A consumer growth stock built on M&A

DHX Media is a content production, distribution, licensing and broadcasting company headquartered in Halifax. It develops films & television programs for kids and family across domestic & international markets. DHX’s popular Teletubbies and Inspector Gadget will soon be joined by Peanuts and Strawberry Shortcake.

consumer_stockBMO Capital Markets media and telecom equity research analyst Tim Casey describes Halifax-based DHX Media Ltd. (TSX—DHX.B) as a growth stock story in his initial coverage of the film production and broadcast company. He gives DHX a ‘market perform’ recommendation along with a $7 12-month target share price. The latter is based on a multiple of about 10 to the analyst’s fiscal 2019 estimate for earnings before interest, taxes, depreciation and amortization (EBITDA).

A consumer growth stock built on mergers and acquisitions, DHX is a good pick because of its ability to adapt to the on-demand video landscape, according to the analyst. DHX provides customers with its own media content to all major media devices (such as tablets, smart TVs and phones), Mr. Casey notes.

Cash flow growth lagging revenue and EBITDA

While the company’s profile is said to be positive, Mr. Casey points to free cash flow conversion as his main concern.

“DHX’s revenue and adjusted EBITDA growth has been impressive. With six-year revenue and adjusted EBITDA compound annual growth rates of 40 per cent and 70 per cent, respectively, DHX’s growth rates show well among Canadian consumer and media names.” The analyst continues:

“That said, content production by its nature requires upfront capital to generate recurring revenue streams that recoup the initial investment and generate sustainable free cash flow.

“Commercially successful productions—hits—are critical, as they create excess profits in and of themselves and, importantly, drive overall library revenues. To date, cash flow conversion from the growth in revenue, EBITDA, investments in film, and acquisitions, has lagged considerably.”

M&A driving this growth stock

A key risk for the company is a potential lack of government subsidies for Canadian content production, cites Mr. Casey. While a drag on content production is considered a key risk by him, he says opportunistic mergers and acquisitions is the major factor in DHX’s growth story over recent years.

Most of the acquisitions were priced at five to six times EBITDA, Mr. Casey says. Now he estimates DHX’s most recent proposed acquisition of Peanuts and Strawberry Shortcake (which at US$345 million is also its largest acquisition) is valued at roughly 12 times EBITDA. (The late Charles Shultz’ family will continue to own 20 per cent of the creator’s famed Peanuts property.)

The BMO analyst forecasts “mid-single-digit organic EBITDA growth over our forecast period”. He says reported growth will be significantly higher based on contributions from acquisitions, as will balance sheet leverage.

At current price levels, he estimates DHX trades at about 10.6 times his estimated fiscal 2018 EBITDA and about 14.6 times his estimated free cash flow for the same time period. 

This is an edited version of an article that was originally published for subscribers in the July 21, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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