Entertainment One Having A Red Hot Summer

Entertainment One (ETO.L) has issued a positive Q1 IMS and our full year forecast of 21% EPS growth is unchanged. Interim results should look particularly strong, based on our estimate of the mix of revenues, including Alliance Films. With the group set to be included in the FTSE indices from September, and management’s stated intention to introduce dividends, eOne should attract an increasingly wide investor audience. The rating looks very good value with an FY14e P/E of 10.2x and EV/EBITDA of 8.2x.

eOne has reported Q1 revenues up over 40%, with digital revenues more than doubling and full year earnings in line with management expectations. A 65% increase in Film revenue reflected the inclusion of Alliance Films (pro-forma was in line with the prior year, but quarterly fluctuations are normal due to the timing of releases). Key positives include a trebling in box office takings (68 versus 49 films released), increased margins reported for both Film and Television and operating costs in line with expectations with Alliance synergies coming through strongly.

eOne now has a very broad spread of product and geographies. FY14 investment in content and programmes is expected to increase to over £250m (FY13 pro-forma: £219m). Thus individual titles should not be over-emphasised, but we note that upcoming films include RED 2 and The Hunger Games: Catching Fire. We were especially pleased to see the Rookie Blue television series commissioned for season five. We plan to release a full review of eOne in September.

We remain very positive on eOne’s prospects. Management has consistently delivered on its targets and we view January’s £141m acquisition of Alliance Films as transformational. The share rating is undemanding and the July 1 move to the premium list means that eOne should enter the FTSE 350 (/250?) in September.

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