RE:National Bank initiates coverage….outperform HIGHLIGHTS
The world's largest independent library of children's video content: The company's
objective is to grow its library of over 9,500 half-hours by about 1% to 2% (75 to 150 half-hours)
per year, both organically and through acquisitions. New productions serve to not only expand
and refresh the library, but also to stimulate growth in DHX's rights exploitation businesses.
Distribution and M&L drive results: While content production was historically DHX's
main source of growth, distribution as well as merchandising & licensing now represent its
key drivers. Given the company's critical mass and strong brands, it's well-positioned to
benefit from the growing value of content driven by changing viewing habits and the
proliferation of new distribution platforms.
Family Channel strengthens all business units: The pending purchase of Family Channel
and related Disney specialty networks not only comes at a particularly attractive valuation, but,
importantly, enables DHX to gain control of the largest distribution platform of kids programming
in Canada. The television market represents an optimal entry point for brands looking to gain
exposure & popularity, thus acting as a key marketing tool for merchandising & licensing.
Solid financial position, strong FCF profile, room to grow dividend: After recent M&A,
leverage is poised to reach 3.0x in f2014 on a pro forma basis, before contracting to 2.0x in
f2015 and then to 1.5x in f2016. We expect DHX's dividend to rise by 10% with 1Q15 (17.1%
payout on f2015E FCF) and by 20% with 1Q16 (18.7% payout on f2016E FCF). FYE is June. Our
forecast doesn't include M&A which remains a core element of the company's growth strategy.
Initiating coverage with an Outperform and $6 target: To derive our target we straddle the
f2014 and f2015 values in our DCF, with implied EV/EBITDA of 13.6x PF2014E, 11.3x f2015E, and
9.7x f2016E. Although it's still too early to use f2016 multiples, the implied EV/EBITDA valuation of
our target sits at just over 10.5x when looking at our forward 12-month expectations one year
from now (i.e., spanning 2H15 and 1H16).