Overview
ETO fell
17.8% today as the company disclosed that a potential buy-out would no longer
occur.
Price Action
- ETO share price; c.185p. FTSE100; c.6,000.
- ETO share price; c.165p. FTSE 100; c.5,100-5,400
- ETO indicates their intention to proceed with buy-out talks (share price rises c.30p).
- Take-over talks fall through, share price slips.
Price
action follows a logical trend with the exception of point 4. ETO holds a beta value of 1.29, pricing them at a 10% discount to the theoretical price. Assuming the wider market has risen c.9% on
August lows (c.5, 400 to c.5, 900), ETO historically would have risen (9 * 1.29
= 11.61%) producing a preliminary target of 185p.
Fundamentals
To
underscore price action irregularities, fundamental information goes further in
suggesting a retrace is due. Peel Hunt
are expecting pre-tax profits of £42m putting ETO on a forward PE of c.7.5 (PE
c.11 on EPS metric) versus a PE of 16.04 for the sector. Although ETO have historically traded at a PE of c.12, this contrast weighs on upside potential.
Despite a declining retail market, diligent management has positioned ETO to benefit from broader exposure to digital distribution channels. Investment in content has been a core positive - personal observation has seen ETO work hard to secure a steady stream of new opportunities.
After turning down 'various buy-out offers' (on grounds that they didn't 'reflect ETO's value') the company intends to expand via acquisition. Alliance Films is rumoured to be a target (Patrice Theroux, head of ETO's films operation spent 18 years at Alliance and attempted a management buy-out in 2006). Having followed ETO for well over a year I have come to view ETO as a well managed firm and thus have faith that aggressive expansion is the most effective strategy at this stage.
