Corus Entertainment Shares: Valuation State Outweighs Near-Term Headwinds


Canada’s Corus Entertainment (OTCPK:CJREF) latest update ahead of the fourth quarter came as a negative surprise, as headwinds from the overall slowdown and post-COVID impacts led to a larger-than-expected downward revision of TV ad revenue. In addition to Near-term pressure across ad markets, Corus Channels business is also facing long-term competitive pressures amid pushing streaming players to ad-supported levels. That doesn’t take into account the recession scenario either (which is increasingly likely after this week’s Fed meeting), which will almost certainly trigger another round of revisions to the consensus estimates for fiscal year 23/24.

In short, challenged fundamentals mean this is a cheap stock for a reason. However, perhaps the case for valuation is too strong to ignore, with the syndicate yield (as a percentage of market capitalization) now at >40%. In addition, management has been proactive in terms of capital returns, implementing an active buyback program and a high single-digit return (backed by a low payout ratio of 20-25%). Despite minimal bullish catalysts on the horizon, patient and long-term oriented investors willing to stick with it should do well over time.

Data by YCharts

The negative update proposes to challenge the entities in the future

Corus recently revealed a negative operational update, citing a complex macro environment and the long-term effects of the COVID pandemic resulting in Meaningful smoothness on an annual basis In Q4 television advertising revenue. In line with its previous comment, spending in the automotive, health and beauty and travel markets remains the main source of weakness.

While the nature of the headwinds is not surprising at this point, the extent of the recent downward revision was a negative surprise, especially given previous attempts to reset expectations to a lower level. The recent overall slowdown and the possibility of a recession appear to have a more tangible impact on the fourth-quarter numbers than previously expected, particularly on the advertising side of business. This makes sense, in my view – during periods of economic weakness, marketing budgets tend to be the go-to area for limiting spending. An early pullback than expected poses a material downside risk to post-Q4 guidance as well, so the fundamental near-term outlook is not convincing.

Think about the impact of profit and loss

The impact of direct stream advertising revenue on profits and losses, particularly in brand advertising (as opposed to performance advertising), is likely to be significant. After fiscal 2019 highs of $967 million, TV ad revenue has slipped below pre-COVID levels and appears poised for a further pullback from the already low fiscal year 22 base. While a near-term recovery in travel and advertising spending, particularly with the easing of supply chain issues on the automotive side, could provide some relief, visibility into these improvements is limited. Nor is it likely to offset the decline in advertising budgets.

With so little leverage on the revenue side, management will likely need to rely on cost adjustments, primarily on the programming side, to mitigate some of the EBITDA impact. This will take some time and, in the near term, it is unlikely that there will be enough flexibility to fully protect margins. Additionally, the medium to long-term threat from large streaming players such as Netflix (NFLX) and Disney (DIS) that roll out ad-supported layers must be addressed (likely through incremental steps in investing in digital content and shows), and that It can further affect profits and losses.

Cross-cycle cash generation and potential capital return silver linings

While the fundamental near-term outlook is bleak as it is, with little bullish catalysts on the horizon for a meaningful recovery in the stock price, Corus has a lot more to do with it on the valuation side. Cash generation in general has been strong during the cycles, improving the balance sheet position and FCF yield of >40% after the last drawdown.

Direct exchange trends and net debt

Koros Entertainment

The increased capacity allowed for more buyback activity, with management’s decision to stick with an active buyback program highlighting its belief in a devaluation of the stock. If the stock continues to weaken heading into a potential recession, my base case is for management to do more upside on the buyback front. In addition to buybacks and debt repayments via direct transfer, Corus also maintains attractive profits (now earning >9%). Since the dividend is in the 20%-25% range as well, the payout is likely to be sustainable under most economic scenarios; Even in the worst case scenario, the company has enough cost leverage to maintain the required FCF, in my view.

shareholder return

Koros Entertainment

Attractive valuation issue outweighs near-term headwinds

Corus’ recent router reset might be a sign of things to come. With the current macro challenges (inflation and rising rates), advertisers are cutting back on spending and final consumer demand dwindling. In the short term, it’s hard to see a case for upward revisions here, while the long-term fundamentals depend on management’s ability to navigate a rapidly changing media landscape to achieve the goal of sustainable annual revenue growth. I’m not particularly optimistic about the latter, but the market is also not – Corus shares are currently offering a return of over 40% from FCF. In addition, a high single-digit dividend yield (with a low payout %) is attractive, even with higher prices. Combined with active buybacks, the total return to shareholders is as good as for Corus shareholders. At this point, investors will need quite a bit of pain to own this name, but those who want to stick with it should do well over time.

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