Rolls-Royce Holdings 

Rolls-Royce Holdings PLC (RR) is a London, United Kingdom-headquartered multinational engineering company, focused on power and propulsion systems. It is one of the world’s leading industrial technology companies and seeks to deliver clean, safe and competitive solutions to a wide range of industries. Throughout the world, Rolls-Royce has continuously remained one of the most famous and renowned names in engineering, with customers in over 150 countries, ranging from commercial airlines and leasing customers to armed forces and marine customers. It also engages in supporting a worldwide network of 31 University Technology Centres and employs 54,500 people in 50 countries, spanning across six continents.

Recent Development
On 6^th June 2019, the company announced that the company had transferred pension risk liabilities worth £4.1 billion and assets worth £4.6 billion to Legal & General Group PLC. This is the largest bulk annuity deal written in the UK and covers approximately 33,000 pensioners who are a part of the company’s Pension Fund. While the remaining pension plans will continue to be funded by the company, net assets worth around £500 million will get reduced because of the transaction.

Key Financial Highlights (FY 2018, in £m)
 
(Source: Company Filings)

Group reported revenue was up 7% to GBP 15,729m and underlying revenue increased by 8% to GBP 15,067m, driven by Civil Aerospace and Power Systems. Underlying gross profit was up by 4% to GBP 2,256m with a gross margin of 15.7%, led by increased spare engine volumes and reduced widebody OE engine losses. Reflecting 20% growth in Power Systems to GBP 317m, due to strong volume growth, underlying core operating profit saw a material GBP 224m improvement on prior year to GBP 633m, while underlying operating profit was up by GBP 253m to GBP 616m. The company’s reported operating loss for the FY18 stood at GBP 1,161 million against operating profit of GBP 366 million in FY17. The operating loss incurred because of the significant increase in the company’s commercial and administrative costs. The loss for the period stood at GBP 2,393 million for FY18 against Profit for the period of GBP 3,383 million in FY17. Basic loss per share stood at 129.15 pence in FY18 as compared to 184.41 pence in FY17.

Valuation Methodology
Method:  EV/EBITDAApproach (NTM)


Share Price Commentary

Daily Chart as at June-07-19, before the market closed (Source: Thomson Reuters)
 
On 7^th June 2019, at the time of writing (before the market closed, GMT 1:40 pm), RR shares were trading at GBX 908.40, up by 1.6 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,089.99/GBX 741.25. The company's stock beta was 1.09, reflecting roughly the same volatility as compared to the benchmark index. Total outstanding market capitalisation was around £17.01 billion, with a dividend yield of 1.53%.

Conclusion
Driven by a steady performance in Defence and ITP Aero and strong growth from Civil Aerospace and Power Systems, underlying financial results were ahead of expectations. For the 2019 Full Year, the company expects to achieve its underlying operating profit and free cash flow guidance of £700m +/- £100m, as it aims to bring down commercial and administrative costs and improve its engineering efficiency through the restructuring programme undertaken by it.

The disposal of the Commercial Marine business represents an important milestone and in-service performance of the Trent XWB-84 remains strong. The company reported a strong order intake year-to-date at Power Systems and continues to see a healthy market environment.

Based on healthy prospects and supported by valuation done using the above method, we have given a "BUY" recommendation at the closing price of GBX 894.00 (as on 6^th June 2019) based on 10.69x NTM EV/EBITDA(approx.) on FY19E EBITDA (approx.).

Entertainment One

Entertainment One Ltd. (ETO) is a Canada-based independent entertainment company that is involved in the complete chain of entertainment content, ranging from development and production to distribution and sales. Through its global reach and expansive scale, the group delivers content to the world, which spans across film, television, music, digital content and live entertainment.

Recent Development
Following a report that Mark Gordon, President and Chief Content Officer, Film & Television, was in talks to leave the role, the company insisted that he would stay at the group. However, the company did not mention whether he would retain his current role or responsibilities, and the company’s spokesperson declined to expand on the statement. The company’s share fell by 17 per cent on the day of the report before recovering most of their losses after the clarification.

Financial Highlights (FY 2019, £m)

(Source: Company Filings)

The company’s reported revenue declined by 9% to GBP 941.2 million as compared to GBP 1,029 million in FY2018, driven by growth in Family & Brands of 28% and in Film, Television & Music of 13%. Reported underlying EBITDA was GBP 197.6 million, an increase of 21% as compared with GBP 163.6 million in the financial year 2018. This increase reflects the surge in Film, Television & Music of 9% and growth in Family & Brands of 37%. The Underlying EBITDA margin rose by 510bps to 21% against the 15.9% in FY2018. Adjusted operating profit climbed by 21% to GBP 193.9 million as compared with the FY18 data of GBP 160 million, due to the increase in the company’s underlying EBITDA. Adjusted profit of the year increased from GBP 105.9 million in FY18 to GBP 124.8 million in FY19. Adjusted diluted earnings per share surged by 30% to 25 pence against the 19.3 pence in FY18.

Valuation Methodology

Method:  Price/Cash Flow Approach (NTM)


Share Price Commentary

Daily Chart as at June-07-19, before the market closed (Source: Thomson Reuters)
 
On 7^th June 2019, at the time of writing (before the market closed, GMT 1:40 pm), ETO shares were trading at GBX 406.20, up by 0.15 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 485.40/GBX 327.80. The company's stock beta was 0.99, reflecting the same volatility as compared to the benchmark index. Total outstanding market capitalisation was £2.01 billion, with a dividend yield of 0.72%.

Conclusion
The group’s streamlined structure and talent-driven approach helped to position the business well in the marketplace and post another year of decent earnings growth. The company’s growth in the underlying EBITDA and the Family & Brands division is benefiting from the higher margins from advertising and streaming video on demand, and the company expects to continue to generate strong revenue and underlying EBITDA growth across the portfolio in FY20. By the end of the next financial year, the company expects to generate £13-15 million of annualised cost savings through the integration of the Film & Television operations. The TV 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.
 
Based on the healthy financials and supported by valuation done using the above method, we have given a "BUY" recommendation at the closing price of GBX 405.40 (as on 6^th June 2019) based on 7.70x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The Buy recommendation is also valid at the current price as on June-07-19.

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