Corus Entertainment: Strong Free Cash Flow Yield, Taking Pandemic Headwinds In Stride
Summary
- Corus has taken a hit to advertising-related revenues as a result of the pandemic.
- Total subscriber revenues have held steady; however, so I expect more advertisers to gradually return as the Canadian economy recovers.
- Content production and streaming initiatives like StackTV and Nick+ have so far helped to offset cord-cutting.
- Based on free cash flow yield of ~27%, valuation, debt paydown since 2018, and other positive attributes, there's a case for a higher share price for Corus.
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Corus Entertainment Inc. (OTCPK:CJREF) is a Canadian media and content company that operates television networks and radio stations, its own production studios, and a couple of recently-launched streaming initiatives. Like other companies in the broadcasting sector, Corus took a hit in terms of both business and stock performance in 2020 during the pandemic. 2021FQ1 revenues were down 10.2% year over year, an improvement from -15.7% in 2020FQ4, and -23.9% in 2020FQ3.
Although its stock price has just recently surpassed its pre-pandemic level, it is still well-below its peak in 2013, with a price return of around -82% and total return of -65% over the past 7 years. There have been a range of bullish SA articles over the years (with most of them mentioning the free cash flow), though clearly the pandemic threw in a curveball. With a vaccine-aided recovery still yet to get under way in Canada, it's possible that a bullish case has more room to run.
Data by YCharts
Looking at the past few years in a nutshell, Corus took on an additional C$1.4B of net debt for the acquisition of Shaw Media Inc. in 2016, and slashed its dividend from C$1.14 to C$0.24/year in 2018 as it tried to digest that. Taking a glance at previous articles, it looks like synergies and debt pay-down did not materialize as quickly as expected. Concerns about cable unbundling, and financial underperformance, may have also contributed to the slide over 2015.
As a broadcaster, it continues to face the specter of cord-cutting, which likely contributed to revenue being fairly stagnant for several years prior to the Shaw Media acquisition and the pandemic (apart from the jump due to the acquisition). On balance, I can see Corus' share price climbing higher based on valuation, strong free cash flow yield, and demonstrated resilience and continued debt paydown through the pandemic. Comparables suggest a share price target of C$7 - if achieved in a year, this would represent a total annual return of about 32% from Thursday's close of C$5.50.
Business Overview
Here's a quick summary of its business segments for fiscal 2020:
Business segment revenues were 93% television and 7% radio.
Sources of revenue were 61% advertising, 32% subscriber, and 7% merchandising, distribution, and other.
Total assets were ~C$4B and bank debt was ~C$1.5B.
- The pandemic has hit radio advertising particularly hard, with radio revenues down 26% in 2021Q4, although this is a smaller segment.
To give an overview of Corus' operations and brands, and to prove that it has some visually appealing logos, see below:
Source: 2020Q1 Investor presentation
Corus caught my attention in 2020 since I owned some Discovery (DISCA) stock, and noticed that Corus operates the licensed Canadian versions of HGTV and the Food Network, among the many others listed. Apart from its own channels and stations, it also has partnerships with NBC, ViacomCBS, and Disney.
I see channels like Food Network Canada, HGTV Canada, History, etc., as highly differentiated - scripted content is not really a substitute for lifestyle-oriented shows about food, cooking, and home & renovations, which are central themes for many people's lives. I'd also expect that many households with the means to pay would generally not want the hassle of regularly sifting through YouTube or other free alternatives. The traction that Discovery is getting with discovery+ helps to illustrate viewer interest in this kind of content on a stand-alone basis.
Of course, Corus does more than just these specialty channels. Management shared a bunch of their content's recent accolades on the latest conference call. For example, Corus' conventional network, Global, delivered 8 of the top 20 shows for adults 25-54 this fall, and Corus Studios and Nelvana had growth of 11% in licensing sales (which falls under merchandising, distribution, and other revenues).
Summary of Investment Pros/Cons
I've listed some high-level points that could argue for or against an investment in Corus.
Pros:
Still a value stock by most measures: e.g. about 3.8 price/cash flow (TTM) and 5.7 EV/Ebitda.
Strong free cash flow yield of ~26.6%.
4.4% forward dividend yield, and normal course issuer bid (NCIB) for about 4.6% of shares.
Resilient through the pandemic - was able to cut back on costs. Benefit from the Canada Emergency Wage Subsidy (CEWS) was only C$3.7M, in 2021Q1.
Total subscriber numbers have remained steady, so advertisers likely to return.
Has paid down debt by C$514M since August 2018, with total bank debt of ~C$1.5B as of November, 2020.
StackTV and Nick+ give streaming/on-demand alternatives for its cable channels, and these have grown to over 400K paying subscribers in total since launching in June 2019.
Differentiated content: e.g., Food Network Canada, HGTV Canada, History, Disney channel.
Own-studio licensing grew 11% year over year, from shows like Island of Bryan (aka Restoration Island), and the Hardy Boys.
There could be some tailwind, with easier comps and as revenues recover from the pandemic.
Cons:
Stagnant organic growth for many years and at risk of cord-cutting.
There was a bunch of complaining about StackTV about a year ago that I found on Reddit. It seemed to boil down to (1) missing on-demand episodes, (2) annoying ads, and (3) the C$12.99/month cost, higher than most streaming services.
Based on issues with licensing rights, the missing episodes could be par for the course for licensed streaming/on-demand services in Canada.
Debt is somewhat elevated, at 3.14 times net debt to segment profit - however, their targeted level of debt is to get below 3.0 by fiscal year-end. This should be highly achievable, given that they reduced it from 3.18 to 3.14 just in 2021Q1.
Free cash flow yield should decline as the cost of programming rights and content investments ramp back up.
Viewer engagement could decline as we emerge from the pandemic, and people spend more time outside the home.
StackTV and Nick+ are add-ons to Amazon Prime, so they're tied to a particular ecosystem. I'd assume this is easier for Corus than having a standalone service.
Note that broadcasting is a highly regulated industry in Canada. So far, this kind of protection hasn't extended to streaming, although the recent Bill C-10 endeavors to change that. Such legislation can depend on the government of the day, and I won't pontificate on its social merits or lack thereof. But from a stock analysis point of view, it could provide some protection from competition and cord-cutting that wouldn't be available to U.S. broadcasters. Having said that, the specific regulations based on Bill C-10 could take years to determine.
Financial Performance
Source: Corus 2021Q1 Report to Shareholders, p.11
Corus delivered C$306M of free cash flow for the last 12 months ended November, 2020 - relative to the current market cap of C$1.15B, this amounts to a yield of about 26.6%. Historically, free cash flow has been strong, as well, at least relative to the current market cap:
Source: 2021Q1 Investor Presentation, p.16
Cord-Cutting and Streaming Initiatives
Of course, a key long-term risk to Corus is cord-cutting. The pandemic, and Corus' resilience throughout it, should put most debt concerns to rest for now, but cord-cutting is not likely to go away. Total subscriber revenues have been roughly flat in the last 2-3 years, and many millennials that are not in the habit of having cable could turn into "cord-nevers."
Despite the negative experiences that some have had with StackTV, it and Nick+ have still grown their total paying subscriber numbers to over 400K since launching in June 2019. On the last conference call, executives described it as an "unbelievable success," a "locomotive," and that they were going to "put the pedal down" on this business. While this does convey management's enthusiasm, it doesn't yet look like its going to be a huge part of overall revenues, but maybe enough to offset the decline in linear subscribers.
Their goal is 800K subscribers, so compared to ~14M households in Canada, this represents about 5.7% penetration. In the 2020FQ4 conference call, StackTV was in "almost 300,000 paying homes." If they do get to 800K total households, split 3/4 and 1/4 between StackTV and Nick+ respectively, that would be (C$12.99*0.75 + C$5.99*0.25) x 12 x 800k = C$107.9M, or roughly 6.4% of their pre-pandemic annual revenue (advertising and other revenue could add to this).
StackTV and Nick+ are specialized add-ons within Amazon Prime Video, so they're not fully comparable with general-interest streaming services. But to get a sense of scale in the Canadian context, here's a basic comparison with Bell's Crave, Netflix (Canada), and Amazon Prime Video:
Company | Corus | Bell Media | Netflix | Amazon |
Service | StackTV and Nick+ | Crave | Netflix (Canada) | Amazon Prime Video |
Cost/month | C$12.99 (StackTV), C$5.99 (Nick+), + Amazon Prime Video | C$9.99+ | C$9.99 | C$7.99 |
Subscribers | >400K in total | ~7.6M* | ~4.0M?** | |
Growth in subscribers | StackTV had >200K in 2020FQ3 and almost 300K in 2020FQ4. | 8% year-over-year (yoy) | ~9.3% yoy | ? |
Launch | June 2019 | January 2016 | ||
Description | Add-on specialty channels in Amazon Prime Video | C$19.98 to include HBO, movies, some live channels. | Part of Amazon Prime membership |
* My approximation, based on taking Netflix's UCAN numbers and scaling by the Canadian % of the Canada + United States population (roughly 10.3%).
** Amazon Prime membership numbers aren't regularly disclosed - I've approximated this in proportion to Crave, based on some survey numbers.
A concern could be competition from discovery+ if it were to be offered directly in Canada. If there aren't better options, some will put up with StackTV's cost of C$13/month, but this looks pricey versus discovery+ at USD$5/month with ads, or roughly C$6.35. It's only a partial overlap between the two, but they would likely appeal to similar fanbases.
At the current time, it probably isn't practical for Discovery to do this because it has licensed the rights to Canadian versions of its channels and content to Corus and Bell Media (BCE). For regular cable TV channels, Discovery would not have been able to provide much of its content directly, because of broadcasting regulations, hence the licensing route.
It seems like Discovery would have an incentive to continue with the status quo, given that cable subscribers in Canada still probably outnumber what they could acquire in terms of streaming-only subscribers. New regulations could create further obstacles, but there's enough competition in the space already that Corus could hit an early plateau with its streaming offerings.
Note that Canadian content regulations dictate that 35% of programming on specialty channels, e.g. Food Network Canada and HGTV Canada, already has to be Canadian-made. Given the lower cost of unscripted content, it's probably more viable for Corus and other Canadian content producers to compete in this area, and I'd expect that having at least some local content will be more relatable for viewers, anyways. Cooking shows, for example, often feature competitions among chefs from across the country.
Unlike BCE, Corus is not a telecommunications provider, so if cord-cutting were to re-accelerate, Corus would be in a trickier position. It could perhaps lean more on content production - in the 2020FQ4 conference call, they touted some of the series they've licensed to U.S. channels including Island of Bryan (which has become 'Renovation Island' on HGTV), Fire Masters, Save My Reno, Scott's Vacation House Rules, Big Rig Warriors, the Big Bake, and the Hardy Boys. Nevertheless, given the competitiveness of content production, a conservative approach would be to assess Corus through the lens of it being a low-growth/secular decline kind of business.
Other Risks
There are a range of other risks that warrant mentioning, although I won't go into depth. Some of the major ones that come to mind:
- Setbacks on the COVID-19 front. A surge in variants could result in additional lockdowns and a decline in ad-spending - even just a slowdown in sequential business recovery could set the share price back. Since intermittent lockdowns have been enough to keep the Canadian healthcare system from collapse, I'm optimistic that vaccines will at least be effective enough to greatly lessen the need for lockdowns.
- There is intense competition for advertising dollars, in general. Note that on the 2020FQ3 call, management talked about a couple of initiatives to improve ad-targeting and the ease of ad-buying.
- Uncertainty about the specifics of new regulation could lead to delayed investments and capital allocation plans.
- Corus' share price has already climbed by about 16% just since the most recent quarterly results, and as a small-cap, it will be particularly susceptible to shifting sentiment. With the roughly 90% climb since October, some market participants could also look to take profits, leading to a pullback, although at that time there was less clarity about vaccines.
- Management has disappointed before, with its expectations and timelines. In particular, in terms of sustained growth, the proof will be in the pudding - and if organic growth doesn't materialize, acquisitions would come with their own set of risks.
One conclusion is that Corus is probably not a buy-and-forget kind of stock. Corus will have a much lower ceiling on its streaming potential versus large U.S. media companies, and there might be less demand for its content once normal production routines resume, making it difficult to generate sustained growth. New regulation could help Corus, but specifics will take a while to determine, and it's unlikely to turn broadcasting back into the walled garden that it once was, in Canada.
Valuation
A dividend discount model can lead to all kinds of results, but here is one possible set of assumptions, which gives a share price of d*(1+g)/(r-g) = 0.24*(1.05)/(.09 - .05) = C$6.30:
- Required return (r) of 9%
- Dividend (d) starts at the current rate of C$0.24/year
- Flat organic growth (g) of 1%/year, with ~4% stock buybacks per year, to give growth on a per-share basis of 5%/year.
Management expects to get below the 3.0 leverage target by fiscal year-end, but they also said that until they have a "full and clear view of the regulatory backdrop, we're going to keep paying down bank debt". So any shift in emphasis from debt pay-down to some combination of dividend raises, buybacks, or acquisitions could take a while longer.
For comparables, Hemisphere Media Group (HMTV), Townsquare Media Inc. (TSQ), and the E.W. Scripps Company (SSP) are U.S.-based broadcasting companies in the same market cap ballpark. Wildbrain Ltd. (WLDBF) is a Canadian-based media content creator. BCE Inc. (BCE) and Discovery Inc. (DISCA) are much larger - BCE competes with Corus through Bell Media, and DISCA has some overlap in content, though it also has much more global potential with discovery+.
Source: Seeking Alpha; *: author calculations.
To get some kind of price target from the comparables, I first "normalize" expenses to 2019Q2-2020Q1 pre-pandemic levels, to reflect production returning to normal, and use trailing 12-month revenues, to assume a slow revenue recovery. This gives C$1,464M - C$1,110M = C$354M segment profits. Corus defines segment profits similarly to EBITDA ("revenues less cost of sales, general and administrative expenses," p.28 of the 2020 annual report).
Using a 8.48 EV/EBITDA multiple as the next-lowest from the comparables gives a C$3.00B enterprise value. Subtracting total debt of about C$1.47B gives C$1.53B in equity value, and dividing by 208.4M shares gives a share price of C$7.35, which I round down to C$7.
So, moderately conservative assumptions suggest that there could be some worthwhile returns, if sentiment continues to improve on Corus, and there's increasing recognition of the progress that they've made on debt paydown and other initiatives. With sustained growth that management is striving for, C$7 is likely an underestimate, although it would take a longer time horizon to see if this materializes.
Based purely on the ebbs and flows of market sentiment, I could easily see this dipping back below C$5 in the near term. I'd be surprised to re-visit the low points of 2020 over the next year, but in the event of major COVID-19 setbacks or underlying business deterioration, anything is possible.
Final Words
With strong free cash flow relative to the current market cap, along with the other pros/cons I've listed, I think it's reasonable to be moderately bullish on Corus. Cord-cutting is a concern, but this is happening slowly, and their streaming initiatives should help to offset it. They've also had success lately with content that has been picked up internationally by other broadcasters.
Previous bullish calls on Corus in 2018-2019 were interrupted by the pandemic - but Corus' ability to navigate the crisis, and the momentum from the recovery, could help to prompt a further re-assessment by the market, which has already gotten under way in the last few months. On the downside, Corus will be sensitive to any pandemic-related setbacks, and management's aspirations for sustained growth have so far not been vindicated.
Please feel free to share your insights or feedback in the comments below; I'm sure that some on SA have followed Corus for longer than I have.
This article was written by
Analyst’s Disclosure: I am/we are long CJREF, DISCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I'm not a financial adviser/advisor, and this post is only intended to express my own opinions. I could have overlooked key facts and/or risks, and my views could change at any time, not least because of new information that might become available. The suitability of an investment depends on your own personal circumstances and risk tolerance. You are responsible for your own due diligence!
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (45)
-Last Q's FCF of C$88M vs. market cap of C$803M.
-Low debt and continuing to deleverage: down to 2.7x. Minus C$700M since Sept. 2018. Long run-way in the debt maturity profile.
-Stable revenue.
-No plans for major M&A: "So we're still very much of the view that the best use of our capital, as I said earlier, absent internal investment is buying back our own stock. The multiples that we see on M&A targets still appear to us to be extremely inflated... So the answer quickly would be no in M&A at this time."Looking cheap. Anything else like this, out there?
(1) Your valuation is very conservative
(2) There is no mention of Corus' strength in women and children's tv, Corus Studios, their global licensing initiative, and their content production abilities. Nelvana is a very underappreciated asset."Corus creates world-class content that is sold in more than 160 countries across the world.Nelvana, one of the world’s leading creators, producers and distributors of children’s animated content, and related consumer products, is the cornerstone of the company’s kids content and production business. Globally recognized brands include Babar, Franklin, Max & Ruby, Hardy Boys, Agent Binky: Pets of the Universe and Esme and Roy. Corus’ content business also includes Corus Studios, a globally recognized producer of hit scripted and unscripted content. Series distributed around the world include Island of Bryan, Masters of Flip, $ave My Reno and Scott’s Vacation House Rules.Also part of the Corus family is Toon Boom, a worldwide leader in digital content and animation creation software, and Kids Can Press, Canada’s leader in children’s publishing.Corus’ powerful combination of entertainment assets make us an industry leader in Canada and a significant player in the international marketplace. Our success means a stronger Canadian broadcasting industry, a stronger economy and stronger communities across Canada."