A growth stock with a track record and a future

Strong free cash flow growth at an attractive price has prompted CIBC Capital Markets analysts Robert Bek and Kulveer Grewal to initiate coverage of Canadian growth stock Stingray Digital, a provider of multi-platform music and in-store media solutions to businesses and individuals worldwide.

Growth_StockMontreal-based Stingray Digital Group Inc. (TSX—RAY.A), a fast-growing digital music provider, continues to generate strong revenue growth. And so, analysts Robert Bek and Kulveer Grewal have initiated CIBC Capital Markets coverage with an ‘outperformer’ rating and $12 target share price.

Stingray is a leading business-to-business multi-platform music and in-store media solutions provider operating on a global scale, reaching an estimated 400 million Pay-TV subscribers (or households) in 152 countries. Geared towards individuals and businesses alike, Stingray’s products include the leading digital music and video services. Stingray also offers various business solutions, including music and digital display-based solutions through its Stingray Business division.

“Stingray currently trades at a free cash flow yield on fiscal 2019 free cash flow of 8.2 per cent, well above our usual six per cent threshold for opportunities in the Canadian cable, telecom and media space.”

The analysts go on to say: “Given a strong recurring revenue component of about 86 per cent of revenues, Stingray’s free cash flow growth comes with a reduced risk profile versus most other media models.

“Stingray represents a material growth opportunity in a Canadian Media sector that has a shortage of names growing revenues and earnings before interest, taxes, depreciation and amortization (EBITDA). The company has a 10-year track record of strong growth (over 30 per cent revenue compound annual growth rate), and we forecast further gains in the years ahead.

Subscription-based recurring revenues are stable

“Not only is Stingray a strong growth story, it accomplishes this with a highly stable base of revenue that is recurring in nature. Over 86 per cent of revenues are subscription-based and, therefore, highly recurring.

“Though mergers and acquisitions are a material component of the story, Stingray’s focus on free cash flow generation reflects a balanced and attractive growth profile, and not simply growth for growth’s sake.

“We forecast free cash flow for Stingray of $0.61 per share for 2018 and $0.83 for 2019, suggesting near-term FCF growth of over 35 per cent and reflecting our view of modest capital expenditure, improving interest expense.”

International revenue will soon dominate

“A key element of the Stingray story is its international exposure. What began as a predominantly Canadian business has expanded materially in foreign markets (led by huge US strength) to the point where Stingray now has almost as much revenue exposure to International markets as it does to Canada. We expect geographic diversification to remain a priority for Stingray, and forecast non-Canadian revenues will approach about 75 per cent of overall revenues by the end of fiscal 2020.

“Stingray’s unique business model is largely alone in the Canadian market, with virtually no competitive player for many of its core offerings. While there have been other music products for Pay-TV operators, and other music-focused channels, the industry has largely been consolidated by Stingray, or ignored while the high-end robust streaming services have fought the battles for direct-to-consumer.”

This is an edited version of an article that was originally published for subscribers in the February 23, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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