Upgrade “Growing” macro concerns are negatively impacting the performance of Canadian media companies, according to RBC Dominion Securities analyst Drew McReynolds.
In a research report released Monday previewing first-quarter earnings season, he said he expects the group to remain under pressure “until greater visibility emerges as to whether a soft or hard landing scenario transpires.”
“Central bank tightening in response to persistently high inflation has shifted the macro narrative from one of post-COVID-19 recovery to one of soft landing and economic slowdown, if not hard landing and outright recession,” he said. “In addition, the risk-off sentiment combined with declining global liquidity has begun to take a toll particularly on the small cap names within our media coverage with cyclical exposure and/or low trading liquidity. Until greater visibility emerges as to whether a soft or hard landing scenario transpires, we expect the group to remain under pressure. In this report, we provide a breakdown of revenues by company alongside FCF, leverage, payout ratio and valuation snapshots highlighting where we believe the more cyclically sensitive revenue exposures reside, as well as highlighting pockets of elevated financial and/or valuation risk.”
“In our media coverage, we currently have eight Outperform-rated stocks and see considerable upside should central banks be able to orchestrate a soft land scenario for the North American economy. Given still limited visibility as to whether a soft or hard landing scenario will emerge and taking into account current valuations, our three best ideas in our media coverage have both growth and defensive attributes – Thomson Reuters (Outperform, US$122 Price Target), VerticalScope (Outperform, $32 Price Target) and Points (Outperform, US$25 Price Target).”
After making estimate revisions for the group, Mr. McReynolds made four target price adjustments:
* Thomson Reuters Corp. ( “outperform”) to US$122 from US$120. The average on the Street is US$118.90.
“We continue to view Thomson Reuters as a high-quality core holding with an ability to deliver average annual total returns of approximately 10-15 per cent over the longer-term,” he said. “We believe the company remains firmly on track with its previously-provided financial outlook for 2022 and 2023 – with potential for upward revisions. We also believe the company has entered a new phase of 8-12-per-cent annual dividend growth underpinned by a step-up in FCF generation driven by the ongoing Change Program.”
* Transcontinental Inc. ( “outperform”) to $24 from $26. Average: $23.08.
“At 5.5 times FTM [forward 12-month] EV/EBITDA, we believe Transcontinental continues to be a cheap way to play the post-COVID theme given operating leverage to renewed year-over-year growth in retail flyer volumes as physical retail traffic recovers,” he said. “Despite lingering resin and FX impacts, we continue to see the potential for an upward rerating of the stock given what is accelerating organic revenue growth momentum within packaging (with the packaging revenue contribution now approaching 60 per cent) and an improving printing narrative with one third of printing and media revenues growing double-digits. With the stock trading at a notable discount to the 8 times average for packaging peers, Transcontinental remains one of our best ideas with each 0.5 times increase in multiple equating to $3 per
share, management’s long-standing masterclass in execution, leverage of 2.3 times and $2.50/share in normalized FCF.”
* Points International Inc. ( “outperform”) to US$25 from US$26. Average: US$23.77.
“With what finally appears to be the beginning of a sustained multi-year recovery in global travel and hospitality post-COVID-19, we believe Points is now benefiting from renewed adjacent growth in the global loyalty industry, providing investors with a low-risk, differentiated way to play the recovery,” he said. “While reinvestments are likely to dampen margins in 2022, reinstated 2024 financial targets point to significant upside potential versus our forecast and we believe are indicative of a multi-year cyclical tailwind, a broader Points service capability and strong pipeline of new business that has been boosted by COVID. Coupled with consistent positive FCF generation, a strong balance sheet and growing capital return optionality, Points remains one of our best small cap ideas in our coverage.”
* Enthusiast Gaming Holdings Inc. ( “outperform”) to $8 from $7. Average: $8.80.
“Management sees a significant opportunity to further aggregate and monetize the still highly fragmented fan experience segment of a broader gaming ecosystem,” he said. “While in the near-term profitability is likely to be superseded by numerous strategic initiatives to capitalize on a firstmover advantage, inevitably adding volatility to the stock, we continue to view current levels as an attractive entry point reflecting multiple catalysts that include: (i) greater appreciation by the market for the shear size, influence and growth potential of the broader global gaming ecosystem; (ii) improving earnings visibility as the company transitions from ‘proof of concept’ to monetization; and (iii) with greater ecosystem appreciation and improving earnings visibility, garnering a growing scarcity premium in the public market as a gaming media pure-play. Longer-term, we believe Project GG represents attractive option value for investors with a successful beta platform launch in 2022 having the potential to be materially NAV accretive over time.”