Business Overview
Entertainment One Ltd. (ETO) is an independent studio and develops, acquires, produces, finances, distributes and sells content rights and entertainment content. Entertainment One distributes and sells films in theatres, digitally, and through DVD. Its brands include PJ Masks, Peppa Pig, Ben & Holly's Little Kingdom, Cupcake & Dino. The company has operations in the US, UK, Australia, Canada, Benelux, Germany and Spain.

Financial Highlights (FY 2019, £million)

(Source: Annual Result, LSE)

The company’s reported revenue declined by 9 per cent to £941.2 million as compared to £1,029 million in FY2018, due to the growth in Family & Brands of 28 per cent and lesser revenue in Film, Television & Music of 13 per cent. Reported underlying EBITDA was £197.6 million, an increase of 21 per cent as compared with the financial year 2018 of £163.6 million. This increase reflects the surge in Film, Television & Music of 9 per cent and growth in Family & Brands of 37 per cent. The Underlying EBITDA margin rose by 510bps to 21 per cent against the 15.9 per cent in FY2018. Adjusted operating profit climbed by 21 per cent to £193.9 million as compared with the FY18 data of £160 million, due to the increase in the company’s underlying EBITDA. Adjusted profit before tax was up by 20 per cent to £155.9 million (FY18: £130.2 million), while reported profit before tax declined to £36.8 million.Adjusted profit of the year increased from £105.9 million in FY18 to £124.8 million in FY19. Adjusted diluted earnings per share surged by 5.7 pence to 25 pence against the 19.3 pence in FY18. Net cash generated from operating activities stood at £30 million, due to the surge in operating performance and lower investment in content. In the financial year 2019, investment in acquired content and productions stood at £380.2 million. Group’s total dividend surged by 0.1 pence to 1.5 pence per share in FY19 as compared to 1.4 pence in FY18.

Share Price Performance

Daily Chart as at May-22-19, before the market closed (Source: Thomson Reuters)

On 22nd May 2019, at the time of writing (before the market close, GMT 9:25 AM), ETO shares were trading at GBX 419, up by 2.195 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 485.40/GBX 277.20. The company’s stock beta was 0.99, reflecting almost the same volatility as compared to the benchmark index.

Valuation Methodology


Recent News
On 11th April 2019, Entertainment One UK Holding Ltd, a unit of Entertainment One Ltd, acquired the entire share capital of Audio Network Ltd, a London-based music publisher, for a total consideration of GBP 178 million.

Conclusion
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 (AVOD and SVOD).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 FY20. For Film, TV & Music, the group now has a more focused and targeted film slate and a strong pipeline. The 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. Going forward, piracy, regulatory procedures and intellectual property risks may impact the company’s performance. However, the ongoing productions, strong business partnerships and strategic acquisitions are likely to present new growth opportunities to the company. Based on the strong growth prospects of the company and the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 410 (as on May-21-19) with low double-digit upside potential based on 6.9x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from the Thomson Reuters.
*The buy recommendation is valid for the current price as covered in the report as on (22^nd May 2019).

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