Their upside scenario target is $8.00 GLTA
April 10, 2015
Sirius XM Canada Holdings Inc.
A Solid Quarter After Tuning Out the Noise
Our view: We continue to like XSR's business model, and the decent
combination of EBITDA growth (+10% CAGR through 2017E), revenue
visibility (minimal advertising and regulatory exposure), and attractive
yield (7.2%), all in the context of an increasing valuation discount to SIRI
(FTM EV/EBITDA of 10.3x versus 16.0x).
Key points:
• Minor estimate revisions; $7 target unchanged. We have made minor
tweaks to our forecast, mostly to reflect (i) slightly lower industry
auto sales, higher OEM penetration, and lower trial conversion; (ii)
slightly lower ARPU and margin assumptions; and (iii) higher NOLs
versus our prior forecast (we now incorporate $180MM versus our
prior forecast of $143MM), translating into payment of cash taxes
in F2018E versus F2017E previously; and (iv) payment of $16MM in
withholding tax in 3Q15. We felt the tone of the conference call was
quite positive. Although subscriber growth is likely to slow sequentially
in 3Q15 (reflecting the SMS unification and a difficult comp for churn),
management reiterated its confidence in delivering mid-single digit selfpay
sub growth for the full year in F2015E.
• A solid quarter and one less thing to worry about. 2Q financials were
largely in-line with our expectations, with solid double-digit EBITDA
growth on slightly better revenue performance offset by lower margins
versus our forecast. Meanwhile, key operating metrics including sub
growth, ARPU, churn, SAC and CPGA all showed healthy improvements
and were mostly slightly ahead of our estimates and consensus
(please see our first glance note for detail). XSR intends to vigorously
defend its tax filing position and confirmed the CRA reassessment
will not impact the quarterly dividend. While $16MM of withholding
tax is incrementally negative to our forecast: (i) the amount is very
manageable ($0.12/share) and is largely offset in our NAV by a larger
amount of remaining NOLs versus our prior (conservative) assumption;
and (ii) we believe better visibility around this issue removes the related
overhang from the stock.
• Other takeaways from the quarter: (i) new car install penetration
reached the high 60% range in 2Q, and management is targeting "low
70%" over the next three years (demonstrates OEM's commitment to
the platform); (ii) progress in the pre-owned channel continues, with
>2,000 dealers signed up and ~9% of gross adds coming from this funnel
in 2Q15; (iii) discussions continue with the NHL, and management is
hoping to reach an agreement in the near-future for programming
following the 2014-2015 season; (iv) management noted there is
recognition by SIRI of the roll XSR could play in regards to the Canadian
rollout of Connected Vehicles services (e.g., Telematics) in the future; (v)
the company remains on track to complete its subscriber management
system integration later this month; and (vi) no update on the XM
license renewal with SIRI later this year (or the possibility of harmonizing
it with the Sirius agreement).