Corus Entertainment Inc T.CJR.B

Scotia

[SunsetGrill]

Advertising Recession Takes A Bite Out of Earnings

OUR TAKE: Mixed. Corus’s stock witnessed pressure on Friday after the company reported weaker than expected results. While consensus had already been brought down after the company’s warning in early September, we expect estimates for FY2023 to be cut some more given trends in advertising. We have reduced our estimates for both FY23 and FY24 and, as a consequence, we also reduced our target. While we see upside in the stock, until we see an improvement in advertising trends we prefer to remain cautious.

KEY POINTS

A weakening economy is taking a bite out of advertising spend, but we believe linear TV is seeing a steeper decline. Corus’s management on Friday’s call indicated that the company was feeling the impact of a North American recession in advertising with 7-12% y/y decline in ad spend in North America in the July/August months. Within the overall ad spend pie however, we estimate that Linear TV ad spending saw even bigger declines, closer to 10-15%. Management indicated that early look at FQ1 results show some stabilization is starting to form at the lower levels reached in FQ4 and some small incremental improvement is likely to occur in FY23.

We believe investors need to monitor the impact of Netflix’s entry in the ad market. When questioned about Netflix’s ad supported new service to be launched in November, management sounded reassuring that this service should draw ad dollars more from digital spend in other areas rather than redirect dollars out of linear TV. We point out however that within the total Video advertising pie, Linear TV accounts for approximately 70-75% of ad spend (down from 90-95% 5 years ago) with Online video at 20-25% and OTT at around 5%. Up until now the OTT segment did not have a provider with Netflix’s influence and large viewership to compete for ad dollars. During Netflix’s launch presentation the company indicated that demand for advertising on their platform was very strong and by looking at their Canadian pricing tier we believe demand in Canada was one of the strongest among all the geographies that the company is intending to launch its ad supported programming in to date. We believe the Canadian TV system, which for a long time has been protected given foreign restrictions, could potentially see pricing pressure if Netflix begins to take share away from Linear video spend.

Lowering valuation multiple to 4.25x from 4.5x. We have taken a measured view of the outlook and have slightly lowered our valuation multiples. We will be looking for signs of improved trends in the business, which we would reconsider in our valuation multiple; If we draw some parallels from the newspaper business10 years ago, these stocks were trading at 3.5-4x EV/EBITDA multiples when EBITDA declines were in the double digits. We are not forecasting these types of declines at the moment (our FY23 EBITDA is calling for a 7% y/y decline) however, the rate of current advertising declines gives us pause.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Note: CJR.B-T Non-voting shares.

Qtly Adj EPS  (FD)	Q1	Q2	Q3	Q4	Year	Price/Adj. EPS
2021A	$0.38	$0.18	$0.21	$0.10	$0.86	7.2x
2022A	$0.37	$0.08	$0.15	$-0.08	$0.52	4.3x
2023E	$0.32	$0.05	$0.17	$-0.04	$0.51	4.4x
2024E					$0.62	3.6x

Exhibit 1 - Corus F22Q4 Summary Model

Source: Scotiabank GBM estimates; company report

Exhibit 2 - Target Price and Valuation

Source: Scotiabank GBM estimates; company report

Company Overview

Company Description

Corus Entertainment Inc. is a Canada-based integrated media and content company established on September 1, 1999. The company operates through two segments: Television and Radio. It generates revenue through subscription fees, advertising revenue, content licensing, and merchandising sales. CJR’s television segment encompasses four sub-segments: conventional television stations, specialty television networks, original content business, and multi-platform business. Corus’ Radio segment comprises 39 radio stations situated primarily in high-growth urban centers in English Canada, with a concentration in Southern Ontario.

 

Key Risks

Macroeconomic slowdown; Decline in ad spending; Subscriber pressure on streaming platforms; Regulatory Risks on TV and Radio operations