RBCTheir upside target remains $11.00. GLTA
June 6, 2014
Sirius XM Canada Holdings Inc.
3Q Preview: With Excess Cash Paid Out, Focus
Returns to Subscriber Growth
Our view: We are making adjustments to our forecast and valuation to
reflect: (i) the recent debt refinancing and special dividend; (ii) minor
downward revisions to our EBITDA estimates; and (iii) a lowering of
our target EV/EBITDA multiple from 14x to 13x as we roll forward
our valuation. Our price target decreases to $9 and we maintain our
Outperform rating.
Key points:
• 3Q preview: Focus shifts back to sub growth. SiriusXM Canada is
expected to report 3Q14 results in mid-July. For the quarter, we forecast
revenue and EBITDA of $78.4MM (+7% YoY) and $17.4MM (+20%
YoY), respectively. Our estimates incorporate: (i) +3.5% YoY growth in
Canadian industry car sales, with higher OEM penetration YoY and
largely stable churn; (ii) modest ARPU pressure in the short-term (-2.0%
YoY); and (iii) continued YoY decrease in SAC ($42) and CPGA (to $65).
Our forecast translates into EBITDA margins of 22.2% (+246bp YoY) and
adjusted EPS of $0.02. Areas of focus this quarter are likely to include
(i) subscriber growth entering the seasonally stronger part of the year;
(ii) progress in the used car market; (iii) the outlook for ARPU given
the growth in pre-owned and new streaming competition; (iv) music
royalties and marketing spend; and (v) an update on a potential CRA tax
reassessment.
• Balance sheet re-leveraged. On May 28, the company announced
a special cash dividend of $0.585 per Class A Subordinate Voting
Share, C$0.585 per Class C Non-Voting Share and C$0.195 per Class B
Voting Share. With a record date of June 9th, the stock already trades
ex-dividend. In total, the special dividend represents about $75MM,
leaving the company with an estimated $15-20MM of cash-on-hand and
a new $35MM credit facility. Although we previously advocated a larger
share repurchase (instead of a special dividend) given the accretion and
multiple-expansion potential, we acknowledge the complexity of this
scenario given XSR’s ownership structure. Our estimate for net debt/
EBITDA at F2014E year-end increases from 1.0x previously to 2.1x. We
are not assuming another increase in the regular dividend until 2015.
• Trimming target from $10 to $9. We are making changes to our forecast,
mostly to reflect (i) payment of the recently announced special dividend
(increasing net debt); (ii) the recent issuance of $200MM of 5.625%
notes; (iii) the early redemption of the company's 9.75% notes at a price
of 107.9616% of the $131MM principal amount plus accrued interest;
and (iv) slightly higher revenue growth assumptions offset by lower
margin assumptions. Our EBITDA estimates in F2014-2016E decrease
modestly (1-2%). As we roll forward of our valuation towards F2016E,
we are lowering our target EV/EBITDA multiple from 14.0x to 13.0x
reflecting a degree of growth deceleration in our forecast post F2016E.
Our 13.0x target multiple is consistent with XSR's current FTM EV/
EBITDA (13.0x) and is a discount to SIRI's trading multiple of 15.5x.