Berenberg initiates coverage on Entertainment One at 'buy'

Analysts at Berenberg coverage coverage on shares of Canadian distribution and production firm Entertainment One at 'buy' with a 475p target price on Monday, noting that although the rise of subscription services such Netflix and Spotify had disrupted some of its traditional revenue lines, revenue from structural growth activities now outweighed income from the disrupted segments.

Berenberg predicts that even excluding Apple, Alphabet and Facebook, content spending in the US will be over $110bn in 2019, up from $95bn in 2018, and while the analysts did not venture any guess as to who will win the subscription video on demand wars, they did notice that all parties involved in the fight will need premium content to capture consumers' attention and wallets - a demand it believes Entertainment One was "well positioned" to serve.

The German broker credited Entertainment One's family and brands division for "bringing home the bacon" for the group, with Peppa Pig and PJ Masks being two of the three biggest pre-school brands globally.

"We believe the company has the know-how to develop and globalize successful children's brands, with eight more brands in development, further monetization opportunities in China and the rest of the world, and Peppa Pig theme parks, we believe there is a lot more upside to come From these opportunities alone, we think there is an additional GBp212 per share upside in our blue-sky scenario, "said Berenberg.

Berenberg also noted that while investors had focused on the decline in low-margin cinema and home entertainment activities within Entertainment One's film and TV division, its analysts still believe "the outlook is rosy".

"With new players entering the SVOD segment, demand for quality content is rising. Meanwhile, Disney is pulling its most compelling content from Netflix, and other studios may follow as they develop their own SVOD services. This is a seller's market for content, with Rising competition and a strong underlying demand We believe Entertainment One, as a platform-agnostic producer of premium content, is well positioned to benefit from these trends on a global basis. "

The analysts also noted that Entertainment One's music division was "too big to ignore", stating that they believed the wing should be viewed in isolation as the group's recent acquisition of Audio Network meant music was now "a significant part of the group" with higher margins, better cash conversion and higher valuation.