$ETO.L – Entertainment One – we are not amused

ETO (Entertainment One) is a Canada-based entertainment company. They hit it big with Peppa Pig, whatever that is. Apparently “Peppa is a loveable, cheeky little piggy who lives with her little brother George, Mummy Pig and Daddy Pig.”

It looks as though investors have taken a caning from this company lately. Its RS6m is -20.2%, putting it in the bottom decile for momentum over 6 months. That spells trouble.

There’s plenty to dislike about the accounts of this company, regardless of the story. According to Stockopedia, ETO has an average ROCE of 6.6% over 6 years, which actually makes it a very unattractive business. One of the things I like to look at, as a very simple measure, is net debt to market capital. According to Sharelock, it has net debt of £314m, against a market capital of £966m. I regard that as substantial debt.

PBT was £44m, which is too low compared to its net debt. It has operating cash flows of £272m for the year, which actually does not look too bad at first glance. At second glance it looks terrible, though, as they have depreciation of £314m and capex of £286. I know nothing about the entertainment business, but the cashflows look untrustworthy. They have to spend an enormous amount in capex.

Given their apparent need for substantial capex, I don’t think it is meaningful just to look at their net income. They have had negative net free cashflows over the last 4 accounting years, a sure tip-off that something is wrong. In order to fund all this, they have had to issue a substantial amount of debt and equity over the last 6 years.

I notice that they had a rights issue recently, too. On 30.9.2015 they raised £194m. Utterly ridiculous. With any luck, the gravy train where investors are willing to pony up large gobs of cash for companies with poor returns is coming to an end.

Despite the shares being up nearly 94% over 5 years, it looks as though investors have bought into the story, rather than looked at the accounts. I note that it is one of Mark Slater’s top 10 holdings. I have a huge amount of respect for Slater, and I was under the impression that he was quite adept at avoiding dubious companies. Sometimes it seems that investing is more about market psychology than actually assessing the company. It would be inconceivable that Terry Smith would invest in this company, in my view.

Debtors days has also risen from 44 in 2008 to 135 in 2015. That’s another sign that their numbers are being massaged.

Conclusion: a pig in a poke. Another EROS and DQE.


Update 14-Nov-2015: I am surprised by how much attention this post is receiving. I have heard that a lot of savvy private investors are quite bullish on this, so you should take what I say with  a pinch of salt. Below is a plot of the Google Trend for “Peppa Pig”. Interest does not seem to be abating recently, so we shall have to see how things progress.

2015-11-14 20_59_46-Google Trends - Web Search interest_ peppa pig - Worldwide, 2004 - present


About mcturra2000

Computer programmer living in Scotland.
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