Share tip of the week: Postman Pat delivers for this company

published 20 November 2007

Postman Pat made his debut on US TV while I was holidaying in Florida last month. If the series does well on NBC, then its owner could enjoy another boost from this children's favourite. But this series is just one in the large stable of prestigious brands the firm owns. Other UK characters include Basil Brush, Little Red Tractor and Jim Jam & Sunny. Entertainment Rights is also part owner of Rupert Bear and The Tweenies.

Entertainment Rights (ERT), rated a BUY by Altium Capital

Postman Pat made his debut on US TV while I was holidaying in Florida last month. If the series does well on NBC, then owner Entertainment Rights could enjoy another boost from this children's favourite. But this series is just one in the large stable of prestigious brands the firm owns. Other UK characters include Basil Brush, Little Red Tractor and Jim Jam & Sunny. Entertainment Rights is also part owner of Rupert Bear and The Tweenies.

In January 2007, Entertainment Rights completed a transformational $305m deal, acquiring America's Classic Media. Classic is a world leader in pre-school and children's content, owning Casper the Friendly Ghost, Mr Magoo, The Lone Ranger, Lassie, and Masters of the Universe, among others. The deal was funded by a combination of debt and a £71m placing at 28.5p per share, leaving the group with net borrowings of £111m at the half year (H1'07).

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Management's job now is to integrate the two firms and exploit their content across geographical regions and various distribution platforms. In the short term, traditional media such as TV, DVDs, books and toys will still contribute the majority of revenues, but fast-growing digital formats, such as video-on-demand, mobile and PC games are on the rise and contributed 8% of sales in H1'07.

Second-half trading is also on track; the Christmas period is when the group earns the majority of its profits. In September, the board said "the integration of Classic is progressing well" and it "remains confident" that the group will "deliver on its expectations for the full year". At a trade show on 22 October, CEO Mike Heap updated the City, saying that "the TV, licensing and merchandising markets are extremely buoyant", with the group experiencing "strong demand" for its products around the world.

The City expects 2007 sales and underlying earnings per share (EPS) of £82.6m and 1.8p respectively, rising to £91.1m and 2.2p in 2008. That puts the stock on a p/e multiple of just eight good value for such a content-rich business. The shares even offer some downside resilience in a softer economic climate. If consumers start to tighten their belts, they usually hold back on high-value discretionary items, such as new cars, rather than scrimp on buying their children's Christmas presents.

So far so good but what do we need to watch out for? With around 57% of revenues now derived from the US, second-half performance will undoubtedly have suffered from the headwind of a weakening dollar. There are also fears that if the retail outlook worsens, especially over the festive season, then even Entertainment Rights may have a hard time. Finally, debt levels are high although interest payments are covered a manageable 3.6 times, with 60% of the borrowings denominated in dollars for hedging purposes.

But overall, with the BBC recently commissioning a new series of The Basil Brush Show, I believe Entertainment Rights offers a good buying opportunity for the more adventurous investor. Altium has a 54p price target on the stock.

Recommendation: BUY at 17.5p (market capitalisation £128m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.