Peppa Pig owner Entertainment One (LON:ETO) reported a 22% decline in full year pre-tax profit as the company restructured its film business to shift its focus towards digital content.
Pre-tax profit for the year to 31 March 2017 fell to £37.2mln from £47.9mln the previous year, due to pre-warned costs related to its overhaul and renegotiating a major film distribution contract.
But shares rose 1.33% to 245.21p in morning traded as adjusted pre-tax profit, which excludes the one-off costs, rose more than analysts' expectations.
Adjusted pre-tax profit rose 25% to £130mln, compared to £104mln the prior year and a Numis forecast of £125mln.
Underlying earnings (EBITDA) edged up 24% to £160mln from £129mln.
The costs associated with its restructuring and film distribution contract had already been priced in. Earlier this month, the company said it had terminated one of its contracts and replaced it with a new film distribution deal, which incurred a one-time payment of US$25mln.
At the same time it said the restructuring of its film division led to an additional £27mln one-off cost.
Revenue driven by growth in TV and family while film delivers stable results...
Recognising the changing trend towards watching films online, Entertainment One has been transitioning its physical distribution activities to focus on digital content. On the back of its restructuring efforts, the company said the film arm delivered “stable” financial results in the full year.
“The continued reshaping of the division, where initiatives undertaken included integrating our physical distribution partnerships with Fox and Sony, and the refocusing of our film distribution arrangements, has positioned us well to retain our strong position catering to a changing global film market,” said chief executive Darren Throop.
The television and family divisions continued to be the stand-out performers with double digit growth in sales, driving a 35% increase in total revenue to £1.1bn from £803mln a year ago.
In television, the company made a number of content acquisitions including season two of Fear the Walking Dead with The Walking Dead maintaining its high viewership and ratings. The family division was boosted by another strong performance of Peppa Pig and the initial rollout of the licensing programme for PJ Masks.
A raft of acquisitions completed during the year also contributed £50.2mln to revenue.
These included a 51% stake in The Mark Gordon Company, the production outfit behind Grey’s Anatomy and Saving Private Ryan, as well as a 65% interest in Renegade 83, the production company behind the Discovery Channel’s hit Naked and Afraid.
The group also bought Dualtone Music Group, an equity investment in Sierra Pictures and Last Gang Entertainment.
The full year dividend was lifted to 1.3p from 1.2p.
Outlook for fiscal year 2018....
Entertainment One expects full year 2018 revenue in the family division to “growth significantly,” but underlying EBITDA margins to decline as it invests as an increased contribution from PJ Masks accrues a higher level of third party participation royalties than Peppa Pig and as it pays £2mln in overheads to grow sales.
The television division is anticipated to achieve organic growth in 2018 as investment in acquired content for eOne Television isexpected to increase to more than £40mln and production spend expected to grow to over £170mln. Investment in productions for The Mark Gordon Company is expected to fall to about to £80mln
In film, the group said investment in acquired content is expected to increase to £150mln.
“The company is in an excellent position to continue to thrive going forward,” said Throop.
“We are on track to deliver our growth target of doubling the size of the business in the five years to fiscal year 2020."
Numis reiterated a 'hold' rating and 215p target price. The broker said it expects to keep its EBITDA forecast of £180mln for 2018, with continued good momentum in TV and family.
Numis also maintained its film estimates, underpinned by the £47mln restructuring that will save £10mln per year.
-- Adds share price reaction, broker comment --