Post by
Daudau11 on Jul 13, 2023 7:33pm
RBC Ups Target Price from $2.50 to $3.00
Divestiture of Toon Boom is an Accretive and Derisking Event Our view:
The sale of Toon Boom Animation is an accretive and de-risking event. Factoring in the transaction, our price target increases from $2.50 to $3.00.
Key points:
• No change to our investment thesis: Navigating cross-currents and rip tides. We continue to be impressed by management’s execution on multiple strategic and tactical initiatives. We expect the stock to remain under pressure pending improved macro/advertising visibility and look for more timely entry points. While under most macro/advertising scenarios the stock appears oversold, we believe renewed multiple expansion for Corus rests squarely on the visibility around management’s ability to return to, and deliver on, sustained YoY revenue growth as well as to protect the balance sheet in the event of an economic recession in Canada.
• Details of the transaction. Corus announced an agreement to sell Nelvana's wholly owned subsidiary Toon Boom Animation to IMC for $147.5MM in cash. Toon Boom is a Montreal-based animation software company founded in 1994, of which Corus originally purchased a 50% interest in 2004 and acquired the remaining 50% in 2012 for $4.1MM. The transaction is expected to close later in calendar 2023, with net proceeds of $142MM to be used for debt repayment.
• Sale is consistent with balance sheet and strategic priorities. We view this transaction as both an accretive and de-risking event with respect to leverage as the company navigates the ongoing advertising recession in Canada (which commenced in earnest in calendar Q3/22) and ongoing writer's (and potential actor's) strike. This transaction is also consistent with the company's recent enterprise-wide review of operations and the asset base, and strategic focus as an aggregator of premium video content (please see our Quick Take note published earlier today).
•Increasing price target to $3.00. Factoring in net proceeds of $142MM, the divestiture of an estimated $30MM and $15MM in annualized revenue and EBITDA, respectively, and simplistically assuming an early fiscal Q2/24 close (i.e., December 1, 2023), our price target increases from $2.50 to $3.00. Importantly, forecast net debt/EBITDA for F2024 declines from ~3.3x to ~3.1x (versus a covenant of 4.25x) and for F2025E from ~2.7x to ~2.5x.