TD ups to $5 (Again) Sales of Toon only 2% of revenues (WOW)
Corus Entertainment Inc. (CJR.B-T) C$1.57 54% of Market Cap Received for 2% of Revenue
Event Corus has agreed to sell Toon Boom (press release – here), an animation production software company, for net-of-tax proceeds of $142 million. The transaction is expected to close before calendar year-end. To make it easier to see the pro forma changes to 2024E revenue/EBITDA/EPS/FCF, we updated estimates at this time to assume that the transaction closes on the first day of fiscal 2024 (new versus old annual estimates are in Exhibit 1). Impact: POSITIVE We estimate that gross proceeds of $147.5mm (all cash) would represent just over 10x EBITDA, versus the current trading multiple for CJR.B shares (using yesterday's closing price) of just over 3x EBITDA. To put this another way, Corus is getting the equivalent of about 54% of its current market capitalization for this one small business segment that generates only about 2% of consolidated revenue. This underscores how dramatically undervalued that Corus shares have been in the recent past, and we believe this transaction could serve as a wake-up call for investors. Some key changes in our forecasts are cited on page two. TD Investment Conclusion With debt leverage risk reduced (details on page two) and with Corus proving to investors that the private market value of at least some of its assets is materially higher than where the stock currently trades, we have increased our target multiple back to 5.0x 2024E EBITDA (we had lowered it to 4.5x from 5.0x in late June when Corus reported Q3/23 results). As such, our target increases to $5.00 from $3.75 and we reiterate our BUY rating (new target still provides a 20% FCF yield). We believe that other asset sales are possible going forward (radio stations, French language TV channels, and possibly Nelvana), but we do not sense that anything is imminent. We also still expect a cyclical recovery and regulatory changes to be positive catalysts over the next 12-18 months (lower CPE costs could be material), and then longerterm, the government and CRTC might even allow much larger scale consolidation in the Canadian broadcasting industry
Details 1. We lowered 2024E revenue and EBITDA by $29mm and $14mm, respectively (to reiterate, we have taken Toon Boom out of all of fiscal 2024 to make the estimate changes easier to see). 2. No other estimate changes were made to other divisions as we do not believe this asset sale will alter the ability of the TV channels or content production businesses to operate (Nelvana can remain as a customer of Toon Boom). 3. The sale proceeds lowered our debt/EBITDA estimate at the end of 2024 to 2.45x EBITDA, versus a prior estimate of 2.70x. Recall that leverage was 3.85x at the end of Q3/23, so these divestiture proceeds plus a slight bounce in EBITDA in 2024 (lower costs flowing through plus a modest estimated recovery in advertising spending) are expected to drive meaningful de-leveraging over the next 13.5 months.
Recommendation: BUY Risk: HIGH 12-Month Target Price: C$5.00 Prior: C$3.75 12-Month Dividend (Est.): C$0.12 12-Month Total Return: 226.1% Market Data (C$) Current Price C$1.57 52-Week Range $1.15 - $4.06 Mkt Cap (f.d.) ($mm) $313.1 Float Cap ($mm) $299.0 Current Dividend $0.12 Dividend Yield 7.6% Avg. Daily Trading Vol. 1,330,837 Financial Data (C$) Fiscal Y-E August Shares O/S (f.d)(mm) 199.4 Float Shares (mm) 190.4 Net Debt/Total Cap 77.0% Estimates (C$) Year 2021A 2022A 2023E 2024E EBITDA ($mm) 524.6 443.6 337.5 390.9 EBITDA ($mm) (old) – – – 405.0 EPS (f.d.) 0.88 0.52 0.08 0.45 EPS (f.d.) (old) – – – 0.44 EPS (f.d.) Quarterly Estimates (C$) Year 2021A 2022A 2023E 2024E Q1 0.38 0.37 0.17 – Q2 0.18 0.08 (0.07) – Q3 0.21 0.15 0.09 – Q4 0.10 (0.08) (0.11) – Valuations Year 2021A 2022A 2023E 2024E Est. EV/EBITDA 3.4x 3.7x 4.8x 3.3x