Strategy to double in size
Entertainment One's (LONDON:ETO) management has set out its strategy to double in size within five years, a creditable target given its success to date. The focus is now on Television and Family, to capitalise on the structural growth in demand for content from broadcast and digital channels, part funded by strengthening cash flows from Film. We expect eOne to continue to buy and build, leveraging existing expertise. Our EBITDA estimates are unchanged post the recent interims. As one of the largest pure content plays, eOne’s FY15e EV/EBITDA of 11.2x and P/E of 14.4x look very attractive.
EBITDA of £200m by FY20?
eOne is already the number one independent film distributor and while there is scope for geographic expansion, we expect most of the future growth to come in television and digital. eOne plans to capitalise on its Canadian television expertise and build a television production presence and creative talent network in the US, UK and Australia. It is also looking at digital opportunities (eg short-form content and networks (MCN)). A large acquisition is possible but we think smaller deals are more likely, where eOne can leverage its existing operations to grow rapidly. eOne is exploring additional debt financing options but we would also expect an equity element in most acquisitions to incentivise key management. It has very disciplined acquisition criteria and has, we believe, turned deals down rather than overpay.
Strong H115 EBITDA margins
Interim EBITDA rose by 27% despite a 10% fall in revenues due to the timing of releases and summer softness at the box office; margins benefited from lower print and advertising costs. Our full-year EBITDA estimates are unchanged but we have reduced revenues (partly due to mix) and PBT, but slightly increased EPS (by 1.9% in FY15e) due to a lower tax charge. We have slightly increased forecast debt but this is mainly in production debt, which is nearer to working capital. Cover ratios remain very comfortable (FY15e net debt/EBITDA 2.1x or 1.2x ex production debt).
Valuation: DCF and peer group point to 360-399p
eOne shares have moved up a little since the H115 results were announced, but with a much stronger H2 film slate and potential deal catalysts we see further share price upside potential from the current level. Both a peer group comparison and DCF support a share price range of 360p to 399p. The valuation is underpinned by eOne’s library (worth c 216p/share on our estimates).
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