Kew Media Group Inc (Variable Voting) KWWMF

TD

[retiredcf]

Here's the more complete report. GLTA

Kew Media Group Inc.

(KEW-T) C$6.80

10% Organic Growth for 6.4x EBITDA

Event

Q4/18 results and 2019 guidance.

Impact: POSITIVE

Partially owing to fears that 2018 EBITDA guidance ($26.5 million) was at risk, KEW shares are down 26% since the beginning of 2018; as such, we are pleased to see the actual result ($26.9 million) come in slightly ahead of plan. This represents impressive organic growth of ~10%, plus contributions from the well-executed acquisition of Essential Quail. Management has delivered as promised in its first two years of operations, which we believe bodes well for the credibility of 2019 EBITDA guidance of $33.5 million-$34.8 million (mid- to high-single-digit organic EBITDA growth off of a pro forma base of $31.9 million in 2018). We have slightly increased our 2019E EBITDA estimate, and the results/guidance have given us enough confidence and visibility to introduce 2020E estimates. Our target price increases by $0.50, to $13.00, based on 8.5x 2020E EBITDA (up from 8.25x 2019E EBITDA previously).

TD Investment Conclusion

We like the growth prospects in the video content production and distribution business, and we believe that the market agrees because key comps continue to trade above 10x forward (2019E) EBITDA (see comp table in Exhibit 3). We believe that KEW is developing a track-record as a good operator and consolidator in this industry, but the stock continues to trade at a meaningful discount to peers at 6.4x 2019E EBITDA. We believe that a material upward re-rating is likely in the coming months as investors see positive developments for both the industry (new streaming services from multiple large TMT players) and for KEW specifically. In addition to evidence in the coming quarters that 2019 guidance is on track, we look forward to the announcement of accretive acquisitions, and we expect meaningful improvements in FCF in 2019 (see page two for more details). A larger scale business and increased trading liquidity will likely be necessary to fully close the valuation gap between KEW shares and its peers, but over the next year, we believe that the gap will narrow and that the 8.5x forward EBITDA is achievable one year from now. We reiterate our ACTION LIST BUY rating.