DHX Media is still undervalued, says Echelon

The dilution associated with a recent $65-million bought deal has Echelon Wealth Partners analyst Rob Goff trimming his target on DHX Media (DHX Media Stock Quote, Chart, News: TSX:DHX.B), though the analyst considers the company’s most recent quarter more proof that the stock is still undervalued.

Yesterday, DHX Media reported its Q3, 2016 results. The company earned $10.2-million on revenue of $84.1-million, a topline that was down 1.8 per cent over the same period last year. The company’s gross margin improved from 52 per cent to 60 per cent.

“Our strategy to be the go-to company for children’s content in an expanding on-demand market is delivering strong results,” said CEO Dana Landry. “Our top-rated original productions are generating strong demand from major digital and linear customers around the globe. We have built a large and growing on-line audience for both our own content and third party brands through our WildBrain multiplatform kids’ network. Furthermore, we are expanding our lineup of high-profile brands with the inherent potential for multiple revenue streams.”

Goff says the quarter modestly outperformed his expectations, but he today trimmed his price target on DHX Media from $13.00 to $12.00 because of the dilution from its recent bought deal. The analyst maintained his “Buy” rating on the stock, and the new target still implied a return of 63 per cent at the time of publication.

“We continue to believe DHX Media’s organic growth potential is discounted in the market despite the impressive organic growth of 26% for F2015,” says Goff. “Furthermore, we are fast approaching an upturn in Merchandising & Licensing as Teletubbies moves from a UK success to a global hit with the merchandising contributions following. We believe the consensus and in turn imbedded expectations significantly discount the growth prospects from the Merchandising and Licensing Division (M&L) along with its international growth potential. We see both emerging in C2017+. Meanwhile, organic prospects are solid and at some time the attractive acquisition pipeline is likely to yield accretive acquisitions. We are fully aware that investors are looking for acquisitions to leverage DHX’s global platform We share their view while also noting that while not acquisitions per se, partnerships struck with Dream Works(DWA-Nasdaq,NR) and Mattel should be considered in the same mode. Revenues and profit contributions from both should ramp in F2017.”

Goff says he is optimistic he will be able to move his price target on DHX Media higher with further evidence of organic growth and the potential for acquisitions in fiscal 2017.

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