Entertainment One confident of overcoming film weakness

Entertainment One said although group sales and earnings were dragged down by weakness from the film division, earnings expectations for the full year remained unchanged.

In a trading update covering the nine months to 31 December, the film and TV distributor said group revenues slipped 3% as strong 39% growth in television sales were offset by the film weakness. At the half year sales were up 2%, implying the third quarter has been down 13% on an arithmetic basis.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 15% higher on a reported basis, which implies a major weakening in the third quarter as EBTIDA growth was 43% in the first half of the year.

The outlook for full year underlying earnings is said to continue to be in line with expectations, which will deliver positive free cash flow.

Despite obvious success of many Hollywood studios as evidenced by the recent Oscars, ETO has suffered a challenging period for its film business, with box office takings almost a quarter lower at $174m, reflecting what the company said is a difficult trading environment with a lower number of releases and some recent title underperformance, including the 'Steve Jobs' flop.

But chief executive Darren Throop was confident the new partnership with Rupert Murchoch's 20th Century Fox Home Entertainment gives opportunity for a restructuring of the film division to create efficiencies and reduce costs, but not for a while. Throop predicted the restructuring will deliver annualised savings of £10m by 2018.

A "very strong" slate of film releases should help the next financial year, with the partnership with Steven Spielberg's Amblin delivering titles such as Roald Dahl's 'The BFG' and thriller 'The Girl on the Train', as well as a range of other high profile releases including Ricky Gervais vehicle 'David Brent: Life on the Road'.

There were also confident words about the acceleration of TV, with Mark Gordon and Peppa Pig particularly, secured by the acquisition of animation studio Astley Baker Davies in October, and a doubling of the Peppa licensee base and an estimated 275% increase in retail sales in 2015.

Broker Peel Hunt said that the film component will reduce by circa 10% this year and is set to deliver mid single digit growth.

Net debt by the year end will be circa £300m, slightly more than it forecast, and rising to £330m by end of the next financial year.

Investec's Steve Liechti added that film was not as much as he had feared. "This is not a disaster in our view given the share price falls, but higher debt guidance - again - is unhelpful for the still very relevant growth-versus-cashflow debate."

But with nine-month EBITDA up only 15%% vs 1H +43% implying 3Q is -40% on an arithmetic basis and vs our published FY +25% which now looks optimistic

His preliminary take is the current and next year's EBITD could fall 3%, implying circa 5% at EPS. While current year FCF is positive, debt looks higher given M&A and capex this year and outer years post new guidance on Mark Gordon content spend.