2) (3.0) Television production 16.4 (100.7) (18.3) Family 23.8 (1.9) Music 1.4 (2.5) Other/corporate (8.1) 1.8 (1.8) (0.1) (2.8) 0.0 (11.0) (9.2) Total (280.8) (33.1) (35.1) Cash impact of one-off items (14.6) (5.0) Capex (4.8) (6.0) Increase in production finance (35.3) (50.7) Free cash flow before interest and tax (13.7) 2.0 Interest and tax (Exhibit 12) (24.2) (30.0) Acquisitions (104.3) 0.0 Dividends/FX/other (6.9) (7.8) Increase in total debt (149.1) (35.8) Year-end debt (incl prod'n finance) Source: Entertainment One, Edison Investment Research. Note: *normalised EBITDA. Film distribution generated 15.3m of adjusted FCF in FY15, down from 25.3m in FY14. There were 33.0m of acquisition adjustments relating to the FY13 acquisition of Alliance eg in respect of onerous contacts (underperforming films that have been provided for) and redundancies. Working capital was relatively high at 19.1m with a weak year for films, but still the need to pay overages in respect of bigger films of prior years. This should slightly reverse in FY16 and with modest acquisition adjustments we expect film distribution adjusted FCF to increase materially to 36.5m, even allowing for an increase in content investment to 170m. This implies an adjusted FCF conversion ratio of 40-50% in FY16 (50% on our estimates), up from 21% in FY15. Arguably this is slightly flattering since eone Features may be seen as another way of acquiring film content for distribution and although its adjusted FY15 FCF was 5.2m (FY14 negative 2.5m), there was a 18.0m outflow after the increase in related interim production finance. However this segment is only just starting up and once in steady state, production finance repayments will broadly equal borrowings in a given year. TV production adjusted FCF was 3.0m in FY15 (FY14: outflow of 10.7m) with a relatively small gap between investment and amortisation but a relatively large working capital outflow of 18.3m (which arises in part because the revenue from licence fees is recognised when the licence term has commenced but payments may be spread over a number of years). Investment in acquired content and productions is forecast to increase to 140m in FY16 and we estimate that the business should remain adjusted FCF positive before deducting the materially increased interim production finance. Family was the star cash contributor in FY15, generating 26.3m or 111% cash conversion (108% after deducting a.0.7m increase in interim production finance). We expect a similar level of adjusted FCF in FY16 despite the development and roll-out of new brands. The small music business is also cash positive. Cash flows and movements in net debt After allowing for the cash effect of one-off items, capex and the 35.3m increase in production finance, free cash flow was an outflow of 13.7m in FY15, or 37.9m after interest and tax. The cash cost of acquisitions was 104.3m (MGC 83.0m, Phase 4, Paperny and Force Four 6-6.5m each and 50% of digital agency Secret Location 2.5m). After dividends and FX the increase in net debt was 149.1m, taking the total to 314.2m (2.9x EBITDA). Entertainment One 2 June

9 Exhibit 9: Summarised net debt movements m Mar-14 Cash flow Mar-15 Cash flow Mar-16e Cash flow Mar-17e Adjusted net debt (113.8) Net interim production debt 54.0 (35.3) 89.3 (50.7) (30.0) Net debt (149.1) (35.8) (15.0) Source: Entertainment One, Edison Investment Research For FY16 we have increased our forecast investment in content rights and productions from 315m to 360m (as flagged by eone in its release), and for FY16 from 330m to 400m. We believe this reflects some shift in growth strategy to focus on organic growth rather than acquisitions, although that is not to say that eone will not seize attractive acquisition opportunities if they present themselves. The MGC stake gives a much bigger platform for US-based expansion than before, and will bring in exclusive global content rights for eone. Overall eone looks to access content through as many routes as possible to put through its distribution network: own production; firstlook/book/output deals; partnerships and JVs; as well as acquisitions that meet the group s strict criteria (the right management team, culture and price). The increase in our forecast investment flows through to higher year-end net debt: we now expect 350m total net debt at March 2016 (previously 320m) and 365m at March 2017 (previously 312m). However, within net debt we distinguish between adjusted net debt and production finance since the characteristics of the two are very different and the latter is quasi working capital. We continue to expect year-end adjusted net debt to trend steadily downwards, while we now expect production net debt of 170m by March 2017 (previously 125m). Adjusted net debt is the group s senior debt facility less cash ( 268.6m less 43.7m at 31 March 2015). There is plenty of headroom against a $504m ( 327m) five-year facility which runs to January Financial covenants include a fixed cover charge, gross debt/normalised EBITDA and capex. Gross debt/ebitda was 2.5x in FY15. By contrast, net interim production finance is shorter-term working capital financing that is independent of the senior credit facility, arranged and secured on a production by production basis and non-recourse to the group. TV productions are only greenlit when broadcaster fees and government/tax credits have been agreed (such that there is a minimum of 85% coverage of production budgets). The interim production finance is secured on the known future income per production (pre-sales, grants and tax credits) and thus is a low-risk and efficient way of financing working capital. In the same way, in film production the finance bridges the gap until international sales and distributor fees are received. With a more mature company such as Lions Gate some equity analysts focus on adjusted (corporate) debt since repayments of production loans broadly equals new borrowings (FY14 net repayment $50.5m, FY13 net borrowing of $6.9m, source Lions Gate 10K). We consider it sensible to look at both metrics for eone given the growing amount of gross production finance ( 116.9m at March 2015, on which interest is charged at bank prime plus a margin). However, we view it as low-risk financing given its relatively short term and the fact that it is not so different from factoring. Our balance sheet and cash flow forecasts will need to be adjusted for production investment made by the Mark Gordon JV, which is now being consolidated (from 19 May). We will have better visibility on this when eone s interims are published in November, as these will be the first consolidated accounts. At the time of the acquisition of the 51% stake we did not expect eone to put any further money into the JV since we expect cash flows from its library (which we estimate to be worth c $130m) and production finance to fund investment in new content. However, with high end shows typically costing as much as $25-30m per series, our total consolidated investment and debt figures (before minority share) may increase, depending on the number of shows and the timing of their delivery. Entertainment One 2 June

10 Valuation Exhibit 10 shows the peer group comparison. For the purposes of valuation we proportionately consolidate the MGC JV (ie for FY16 EBITDA we use 118m, being our forecast of 126m less 49% of MGC s forecast EBITDA of 16m). eone s FY16 EV/EBITDA of 11.1x is below both the peer group average and its two closest comparators, US mini-studio Lions Gate Entertainment and UK TV broadcaster ITV. Moreover we believe that it should trade at a premium to the smaller and less diversified Canadian DHX Media group. Overall eone trades at a 13% discount to the average based on FY16 EV/EBITDA estimates and 34% based on P/E, whereas we consider a premium could easily be justified given its consistent strong growth and track record of delivery. Exhibit 10: Peer group comparison Price Mkt Cap EV/EBITDA (x) P/E (x) ( m) FY15 FY16e FY17e FY15 FY16e FY17e Entertainment One ITV plc* DHX Media* C$ Lions Gate Ent. (NYSE: LGF) US$ , Walt Disney * (NYSE: DIS) US$ , Peer group average ** Source: Thomson Reuters, Edison Investment Research. Share prices at 1 June. Note: *annualised to March. ** excludes highlighted outlier.. We have updated our sum-of-the-parts calculation in Exhibit 11. We have applied a 10-11x multiple to Film to reflect its scale and the quality of its library, which has further scope for international leverage to offset its maturity in its main markets. We have pitched the Television high/low multiples around the peer group average, since the division is in the process of rapid scaling up, and applied a premium to Family given Peppa Pig s huge opportunity in the US and Far East markets, which is not yet reflected in our numbers. We have included the MGC JV at cost, and at cost plus 5% for the high value. We have conservatively included production finance in debt and added back its cost (the amortisation of capitalised borrowing costs, c 1m) to TV production and sales EBITDA. Overall our calculation produces a value range per diluted share of 336p to 396p, 3-21% above the current share price. However, we believe this is conservative since FY16 EBITDA is somewhat depressed by the increase in investment across the group, with the benefits flowing through to stronger growth to come in FY17 and beyond. Exhibit 11: Sum-of-the-parts valuation m FY16 EBITDA Multiple Value Low High Low High Film TV production and sales Family Music 1.5 ** ** Overhead (8.5) (59.5) (59.5) Operations Mark Gordon JV (51%) Debt (incl production finance) (350.0) (350.0) Equity value ,173.7 Value per diluted share (p) 336p 396p Source: Edison Investment Research. Note: valued at x FY15 sales of 18.4m. Entertainment One 2 June

11 Exhibit 12: Financial summary m e 2017e Year end 31 March IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue ,020.0 Cost of Sales (478.1) (642.3) (578.0) (710.6) (775.2) Gross Profit EBITDA Operating Profit Amortisation of intangibles (18.2) (36.0) (22.2) (18.5) (17.0) Exceptional items (26.8) (22.1) (17.9) Share based payment charge (1.2) (2.7) (3.4) (4.0) 0.0 JV tax, finance costs, dep'n Operating Profit Net Interest (6.1) (11.8) (14.8) (17.0) (16.0) Exceptional finance items (2.1) 3.9 (1.4) Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax (reported) (6.6) (1.5) (2.7) (16.2) (20.2) Tax (adjustment for normalised earnings) (8.4) (18.1) (17.3) (7.1) (6.3) Profit After Tax (norm) Profit After Tax (FRS 3) (1.1) Non-controlling interests (4.7) (5.0) Average Number of Shares, Diluted (m) EPS - normalised diluted (p) EPS - post share based payments (norm, dil) (p) EPS - FRS 3 (p) (0.5) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except) (%) BALANCE SHEET Non-current Assets Intangible Assets (incl Investment in programmes) Tangible Assets Deferred tax/investments Current Assets Stocks Investment in content rights Debtors Cash Current Liabilities (482.8) (449.2) (488.3) (545.0) (563.0) Creditors (436.8) (401.1) (398.7) (440.0) (463.0) Short term borrowings (46.0) (48.1) (89.6) (105.0) (100.0) Long Term Liabilities (170.5) (168.6) (319.6) (313.0) (305.0) Long term borrowings (131.9) (155.9) (295.9) (300.0) (290.0) Other long term liabilities (38.6) (12.7) (23.7) (13.0) (15.0) Net Assets CASH FLOW Operating Cash Flow Net Interest (7.6) (10.7) (13.4) (15.5) (16.0) Tax (9.0) (5.9) (10.8) (14.0) (16.0) Capex (7.1) (4.2) (4.8) (6.0) (7.0) Acquisitions/disposals (143.7) (6.1) (104.3) Investment in content rights and TV programmes (179.5) (281.4) (280.8) (360.0) (400.0) Proceeds on issue of shares Dividends (2.9) (3.3) (4.0) Net Cash Flow (52.5) (44.1) (145.1) (30.8) (15.0) Opening net debt/(cash) Movements in exchangeable notes Other including forex (1.8) 23.5 (4.0) (5.0) 0.0 Closing net debt/(cash) ANALYSIS OF NET DEBT Total debt Net production finance Adjusted net debt Source: Entertainment One Ltd., Edison Investment Research Entertainment One 2 June

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