Entertainment One: Still Plenty Of Upside

Entertainment One Ltd (ETO.L) is a focused play on the growing demand for entertainment content. Its library is worth well over $650m (£410m) and represents more than half the £752m EV; the remaining EV is only 1.2x the annual investment in content, which we estimate should achieve an IRR of c 20%. Based on the recent trading update, we expect H1 normalised EPS to increase by 58%, helped by the successful integration of Alliance Films. Analysis of the business model underpins our expectation of strong positive cash flows from FY15, and both a peer group comparison and DCF point to a share price over 273p, 26% above the current level.

Step change in scale, cash positive from FY15
Alliance Films increased eOne’s size by over 40%, bringing economies of scale and greater diversification, both by product and geography. The group is continuing to invest heavily in content and programmes (with further bolt-on acquisitions still a possibility). This is reflected in our estimate of September adjusted net debt of £150m (March 2013: £87.8m) or £210m including TV debt. However, this report revisits the business model and shows that as soon as the growth in content investment begins to stabilise – as we expect from FY15, and something that is very much under management’s control – the group will turn strongly cash positive.

Positive pre-close update
On 26 September, eOne reported that H1 revenue and EBITDA was “significantly higher than the comparative period”, with full year earnings “anticipated to be in line with management expectations”. We expect a doubling in H1 EBITDA to £26.0m (H113: £13.4m) due to the inclusion of Alliance Films and the timing of releases. Our full-year profit estimates are unchanged (although we have trimmed EPS to allow for increased diluted share capital, with FY14e at 19.0p versus 19.3p).

Valuation: Still plenty of upside
eOne’s share price has risen by 29% since the start of 2013, helped by the move to a premium listing and promotion to the FTSE 250, the successful integration of Alliance and estimated FY14e EPS growth of 18%. Yet the FY14e EV/EBITDA is still only 9.0x. Entertainment company multiples have increased over the same period and our peer comparison and DCF now point to a share price of 273-286p per (diluted) share, suggesting plenty more upside.

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