A company with a very high (~90%) conversion of EBITDA into FCF, owing to minimal CAPEX
requirements and significant cash tax shelters ($490 million in Canadian non-capital tax losses at the end
of 2011). Our $6 valuation would equate to an FCF yield of just over 10%, which we believe is attractive
for a growth entity, and we note that it is higher than the current FCF yields for other subscription-based
telecom businesses in Canada that have much lower growth profiles (Exhibit 1 shows FCF yields for
BCE, TELUS, Rogers, and Shaw).
Strategic players in Canada could also take note of these favourable attributes of XSR over the next 12-
24 months, so that the company could become a takeover target. A larger telecom/cable company could
enhance the branding and distribution of the SiriusXM radio product in Canada, and there could also be cost
synergies on the billing and call centre fronts. Furthermore, using the current low interest rate environment to
fund an acquisition of XSR could allow one of the larger carriers to both enhance EPS and consolidated
revenue/EBITDA growth rates. We have not attached any official probability of a takeover to our target
valuation at this time, but our estimated private market value would be $7.50 in 2014 based on 10x EBITDA
plus 50% of the tax losses.
Investor Day Outlook:
At the company's first ever investor day (since the merger of Sirius and XM in May 2011), we believe that
management will set a positive tone with regards to the medium- to longer-term opportunities to:
? Grow subscribers via retail channels and continuing OEM penetration gains within the automotive
industry, including a push into used cars;
? Increase ARPU via rate increases (note that a fee increase to $15.99 from $14.99 was just announced
on August 28 for self-paying subscribers) and/or premium services;
? Reduce churn owing to the benefits of consolidation, and owing to fewer new customers "sampling"
the service as a percentage of the overall base; and
? Reduce costs via scale/merger efficiencies and via potentially reduced requirements to support Canadian
Talent Development (XSR asked the CRTC for a fee reduction to 0.5% of revenues from 5.0%, which at
the extreme would add about $12 million to EBITDA). Note that we would not view any NHL hockey
programming cost savings in the coming months ($6 million-$7 million per year cost item) as a recurring
event that would affect our valuation.
The investor day could also be viewed as a platform to increase awareness of the company's successes in
advance of a potential secondary offering of shares by the main shareholders (shown in Exhibit 2). Given the
low float and limited liquidity of XSR shares, we would more than welcome another secondary offering that
could increase institutional interest in the name, while at the same time not leading to any dilution for existing
shareholders
Justification of Target Price
Our target price is based on 8.5x 2014E EBITDA, which drives a value of $6.00 per share. This figure is
discounted by 5% for time value to generate our 12-month target price of $5.50.
Key Risks to Target Price
? Valuation risk. There is really only one comparable company, reducing our confidence on what are the
proper valuation metrics.
? Liquidity risk. Despite a secondary issue of 8 million shares earlier this year, XSR remains a very
illiquid stock with a float of only 11.3 million shares. Investors buying or selling the stock may not be
able to transact any meaningful volumes at the last traded price.
? Forecast risk. In our view, there is a greater-than-usual degree of uncertainty forecasting future results
for this company. Actual results could vary materially from our forecasts.
? Technology risk. Risk of technology advancing to the point where mobile Internet access is available at
more affordable prices than currently prevail, facilitating Internet radio and other competitive
applications.
? Exposure to the automotive and retail sectors.
? Subordinate voting share structure (Four shareholder groups control 95.1% of the votes).
Investment Conclusion
We believe that XSR operates in an attractive niche, with growth prospects for the next couple of years that are
well above other media and telecom companies in Canada. The investor day being held today could draw
attention to the company's prospects for subscriber, ARPU and EBITDA growth through 2015, at which point
we would expect significant FCF generation to allow for healthy dividend payments to shareholders.
Alternatively, XSR could attract a premium takeover offer from one of the larger cable/telecom players in
Canada between now and 2015. We are assuming coverage of the name with a BUY rating and a target price
of $5.50.