Entertainment One trots to new all-time high after 'solid' year

4th Apr 2019 07:19

(Sharecast News) - The growing popularity of its porcine TV star in China and the completion of a turnaround at the film division produced fatter annual profits for Entertainment One, sending its shares to a new all-time high on Thursday morning.In a year-end trading update, management at the television and film production group said the performance was in line with its expectations, as the Family & Brands division grew revenue and earnings before interest, tax, depreciation and amortisation by more than 25%, the music arm grew EBITDA 20% and there were "significantly improving" profit margins as the film business tilted from distribution towards production.The outlook for underlying financial performance for the year was said to be in line with guidance, with net debt at the year-end at roughly 1.8 times underlying EBITDA.Chief executive Darren Throop felt it was a "solid" performance for the 12 months to end-March, "driven by strong momentum in Television, continued growth in Family & Brands and with the restructuring of Film having a beneficial impact on the slate and margins. As such, the financial performance of the business is in line with management expectations for the year."It was a key year for the FTSE 250 company as the strategy was pivoted to capitalise on the dynamics of a rapidly evolving media landscape and growing demand for video content from the likes of Netflix, Amazon and others, with Throop confirming that benefits of the changes were "bearing fruit across all [the] group's divisions".FAMILY FAVOURITESGrowth from both Peppa Pig and PJ Masks grew to Family & Brands revenues, with more than 100 live licensing and merchandising contracts added globally to take the total to above 1,600. PJ Masks, in its fourth year since launch, represented roughly 37% of the division's sales, with Peppa Pig at 57%.The first few episodes of the anthropomorphic piglet from a current production slate of 117 new episodes will be aired by broadcasters around the globe from spring 2019 through to 2023, while season three of the nighttime crime-fighters will launch on the Disney Channel this month, beginning in North America, while Chinese viewers can now catch the older episodes via the national CCTV channel.Family revenues in China jumped 50%, driven predominately by Peppa Pig through robust subscription video on demand sales and 71 live licensing and merchandising contracts, given a boost in January by the cinematic release of Peppa Pig Celebrates Chinese New Year and launched of new Peppa Pig World of Play centres launched with partner Merlin Entertainments in Shanghai. Another was opened in Dallas, Texas during the year, with two more each in China and the US expected in the coming twelve months.A new brand for the Family division, Cupcake and Dino, launched with two seasons on Netflix in the year and a new comedy show has moved into production after being given the green light by a major global SVOD platform.For the new 2020 financial year, new kids title Ricky Zoom, about a young chap who happens to be a motorbike, is due to launch in China on SVOD platform Youku by the summer before being simultaneously rolled out around the world in the autumn and winter, with toys launched in spring/summer 2020 via toy manufacturer TOMY. A further seven properties are said to be in development, across pre-school and older demographics.FILM PIVOTSIn the newly integrated Film, Television & Music division, "strong momentum" was reported in television throughout the year, with a 20% increase in produced or acquired content delivered, in line with previous guidance, and more than 60 TV projects in funded development with major broadcasters, cable networks and digital platforms from 1 April. A reduction in the number of films to 57 from 85 the year before led to lower revenues, but underlying margins improved as the pivot towards production was largely completed and led to fewer but more profitable releases, with average revenue per film increasing 44% despite box office revenues dropping more than 3% to $200.7m.New TV shows included Rookie on the ABC network in the US, while some unmade "key series" were said to have been recommissioned as well as Grey's Anatomy. New scripted television shows commissioned during the year for delivery in FY20 include Run, a romantic comedic thriller created and co-written by Fleabag's Vicky Jones and Phoebe Waller-Bridge for HBO and the pilot of Deputy, a scripted drama for Fox starring Stephen Dorff of True Detective fame.The reduction in film numbers is expected to decrease further over the coming years towards a targeted annual run-rate of 35-40 unique titles, with new releases for FY20 including Guillermo Del Toro co-production Scary Stories to Tell in the Dark, the first feature from Hollywood veteran Brad Weston's production company Makeready, called Queen and Slim, and a partnership with Stranger Things producers 21 Laps Entertainment to produce science fiction title Sovereign, starring Oscar-winner Mahershala Ali.The consolidation of film distribution continued, with Australia and Benelux territories moving to sub-distribution, while Universal/WW Entertainment respectively and all physical now consolidated under Universal.In Music, investment in new business verticals and what eOne called the "continuing recovery of the music industry" resulted in year on year growth of over 20% in revenue and underlying EBITDA.MARKET REACTION & ANALYSISShares in the company climbed more than 3% in early trade on Thursday to an all-time high of 461.40p. Citi noted that the 25% Family growth compares to consensus forecasts of circa 29% revenue and circa 16% EBITDA growth.Analysts at the bank noted that the more cash generative Family is stronger in the mix than expected, driven by the strength of Peppa Pig in China. "A planned reduction in the number of film releases... has driven a stronger performance per title and improved margins but it partially offsets the Family beat."Calling it a "reassuring" update, Stifel said the numbers were consistent with its forecast for 10% growth, making no change to its estimates but expecting the mix of EBITDA to be "more weighted to the cash generative Family division"."TV looks solid and Film had a better second half despite the reduced slate. We expect momentum to remain strong in Family in FY20, which will benefit from the widening merchandise roll out, fresh content, the Merlin partnership and the broadcast debut of a new brand. The Television pipeline seems well developed, and while Film will continue to face headwinds, we expect restructuring benefits to start to become evident in margins."Analysts at JPMorgan Cazenove said they were leaving forecasts broadly unchanged as they awaited final results on 21 May."In our recent detailed note [...], we flagged eOne as the top pick in the Media Smid space driven by continuously strong momentum in the international rollout of its Family brands. Our price target is 623p, while we highlight that our blue sky scenario offers a further 90p/share if the adoption of both Peppa and PJ proves to be more successful than anticipated in the US and China."- The author holds shares in ETO