Pantaleon Entertainment AG Germany - Media

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1 Germany - Media Buy (old: Buy) 19-July-17 Price target: EUR (old: EUR ) Price: EUR Next result: H1 17: Pierre Gröning Bloomberg: PAL:GR Market cap: EUR m pierre.groening@ha-research.de Reuters: PALG.XE Enterprise Value: EUR m Tel.: Steady on both feet: PANTAFLIX to grow into a leading actor; chg. Management s recently announced intention to rename Pantaleon into PANTAFLIX AG already hints that its scalable video-on-demand platform looks set to become the company s leading actor. And indeed, the outlook for PANTAFLIX is promising given that the platform has grown into much more than just a vague concept: Technical features should facilitate adaptability. Following the termination of the platform s beta version status at year-end FY 16, Pantaleon has launched apps for ios and Android in several languages making it available on > 95% of smartphones worldwide. Moreover, the recently implemented PayPal function should further facilitate the usability for consumers. Content offering is growing rapidly. Access to a comprehensive base of local home content represents one of the key pillars of differentiation to other streaming platforms. Positively, management confirmed to be on track expanding content from currently 10,000 formats to 40,000 by year-end FY 17E and 160,000 by FY 18E. Efficient marketing push should drive consumer adaption. With recent test data suggesting strong marketing efficiency, the marketing strategy for the PANTAFLIX roll-out is seen to be strongly geared towards digital advertising (e.g. social media, search engines) potentially supported by co-operations with media and retail partners in the short to mid term. As a result, actual marketing costs should amount to 3m in FY 17E substantially lower than initially assumed (eh&a old: 6m). Ready to go global. While already being launched in the key markets of Europe and the US as well as selected Asian countries (Indonesia, Japan, Philippines, Vietnam), PANTAFLIX looks set to gradually enter further regions across the globe in the months ahead as soon as country-specific requirements are met. Hence, we expect the platform to reach global availability by year-end FY 17E. The market potential looks huge. Addressing domestic consumers as well as millions of immigrants and expats which currently lack access to their domestic content (UN: >200m worldwide), the platform s potential client base looks massive. Accordingly, PANTAFLIX provides appealing growth potential even assuming conservative penetration rates (see Graph on next page). As a result of the enhanced visibility on the progress of PANTAFLIX roll-out, we increase the TY EBIT margin to 15% (old: 10%) yielding a new PT of 164. Y/E (EUR m) E 2018E 2019E growth 165 % -17 % 128 % 11 % 137 % 47 % 41 % EBITDA EBIT Net income Net debt Net gearing n/a n/a n/a n/a n/a n/a % Net Debt/EBITDA EPS pro forma CPS DPS Dividend yield 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Gross profit margin n/a n/a 32.5 % 76.7 % 84.0 % 82.6 % 84.0 % EBITDA margin 42.7 % -5.5 % 64.4 % 60.5 % 66.6 % 61.4 % 62.8 % EBIT margin 40.7 % -5.8 % -4.0 % % -3.2 % 20.6 % 32.1 % ROCE n/a n/a n/a n/a n/a n/a n/a EV/sales EV/EBITDA 40.5 n/a n/a EV/EBIT 42.6 n/a n/a PER n/a n/a n/a Adjusted FCF yield n/a -0.4 % -0.3 % -1.2 % -0.7 % 5.1 % 11.3 % Close price as of: High/low 52 weeks: / Price/Book Ratio: 46.0 Relative performance (SDAX): 3 months 53.7 % 6 months 30.5 % 12 months % Changes in estimates Key share data: EBIT EPS n.a. n.a. n.a Number of shares: (in m pcs) 1.1 Authorised capital: (in m) - Book value per share: (in ) 2.8 Ø trading volume: (12 months) 1,000 Major shareholders: Blackmars Capital 77.9 % Free Float 22.1 % Allianz Global Investors 7.5 % Frankfurt Performance 4.8 % Carmignac Gestion 2.6 % Taaleri Wealth Mgmt 2.1 % Company description: Pantaleon develops and produces films in Germany and internationally. It is also involved in the exploitation of the rights to films through international film distributors. In 2016, the company launched its online streaming platform PANTAFLIX.

2 PANTAFLIX offers appealing sales growth potential 2016* 2017E 2018E 2019E Total adressable market Penetration rate 0.0% 0.6% 3.1% 5.3% pp change pp pp pp Active customers (in m) growth yoy n/a 419% 72% Number of movies uploaded (end of year) 1,000 40, , ,000 Streams / active customer (p.a.) growth yoy 5% 7% 16% Total streams (in m) Avg. price per stream (in ) Commission PANTA (in %) 25% 25% 25% 25% Net sales (in m) growth yoy n/a 456% 98% as % of group sales 0% 9% 34% 48% The ongoing roll-out of PANTAFLIX is seen to drive dynamic sales growth at a CAGR of 70% from FY 16-19E, adding a highly scalable revenue stream which should by far outgrow today s solid and profitable core production business (eh&a: c. 35% of sales in FY 18E vs. < 1% in FY 16). Bottom-line contributions from high-margin incremental sales should become visible from FY 18E onwards after the digestion of roll-out costs (c. 80% incremental EBITDA margin). PANTAFLIX is seen to outgrow the company's healthy production business Group sales: +70% p.a. CAGR 16-19E % p.a. CAGR 16-19E E 2018E 2019E 484% p.a. CAGR 16-19E Distribution PANTA (sales, in m) Production Business (incl. Branded Entertainment, sales, in m) Production business provides a solid back-up But all of this does not mean that the production business is not worth a look. In fact, the content pipeline for FY 17E looks set to be a blockbuster: We expect the three major formats Hot Dog, You Are Wanted 2 and Vielmachglas to generate sales of > 28m alone, hence already implying top-line growth of 85% yoy without factoring in any other format and contributions from PANTAFLIX. Further, the international success of the VoD format You Are Wanted produced for Amazon (amongst the five most-watched series on Amazon Prime Video in 70 countries over the opening weekend) serves as a proof of concept for Pantaleon s high-quality content and its increasingly international growth path. 2 Hauck & Aufhäuser Privatbankiers AG

3 With this, Pantaleon is seen to have successfully entered the international market of web-streamed formats looking well-positioned to win further productions for global players: Already having been commissioned by Amazon to produce the second season of You Are Wanted (eh&a > 10m sales volumes), Pantaleon should gain further commissions for respective formats making the production of series / VoD formats a second main pillar next to the traditional cinema movies (mostly starring Pantaleon s major shareholder Matthias Schweighöfer). Overall, Pantaleon s production business looks set to generate solid organic growth. Following the substantial boost in FY 17E (eh&a > +100% to 33m) we conservatively expect growth at a CAGR of 8% from FY 17-19E to c. 38m. Action We overhaul our model and reflect lower-than-expected roll-out costs mainly on the back of cost-efficient digital advertising. While we still incorporate a significant discount for execution risk in the terminal year, the enhanced visibility on the progress of PANTAFLIX roll-out allows us lifting the assumed terminal-year EBIT margin from 10% to 15% which still looks conservative given the scalability and margin potential assuming a successful roll-out (> 30% FY 19E). Capturing the dynamic growth potential, DCF is used for valuation purposes yielding a new PT of 164 (old: 118). BUY. 3 Hauck & Aufhäuser Privatbankiers AG

4 Financials Profit and loss (EUR m) E 2018E 2019E Net sales !"#$!!$ %&&$ '!$ (!!$ "&"$ "'!$ Increase/decrease in finished goods and work-in-process Total sales Other operating income Material expenses Personnel expenses Other operating expenses Total operating expenses EBITDA Depreciation EBITA Amortisation of goodwill Amortisation of intangible assets Impairment charges EBIT Interest income Interest expenses Other financial result Financial result Recurring pretax income from continuing operations Extraordinary income/loss Earnings before taxes Taxes Net income from continuing operations Result from discontinued operations (net of tax) Net income Minority interest Net income (net of minority interest) Average number of shares EPS reported Profit and loss (common size) E 2018E 2019E Net sales % % % % % % % Increase/decrease in finished goods and work-in-process 0.0 % 0.0 % 0.0 % 2.8 % 0.0 % 0.0 % 0.0 % Total sales % % % % % % % Other operating income 35.6 % 31.9 % 48.6 % 6.2 % 8.4 % 5.3 % 4.5 % Material expenses 78.6 % % 67.5 % 23.9 % 16.0 % 17.4 % 16.0 % Personnel expenses 6.8 % 8.6 % 6.0 % 13.1 % 11.5 % 11.0 % 10.5 % Other operating expenses 7.4 % 12.7 % 10.8 % 11.5 % 14.2 % 15.5 % 15.2 % Total operating expenses 57.3 % % 35.6 % 42.3 % 33.4 % 38.6 % 37.2 % EBITDA 42.7 % -5.5% 64.4 % 60.5 % 66.6 % 61.4 % 62.8 % Depreciation 2.1 % 0.3 % 0.7 % 0.2 % 0.5 % 0.5 % 0.5 % EBITA 40.7 % -5.8% 63.7 % 60.3 % 66.1 % 60.9 % 62.3 % Amortisation of goodwill 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Amortisation of intangible assets 0.0 % 0.0 % 67.6 % 71.7 % 69.4 % 40.3 % 30.2 % Impairment charges 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % EBIT 40.7 % -5.8% -4.0% -11.4% -3.2% 20.6 % 32.1 % Interest income 0.1 % 1.9 % 0.9 % 0.7 % 0.3 % 0.2 % 0.2 % Interest expenses 0.4 % 0.3 % 0.1 % 0.0 % 0.1 % 0.1 % 0.1 % Other financial result 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Financial result -0.2 % 1.7 % 0.8 % 0.7 % 0.2 % 0.1 % 0.1 % Recurring pretax income from continuing operations 40.4 % -4.1% -3.2% -10.8% -3.0% 20.7 % 32.1 % Extraordinary income/loss 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Earnings before taxes 40.4 % -4.1% -3.2% -10.8% -3.0% 20.7 % 32.1 % Tax rate 5.4 % % 11.9 % -3.6 % -3.6 % 30.0 % 30.0 % Net income from continuing operations 38.3 % -6.5% -2.8% -11.1% -3.0% 15.3 % 22.5 % Income from discontinued operations (net of tax) 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Net income 38.3 % -6.5% -2.8% -11.1% -3.0% 15.3 % 22.5 % Minority interest 0.0 % 0.0 % 0.0 % -0.1 % 0.0 % 0.0 % 0.0 % Net income (net of minority interest) 38.3 % -6.5% -2.8% -11.1% -3.0% 15.3 % 22.5 % 4 Hauck & Aufhäuser Privatbankiers AG

5 Balance sheet (EUR m) E 2018E 2019E Intangible assets Property, plant and equipment Financial assets FIXED ASSETS Inventories Accounts receivable Other current assets Liquid assets Deferred taxes Deferred charges and prepaid expenses CURRENT ASSETS TOTAL ASSETS SHAREHOLDERS EQUITY MINORITY INTEREST Long-term debt Provisions for pensions and similar obligations Other provisions Non-current liabilities short-term liabilities to banks Accounts payable Advance payments received on orders Other liabilities (incl. from lease and rental contracts) Deferred taxes Deferred income Current liabilities TOTAL LIABILITIES AND SHAREHOLDERS EQUITY Balance sheet (common size) E 2018E 2019E Intangible assets 0.0 % 0.0 % 7.7 % 41.4 % 6.6 % 9.1 % 6.7 % Property, plant and equipment 0.2 % 0.1 % 0.3 % 0.6 % 0.7 % 0.4 % 0.3 % Financial assets 0.0 % 0.0 % 0.0 % 0.1 % 0.1 % 0.0 % 0.0 % FIXED ASSETS 0.3 % 0.2 % 8.0 % 42.1 % 7.3 % 9.5 % 7.0 % Inventories 20.6 % 32.5 % 6.7 % 0.0 % 0.0 % 0.0 % 0.0 % Accounts receivable 16.9 % 31.8 % 25.1 % 25.6 % 63.0 % 61.0 % 51.1 % Other current assets 0.0 % 0.0 % 24.3 % 22.0 % 22.9 % 15.1 % 9.0 % Liquid assets 62.2 % 31.0 % 35.7 % 10.1 % 6.5 % 14.2 % 32.8 % Deferred taxes 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Deferred charges and prepaid expenses 0.0 % 0.0 % 0.2 % 0.3 % 0.3 % 0.2 % 0.1 % CURRENT ASSETS 99.8 % 95.3 % 92.0 % 57.9 % 92.7 % 90.5 % 93.0 % TOTAL ASSETS % % % % % % % SHAREHOLDERS EQUITY -4.5 % 0.0 % 35.3 % 17.1 % 6.9 % 35.2 % 58.7 % MINORITY INTEREST 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Long-term debt 25.3 % 55.4 % 22.6 % 31.9 % 33.2 % 21.9 % 13.0 % Provisions for pensions and similar obligations 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Other provisions 2.3 % 0.9 % 0.4 % 0.9 % 0.9 % 0.6 % 0.4 % Non-current liabilities 27.5 % 56.4 % 22.9 % 32.8 % 34.1 % 22.5 % 13.4 % short-term liabilities to banks 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Accounts payable 0.8 % 1.6 % 1.7 % 4.7 % 11.5 % 11.2 % 9.4 % Advance payments received on orders 0.0 % 29.0 % 37.1 % 36.0 % 37.5 % 24.6 % 14.7 % Other liabilities (incl. from lease and rental contracts) 76.1 % 13.1 % 2.9 % 9.5 % 9.9 % 6.5 % 3.9 % Deferred taxes 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Deferred income 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Current liabilities 76.9 % 43.6 % 41.7 % 50.2 % 59.0 % 42.4 % 28.0 % TOTAL LIABILITIES AND SHAREHOLDERS EQUITY % % % % % % % 5 Hauck & Aufhäuser Privatbankiers AG

6 Cash flow statement (EUR m) E 2018E 2019E Net profit/loss Depreciation of fixed assets (incl. leases) Amortisation of goodwill Amortisation of intangible assets Others Cash flow from operations before changes in w/c Increase/decrease in inventory Increase/decrease in accounts receivable Increase/decrease in accounts payable Increase/decrease in other working capital positions Increase/decrease in working capital Cash flow from operating activities CAPEX Payments for acquisitions Financial investments Income from asset disposals Cash flow from investing activities Cash flow before financing Increase/decrease in debt position Purchase of own shares Capital measures Dividends paid Others Effects of exchange rate changes on cash Cash flow from financing activities Increase/decrease in liquid assets Liquid assets at end of period Regional split (EUR m) E 2018E 2019E Domestic Rest of Europe NAFTA Asia Pacific Rest of world TTL Hauck & Aufhäuser Privatbankiers AG

7 Key ratios (EUR m) E 2018E 2019E P&L growth analysis growth % % % 10.6 % % 47.4 % 40.6 % EBITDA growth % % % % 35.8 % 43.8 % EBIT growth % % 56.4 % % % % EPS growth % % % % % % % Efficiency Total operating costs / sales 57.3 % % 35.6 % 42.3 % 33.4 % 38.6 % 37.2 % per employee n/a n/a n/a n/a n/a EBITDA per employee n/a n/a n/a n/a n/a Balance sheet analysis Avg. working capital / sales 56.4 % 87.9 % 31.4 % 9.1 % 8.9 % 14.9 % 17.0 % Inventory turnover (sales/inventory) n/a n/a n/a n/a Trade debtors in days of sales A/P turnover [(A/P*365)/sales] n/a n/a Cash conversion cycle (days) n/a n/a n/a n/a Cash flow analysis Free cash flow Free cash flow/sales 35.2 % % 2.2 % % 0.3 % 4.9 % 14.5 % FCF / net profit 92.0 % % % % % 32.3 % 64.5 % Capex / depn 0.0 % % % % 74.7 % % % Capex / maintenance capex 0.0 % 0.0 % 0.0 % 1.0 % 0.7 % 1.2 % 1.6 % Capex / sales n/a n/a n/a n/a n/a n/a n/a Security Net debt Net Debt/EBITDA Net debt / equity Interest cover Dividend payout ratio 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % Asset utilisation Capital employed turnover Operating assets turnover Plant turnover Inventory turnover (sales/inventory) n/a n/a n/a n/a Returns ROCE n/a n/a n/a n/a n/a n/a n/a ROE % % % % 87.1 % 64.3 % Other Interest paid / avg. debt 0.9 % 0.2 % 0.3 % 0.1 % 0.6 % 0.9 % 1.3 % No. employees (average) Number of shares DPS EPS reported Valuation ratios P/BV EV/sales EV/EBITDA 40.5 n/a n/a EV/EBITA 42.6 n/a n/a EV/EBIT 42.6 n/a n/a EV/FCF Adjusted FCF yield n/a -0.4 % -0.3 % -1.2 % -0.7 % 5.1 % 11.3 % Dividend yield 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 7 Hauck & Aufhäuser Privatbankiers AG

8 Disclosures regarding research publications of Hauck & Aufhäuser Privatbankiers AG pursuant to section 34b of the German Securities Trading Act (WpHG) and distributed in the UK under an EEA branch passport, subject to the FCA requirements on research recommendation disclosures It is essential that any research recommendation is fairly presented and discloses interests of indicates relevant conflicts of interest. Pursuant to section 34b of the German Securities Trading Act (WpHG) a research report has to point out possible conflicts of interest in connection with the analysed company. Further to this, under the FCA s rules on research recommendations, any conflicts of interest in connection with the recommendation must be disclosed. A conflict of interest is presumed to exist in particular if Hauck & Aufhäuser Privatbankiers AG (1) or its affiliate(s) (either in its own right or as part of a consortium) within the past twelve months, acquired the financial instruments of the analysed company, (2) has entered into an agreement on the production of the research report with the analysed company, (3) or its affiliate(s) has, within the past twelve months, been party to an agreement on the provision of investment banking services with the analysed company or have received services or a promise of services under the term of such an agreement, (4) or its affiliate(s) holds a) 5% or more of the share capital of the analysed company, or b) the analysed company holds 5% or more of the share capital of Hauck & Aufhäuser Privatbankiers AG or its affiliate(s), (5) or its affiliate(s) holds a net long (a) or a net short (b) position of 0.5% of the outstanding share capital of the analysed company or derivatives thereof, (6) or its affiliate(s) is a market maker or liquidity provider in the financial instruments of the issuer, (7) or the analyst has any other significant financial interests relating to the analysed company such as, for example, exercising mandates in the interest of the analysed company or a significant conflict of interest with respect to the issuer, (8) The research report has been made available to the company prior to its publication. Thereafter, only factual changes have been made to the report. Conflicts of interest that existed at the time when this research report was published: Company Disclosure Pantaleon Entertainment AG 3 Historical target price and rating changes for Pantaleon Entertainment AG in the last 12 months Initiation coverage 15-December-15 Company Date Rating Target price Close Pantaleon Entertainment AG Gröning, Pierre Buy EUR 118,00 EUR 103, Schwenkenbecher, Christian Buy EUR 118,00 EUR 92, Schwenkenbecher, Christian Buy EUR 118,00 EUR 60, Schwenkenbecher, Christian Buy EUR 106,00 EUR 55, Schwenkenbecher, Christian Buy EUR 106,00 EUR 43, Schwenkenbecher, Christian Buy EUR 106,00 EUR 43,20 8 Hauck & Aufhäuser Privatbankiers AG

9 Schwenkenbecher, Christian Buy EUR 106,00 EUR 48, Schwenkenbecher, Christian Buy EUR 106,00 EUR 45,00 Hauck & Aufhäuser distribution of ratings and in proportion to investment banking services Buy % % Sell % 0.00 % Hold % 7.14 % Date of publication creation: 19/07/ :40 AM Date of publication dissemination: 19/07/ :45 AM 9 Hauck & Aufhäuser Privatbankiers AG

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Information Concerning the Methods of Valuation/Update The determination of the fair value per share, i.e. the price target, and the resultant rating is done on the basis of the adjusted free cash flow (adj. FCF) method and on the basis of the discounted cash flow DCF model. Furthermore, a peer group comparison is made. The adj. FCF method is based on the assumption that investors purchase assets only at a price (enterprise value) at which the operating cash flow return after taxes on this investment exceeds their opportunity costs in the form of a hurdle rate of 7.5%. The operating cash flow is calculated as EBITDA less maintenance capex and taxes. Within the framework of the DCF approach, the future free cash flows are calculated initially on the basis of a fictitious capital structure of 100% equity, i.e. interest and repayments on debt capital are not factored in initially. 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11 Contacts: Hauck&Aufhäuser Privatbankiers AG Hauck & Aufhäuser Research Hauck & Aufhäuser Privatbankiers AG Mittelweg 16/ Hamburg Germany Tel.: +49 (0) Fax: +49 (0) Henning Breiter Head of Research Tel.: Tim Wunderlich, CFA Head of Research Tel.: Robin Brass, CFA Tel.: Lars Dannenberg Tel.: Christian Glowa Tel.: Pierre Gröning Tel.: Aliaksandr Halitsa Tel.: Christian Salis Tel.: Torben Teichler Tel.: Hauck & Aufhäuser Oliver Anderson Tel.: Christian Alisch Tel.: Georgina Harrold Tel.: JPP Eurosecurities Inc. North America Quinn Raftery Tel.: quinn.raftery@haa-na.com Christian Schwenkenbecher Tel.: christian.schwenkenbecher@ha-research.de Vincent Bischoff Tel.: vincent.bischoff@ha-research.de Jan Neynaber Tel.: jan.neynaber@hauck-aufhaeuser.de Alexander Lachmann Tel.: alexander.lachmann@ha-research.de Toby Woods Tel.: toby.woods@ha-research.de Hugues Madelin Tel.: hugues.madelin@ha-research.de Marco Schumann Tel.: marco.schumann@hauck-aufhaeuser.de Hauck & Aufhäuser Trading Hauck & Aufhäuser Privatbankiers AG Mittelweg 16/ Hamburg Germany Tel.: Fax: info@hauck-aufhaeuser.de Mirko Brueggemann Trading Tel.: E.Mail: mirko.brueggemann@hauck-aufhaeuser.de Fin Schaffer Trading Tel.: E.Mail: fin.schaffer@hauck-aufhaeuser.de Joseph Kaselak Trading Tel.: E.Mail: joseph.kaselak@hauck-aufhaeuser.de Kathleen Jonas Middle-Office Tel.: E.Mail: kathleen.jonas@hauck-aufhaeuser.de Christian von Schuler Trading Tel.: E.Mail: christian.schuler@hauck-aufhaeuser.de Carolin Weber Middle-Office Tel.: E.Mail: carolin.weber@hauck-aufhaeuser.de 11 Hauck & Aufhäuser Privatbankiers AG