Sirius XM Canada Holdings Inc.
Moving In The Right Direction
What's The Event
Sirius XM Canada reported a solid FQ2, with financials meeting or
exceeding our expectations. More importantly, operating metrics
saw improvement right across the board, with a number of
reassuring trends for a further recovery into H2/2015.
Of note in the quarter, Sirius XM Canada received a formal notice of
reassessment from the Canada Revenue Agency (CRA), following an
audit of the company's August 31, 2006 tax return. As a result,
some of the company's tax loss carry-forwards will be disallowed,
with Sirius turning cash taxable earlier than anticipated (in F2018
vs. F2019/20 based on our estimates). The tax agency is also
looking to apply interest and penalties. While XSR management
continues to stand behind their original filing, a favourable outcome
is less likely, in our view at this point.
Implications
Sirius XM looks increasingly on track to see further improvements
into the back half of the year, as management works through some
of the transient elements to the story (including ARPU-dilutive OEM
renewals, and a price increase to offset higher royalty fees). Given
an investor base that looks much more warily at results after a
period of underperformance for XSR shares, it will surely take
several quarters of consistent strong results to rebuild confidence in
the story, not unlike what was delivered this quarter.
The CRA reassessment sees cash taxes kick in faster than initially
anticipated, but still not until at least F2018, with plenty of liquidity
to deal with the $16M in interest and penalties. Feeding this through
our DCF takes ~$0.50 off our NAV, with our price target now at
$7.50 (from $8.00). We continue to rate the shares at SO.