The value of an investment in the Fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.
As businesses go, we think Pinewood also deserves an Oscar for resilience – you do not stay at the top of your game for over 80 years unless you are able to adapt consistently to changes in the industry and in technology. And so it has done, it continues to move with the times. That’s why the crux of our investment case is not just the stable partnerships Pinewood enjoys with the world’s biggest content producers – in some cases, spanning over 50 years – but that its reputation and experience will continue to make it the go-to-home for the next generations of content producers.
Pinewood is a Hollywood icon, but it is no fading star. It is a leading light in a flourishing industry. According to the British Film Institute, in 2017, production spend in the UK rose 12% year on year, with a combined spend of £2.8 billion on feature films and high-end television. In this environment, Pinewood has never been in such demand. Its state-of-the-art studios are ready to roll as the new wave of deep-pocketed premium content producers, such as Netflix (another of our High Yield investments) and Amazon, begin a push to create more of their own content. It is no co-incidence that one of the first productions to be filmed at the Pinewood Iskandar Malaysia Studios was the popular Netflix series Marco Polo.
Netflix alone is expected to release 80 films during 2018. Compare that to the 106 films released in total by the six major studios in 2017. By next year, Disney will have launched its own streaming service to compete against them. Already home to the most recent Star Wars productions, might a Star Wars-based series be in the offing at Pinewoods?
Britain's Prince Harry (R) meets Chewbacca during a visit to the Star Wars film set at Pinewood Studios
© Getty Images
From there, we also wouldn’t be surprised if Alphabet (the parent company of Google and YouTube), Facebook and Apple were to come knocking on the door in the next few years. In our view, creating exclusive, thought-provoking content may just be the one of the healthier ways to increase users’ time spent on their products. For Pinewood, these potential customers might also be key for exploring new frontiers in the movie industry, as virtual and augmented reality experiences are eventually made for the masses.
Despite boasting over a million square feet across 74 stages in five countries – the UK, USA, Canada, Dominican Republic and Malaysia – in this demand-driven market, Pinewood has found that it can’t grow fast enough. Having just finished a major expansion, it came to the bond market to help fund an additional one. Phase two, as it is called, will add another six stages and will allow the company to film four blockbusters at a time. Until its completion in spring 2019 and perhaps well beyond that, Pinewood should have no problem in continuing to put up its prices higher than the rate of inflation.
In fact, it’s hard to imagine a scenario where Pinewood would stop being the icon that it is. Since 2010, almost a third of all movies with budgets of more than $100 million have been filmed at a Pinewood studio. In theory, new studios could come in and invest heavily in land and studio facilities, but they would still find it hard to compete with the Pinewood brand. Not only does it have world-class facilities – indoor stages where you can shoot submarine scenes and outdoor stages where you can film beach and ocean scenes – it is connected to an enormous talent pool of engineers, assistants, stunt men and choreographers. Movie makers know that if they rent a Pinewood studio, everything is set up for them to start shooting and there will be no limits placed on their creativity, due to lack of resources or talent. As Pinewood’s previous CEO Ivan Dunleavy noted,
“Pinewood’s name above the door guarantees you’re going to get this done.”
Viewed in isolation, some investors might be put off by the amount of debt that Pinewood has and we would not downplay it. However, looking at the bigger picture, we think that its current level of indebtedness is manageable. The cost of keeping the current operations running smoothly is relatively low – $2million per year – and the EBITDA margin, a measure of the company’s operating profitability as a percentage of its total revenue, is 51%. Theoretically then, if the need arose, Pinewood would be able to put expansion plans on hold, leaving it with an abundance of free cash flow, which it could use to reduce its debt. This is not a company that depends on debt to survive, rather it is using debt to grow to meet demand that is already there and looks set to continue as we begin to consume more content online.
As for this movie’s director, the asset managers Aermont Capital have been overseeing Pinewood since taking it private in 2016. Under Aermont’s watch, Pinewood has systematically been editing out non-core, and less profitable, activities such as organising concerts, brokering for production insurance and producing its own film and TV content. By focusing on its core capabilities, providing world-class infrastructure and services for blockbusters, we believe Pinewood is set to be centre stage in the film and TV industry for many years to come.
The views expressed in this blog should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions. This blog contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
This communication was produced and approved in November 2018 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Investment markets can go down as well as up and market conditions can change rapidly. Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the Fund invests may not be able to pay the bond income as promised or could fail to repay the capital amount.
Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). Issued by Baillie Gifford & Co Limited. This does not in any way constitute investment advice.
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