Portfolio

Chinese Year of the Pig fuels Entertainment One

By Abigail Townsend

Date: Tuesday 20 Nov 2018

Chinese Year of the Pig fuels Entertainment One

(Sharecast News) - Children's favourite Peppa Pig helped Entertainment One push past challenges in other parts of the business, as profits were wiped out by hefty impairment charges.
The FTSE 250 group's Family & Brands division saw revenues rise 29% as demand for the popular porcine cartoon character remained strong and was bolstered by the growing popularity of the junior superheroes of PJ Masks. That helped offset a 7% fall in the Film & Television unit, which was hit by fewer film releases and what Entertainment One called "the accelerated decline of the home entertainment market", as DVDs fell out of fashion.

Group revenues for the six months to 30 September were £404.9m against £412.7min 2017, while underlying earnings were ahead 10% at £60.1m, helped by £2m of cost savings and a sales shift towards the higher-margin Family division.

Entertainment One is shifting its focus away from distribution to production of its own content. The resultant impairment charges of £59.4m meant it reported a bottom-line loss of £40.1m against a pre-tax profit of £2.3m a year earlier.

Darren Throop, chief executive, said: "Looking ahead, we anticipate further progress Family & Brands properties in China and around the globe, a number of initiatives for Peppa Pig will consolidate its position as one of the leading pre-school brands, as well as wider merchandising phase for PJ Masks in China."

Asia is expected to be a core growth region for Family & Brands in the second half. Projects include a Peppa Pig Chinese feature film, to tie in with the Year of the Pig, and a range of PJ Masks-branded clothes and books.

Entertainment One has also pencilled in a stronger second half for Film & Television. Said Throop: "The division has 74% of the full year's expected TV programming margin already greenlit or committed. There is also a full pipeline of development projects which will help drive future growth."



Shares in the group initially fell heavily, losing as much as 5% in early trading. By mid-morning they were down 2% at 377p.

In terms of the mix, said analyst Marcus Diebel at JPMorgan Cazenove, nothing has changed since the company's recent trading statement, as Family "goes from strength to strength" at an impressive 62% EBITDA margin, with Film, TV & Digital declining more steeply than the 4% he expects for the full year as management expects a strong weighting towards the second half, similar to last year.

"Overall, our (unchanged) estimates for FY19 EBITDA of £196m and adjusted EPS of 24.7p appear well underpinned. We continue to see eOne as one of the top picks in the European Media space," he said.

Fiona Orford-Williams, analyst at Edison Investment Research, said Peppa Pig and PJ Masks were "strong brands with plenty left in the tank".

She continued: "Film & Television had a lighter first half as it moves through its transition to higher-margin production from its distribution roots, but has a stronger slate for the second half. The market is hungry for content and needs high-quality series to drive traffic. Entertainment One's independence puts it in a strong position to benefit from that."

Investec said it was trimming its 2019 and 2020 revenue forecast 7% to £1.1bn and £1.2bn reflecting the new mix, but keeping EBITDA at £196m and £214m due to the higher margins in Family offsetting the shift from Film & TV.

"We note ETO is evaluating financing options, referencing the first call date for senior secured notes on 15 December - which we see as a potential positive catalyst."

Tom Selby, senior analyst at AJ Bell, said: "The slow death of the DVD has caused a minor setback at Entrainment One. It has impaired certain film distribution assets because fewer people are buying those shining discs. Arguably this isn't a major worry because many other parts of its business are booming. Peppa Pig has become an unstoppable force around the world and PJ Masks looks like it is heading in the same direction."

He added: "The business is expanding with live events and its film and TV division continues to churn out lots of content that is mopped up by the likes of Amazon and Netflix. ITV has tried and failed to buy the company in the past. One could argue that Disney would be a better owner of Entertainment One as it is in the process of developing its own streaming service and assets like Peppa Pig and PJ Masks would strategically be a great fit, plus the extra film and TV content that would come with such an acquisition."

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