CJR.B-TO/CJREF -- Corus Entertainment Inc.

[Nelson]

Did a search and couldn't find a thread for Corus Entertainment (TSX:CJR.B).

 

Corus is one of Canada's largest media companies, owning approximately a dozen TV stations and 40 radio stations. The TV stations are focused in kids programming, like Treehouse, YTV, Teletoon, Nickelodeon Canada, The Cartoon Network and Disney Canada. They have long-term deals in place for the U.S. content on the U.S.-branded stations. Corus also owns W Network, Cosmo TV, ABC Spark, CMT, and a few other local stations in Ontario. It's in the process of selling its rights for HBO Canada and Movietime in Western Canada to Bell, which owns the rights in Eastern Canada.

 

The radio business is mostly clustered in Ontario, but it also has exposure to Vancouver, Calgary, and Edmonton. Stations come in all genres, with a definite focus on upbeat pop contemporary stuff that won't offend anyone and news talk. Radio is a steady business, contributing about 20% of revenue.

 

The other interesting asset is Nelvana, Corus's in-house producer of animated content. Every few years Nelvana comes up with a hit that will get syndicated in other markets. Previous examples include Babar, Franklin the Turtle, The Magic School Bus, and something called The Day My Butt Went Psycho, a show I still don't believe actually exists. In a world where parents like putting on Netflix for their kids, Nelvana's library of content is at worst a hedge against the further decline of broadcast TV.

 

Reasons why I like Corus:

 

1. Valuation - Trades at less than 5x TTM FCF. Stock is around $9.60 today, and if you take away the asset write-downs, it would have done $2.50 per share in operating profit TTM.

 

2. Temporarily poor ad spending - Corus has guided softer for 2016, giving the expectation FCF might be slightly down next year on softer ad spending. I think this returns to normal once Canada's economy picks up a little bit.

 

3. Kids channels - Since I've been interested in Corus, I've asked every parent I know how often their kids watch Corus's kids channels. The answer is always the same: Yes, my kids watch those channels, and usually for more than an hour each day. Even the parents who have Netflix still subscribe to those channels. If you're an advertiser that wants access to kids, I can't think of a better way than to throw an ad up on Treehouse or YTV.

 

4. Potential for Shaw to reacquire it - Shaw spun out Corus in 2000 and retains control over it via multiple voting shares. Corus is down ~50% over the last year. It makes all the sense in the world for Shaw to buy it back. Shaw got back into the broadcast television business back in 2010 when it acquired Canwest Global out of bankruptcy. There are potential snyergies.

 

Reasons to be nervous about Corus:

 

1. New CRTC rules - The CRTC wants Canadians to no longer be forced into buying expensive cable bundles even though they might only be interested in a channel or two. Starting in 2016, the cable providers will be forced to offer an inexpensive base package ($25 monthly) along with the option to cheaply add individual channels. It seems like Corus's women's programming would be most in danger when this happens.

 

2. A continued rise in Netflix and other streaming options - I don't have cable. We moved into a brand new apartment that didn't have the infrastructure installed. When it finally got installed, we just sort of shrugged and stuck with Netflix/MLB.TV. Shaw (the big cable provider where we live in Western Canada) lost about 4% of its subscriber base in 2015, Some of that was Telus poaching customers, but I'd say at least 2-3% of customers just left and didn't come back. Obviously, this trend is bad news for Corus and the other broadcasters.

 

Anybody have any additional thoughts?

[kab60]

Nothing much to add other than it seems like a very interesting idea due to the current valuation. Current cash yield seems pretty spectacular, they're paying down debt while sporting a crazy dividend. Obviously operating leverage is a big thing, so falling revenue will hurt, but right now it seems to trade at half of the valuation that it has done traditionally, and management seem to guide for stable EBITDA next year?

 

Did you take into account that they're selling their pay TV business in Western Canada, which includes Movie Central, Encore Avenue and HBO Canada? According to the FY2015 EBITDA and multiple of 6.7x I suppose they'll lose around 31,5m EBITDA? On the other hand they're getting 211m.

[Mark Jr.]

Any further thoughts on this since Corus bought Shaw?

 

The dividend has held up, and the price has come down, but right now when you factor in their dividends to Shaw holders in the form of a DRIP until August, they are paying out over 130% of FCF. Obviously not sustainable. (See the "caveat" on page 2 of https://seekingalpha.com/article/4060759-corus-q2-dividend-solidified-short-term - login required for page 2)