TD Writeup on Corus
TD May 29,2018 Report
EVENT
Commissioner of Competition blocked the sale of French language specialty channels (Historia and Sries+) to Bell Media.
Impact: NEGATIVE
Despite seeming structural declines in the pricing power of traditional broadcast assets over the past five years, the Competition Bureau was not willing to alter its 2013 decision (with the Bell-Astral deal) that precluded Bell from buying back divested assets within 10 years. Consequently, a non-trivial deleveraging event for Corus looks to be in jeopardy (we are not assuming at this point that either Bell will win an appeal of this ruling or that Corus will find another buyer for the assets at a similar price). The sale of ~$20 million in EBITDA for ~$200 million by the end of fiscal 2018 had been expected to lower debt leverage at Corus to 3.1x EBITDA by year end, versus our base case assumption with no asset sales of 3.4x.
TD Investment Conclusion
We maintain our HOLD rating on CJR.B shares. The valuation appears attractive, especially on P/FCF, but we need more certainty on the outlook for both advertising revenue erosion and debt reduction plans before we could have the confidence to consider an upgrade. Given the lack of asset sale proceeds to reduce debt, we are now assuming that the company will announce a 75% dividend reduction (prior estimate was 50%) when it reports Q3/18 results on June 27, which would put the prospective yield at 4.4%. Excess FCF (post dividends) for debt reduction is now expected to be $245 million in 2019, versus our prior estimate of $167 million. This leaves us with a debt/EBITDA forecast of 3.1x at the end of fiscal 2019 (prior estimate assuming the asset sale and a 50% dividend cut was 3.0x at the end of 2019). Our EBITDA forecasts have increased (slightly lower opex assumed in Q3/Q4 of 2018, and then French channels added back in 2019), but owing to increased balance sheet uncertainty, we have trimmed our target multiple to 6.2x EBITDA from 6.5x, so our target price declines to $8.00 from $9.00.