What?
Corus entertainment (TSE:CJR.B) is a Canadian company in the radio and television broadcast business. Corus owns 45 specialty television networks, 15 television stations, 39 radio stations, and a content development segment that produces and distributes films and television programs, merchandise licensing, book publishing, animation software, and media and technology services across 160 different countries. Corus owns a majority voting share in 38 major specialty television shows across Canada, including Teletoon, YTV, the History Channel, and Global News Network. Corus also holds a deal with Disney that makes it the home for all Disney’s channel brands in Canada.
Why?
● P/B and P/FCF are at their lowest levels in 10 years by about 50% off the average, which suggests overblown undervaluation.
Historical 10yr P/B
Historical 10yr P/FCF
● Monthly dividend of 16% maintainable for the next 1-2 years helps offset some downside risk. Management believes they will maintain the current dividend of $1.14 per share until the end of FY2019. Assuming the dividend is maintained for FY2018, investors still have have 9 payments left to receive a total gross income of 12%.
● High uncertainty and pessimism have caused the stock to extreme lows of 0.6 book value with a generous P/FCF of 4.5, even though the company is in good financial health, is improving costs, and is making acquisitions.
● Strong FCF to innovate and maintain debt gives Corus a fighting chance in a distressed industry.
● High protection from the Canadian Radio-television and Telecommunications Commission (CRTC) makes the probability of Corus falling prey to a liquidation bankruptcy in the next 5 years <1%.
At What Price?
● A discounted cash flow analysis assuming a 10% discount rate and 3% growth in free cash flow gives Corus an intrinsic value of $10.16 per share. At the prior price, Corus would still have a meager P/B ratio of 0.85. I’d likely sell at 90% of fair value, which shows how much of a wuss I am.
At What Risk?
● Difficulty to quantify the extent of negative investor sentiment could push prices lower. Cord-cutting is occurring at a 2% annual rate globally, and it’s difficult to see the degree in which competition from streaming companies could erode the moats of broadcasting businesses further. In other words, Corus’ downside could be greater than expected in the short-term as a result of strong negative sentiment towards broadcasters. However, given Corus’ extreme undervaluation relative to historical multiples, I think the downside is limited from this point on. Note: Corus unexpectedly beat estimates for Q218, which has driven up prices >20% in the past two days. Be wary of market frenzies and the likelihood that it will probably take a few quarters of estimate beats for the market to gain sustained interest.
● Corus holds 2.1B in bank debt with RBC and TD. While Corus is apt to meet its debt obligations within the next 2 years, central banks are in a fragile position due to high consumer and corporate debt levels. If delinquency rates rise to critical levels, RBC and TD may call the loans to prevent insolvency, which would force Corus to sell assets or face bankruptcy.
● While I don’t believe broadcasting will disappear anytime soon, if broadcasting companies are unable to innovate effectively over the next few years, further pessimism could prevent Corus’ shares from mean reverting for longer than expected, if at all.
Disclaimer: The information provided in this article expresses my own opinions and should not replace financial advice provided by a certified financial professional. Please seek certified professional advice for all investment-related matters.
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Value Snapshot: Corus Entertainment (TSE:CJR.B)
What?
Corus entertainment (TSE:CJR.B) is a Canadian company in the radio and television broadcast business. Corus owns 45 specialty television networks, 15 television stations, 39 radio stations, and a content development segment that produces and distributes films and television programs, merchandise licensing, book publishing, animation software, and media and technology services across 160 different countries. Corus owns a majority voting share in 38 major specialty television shows across Canada, including Teletoon, YTV, the History Channel, and Global News Network. Corus also holds a deal with Disney that makes it the home for all Disney’s channel brands in Canada.
Why?
● P/B and P/FCF are at their lowest levels in 10 years by about 50% off the average, which suggests overblown undervaluation.
Historical 10yr P/B
Historical 10yr P/FCF
● Monthly dividend of 16% maintainable for the next 1-2 years helps offset some downside risk. Management believes they will maintain the current dividend of $1.14 per share until the end of FY2019. Assuming the dividend is maintained for FY2018, investors still have have 9 payments left to receive a total gross income of 12%.
● High uncertainty and pessimism have caused the stock to extreme lows of 0.6 book value with a generous P/FCF of 4.5, even though the company is in good financial health, is improving costs, and is making acquisitions.
● Strong FCF to innovate and maintain debt gives Corus a fighting chance in a distressed industry.
● High protection from the Canadian Radio-television and Telecommunications Commission (CRTC) makes the probability of Corus falling prey to a liquidation bankruptcy in the next 5 years <1%.
At What Price?
● A discounted cash flow analysis assuming a 10% discount rate and 3% growth in free cash flow gives Corus an intrinsic value of $10.16 per share. At the prior price, Corus would still have a meager P/B ratio of 0.85. I’d likely sell at 90% of fair value, which shows how much of a wuss I am.
At What Risk?
● Difficulty to quantify the extent of negative investor sentiment could push prices lower. Cord-cutting is occurring at a 2% annual rate globally, and it’s difficult to see the degree in which competition from streaming companies could erode the moats of broadcasting businesses further. In other words, Corus’ downside could be greater than expected in the short-term as a result of strong negative sentiment towards broadcasters. However, given Corus’ extreme undervaluation relative to historical multiples, I think the downside is limited from this point on. Note: Corus unexpectedly beat estimates for Q218, which has driven up prices >20% in the past two days. Be wary of market frenzies and the likelihood that it will probably take a few quarters of estimate beats for the market to gain sustained interest.
● Corus holds 2.1B in bank debt with RBC and TD. While Corus is apt to meet its debt obligations within the next 2 years, central banks are in a fragile position due to high consumer and corporate debt levels. If delinquency rates rise to critical levels, RBC and TD may call the loans to prevent insolvency, which would force Corus to sell assets or face bankruptcy.
● While I don’t believe broadcasting will disappear anytime soon, if broadcasting companies are unable to innovate effectively over the next few years, further pessimism could prevent Corus’ shares from mean reverting for longer than expected, if at all.
Disclaimer: The information provided in this article expresses my own opinions and should not replace financial advice provided by a certified financial professional. Please seek certified professional advice for all investment-related matters.
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About The Author
Owen Hofmeyr
“Investment is most intelligent when it is most businesslike.” - Benjamin Graham