Entertainment One - Peppa Pig meets Grey's Anatomy

Entertainment One: Their best known property is the kid’s character Peppa Pig, but I am surprised how often their name comes up in film credits nowadays. This is a decent sized company (mkt. cap. c£970m) that many have never heard of. In their recent annual results (to 31^st March 2015) there were lots of adjusted and pro-forma numbers following the acquisition of a 51% stake in The Marc Gordon Company (who are behind Grey’s Anatomy). Adjusted pre-tax profits were up 13% to £88.8m, with eps up 12% to 23.5p. On the back of this the (mainly symbolic) dividend was raised 10% to 1.1p. The group re-affirms that it is on track “to double the size of the business over the next five years” (i.e. by FY2020), although the future balance between organic and acquired growth is an unknown. The group has expanded quickly so far and whilst cash conversion has improved, free cash flow was only £41.0m against pro forma EBITDA of £107.3m. Total net debt (including production costs) was £314.2m, which is about 2.7x adjusted EBITDA, so I expect that any further acquisitions might just need an equity component. As expected, the Peppa Pig brand is being expanded with bridgeheads established in the US and a China broadcast launch slated for later this year. The Marc Gordon deal is part of a major push into TV programming, but like film this can be a lumpy volatile business. Sheer scale does help smooth out some of the bumps, although this year did see Film revenues decline, with EBITDA held static. Overall £280.8m was spent on acquiring content last year, slightly up on last year and showing the kind of stakes being wagered. The flip side is that the programme library had a value of $801m at 31^st March 2014 and will have increased further in FY2015, not least because of the Marc Gordon deal.

Clearly Entertainment One is moving fast, although it is worth remembering that few kid’s brands achieve the longevity of a Sesame Street. How long Peppa Pig can keep oinking for is a complete unknown, but the bacon factory is still for a far off day. Looking at forecasts, consensus eps in FY2016 look like 25.5p giving a PE of 12.8x at 327p. A further dividend nudge to 1.2p points to a weeny dividend of 0.4%. Further out, if the doubling in group size can be made to drop through to earnings then in FY2020, eps could be 42p. Further, if ever the voracious cost of content can be tamed then the dividend pay-out might be improved. Even a cautious 4x cover would be a 10p dividend to collect. There are many pitfalls for companies in the entertainment and media content space, but Entertainment One is building a good reputation and in Peppa Pig has a great calling card. So not a yield stock, but it could grow its dividend at a nice clip and generate shareholder value, making it worth considering for the more adventurous. (Neil Cumming^, 3^rd June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower