NeuLion shakeup is a positive, Beacon Securities says

The sale of certain assets at NeuLion (TSX:NLN) is a good thing, Beacon Securities analyst Gabriel Leung says.

On Tuesday, NeuLion announced that it sell some assets to an affiliate of NYSE-listed Fortress Investment Group LLC. for $41.5-million. The company described the assets as non-core.

“As the OTT market continues to expand globally, NeuLion is perfectly positioned to take advantage of these new opportunities with its OTT technology and services enabled by the NeuLion digital platform, including the consumer electronics 4K market with its NeuLion CE SDK, and the video compression H.265 market, powered by the MainConcept line of CODEC tools,” the company said in a press release. “NeuLion technology and services provide its customers with an end-to-end platform, solutions that enable digital content management, distribution and monetization across the entire video ecosystem — content owners, content creators and consumer.”

Leung says this deal actually sets up NeuLion’s valuation better.

“In our opinion, this transaction should be viewed as positive,” the analyst says. “While DivX was profitable, it was a declining asset and, in our opinion, a drag on NeuLion’s valuation. To put that into perspective, as highlighted in our January 16, 2015 research note, NeuLion was trading at ~5x EV/Sales (current fiscal year) when the DivX acquisition was first announced. By comparison, post this transaction, based on the aforementioned metrics, we estimate NeuLion is trading at ~0.55x EV/Sales. Furthermore, while NeuLion’s profitability has been impacted in the past year due to higher operating spend to grow its European and Asian operations, we believe the company is a stronger one than it was 3 years ago. Furthermore, as the company successfully closes the larger opportunities in its pipeline, we believe there could be good operating leverage in the business model, which could drive a meaningful valuation lift (certainly above the proforma valuation of 0.55x EV/Sales).”

In a research update to clients today, Leung maintained his “Speculative Buy” rating and one-year price target of $0.70 on NeuLion, implying a return of 35 per cent at the time of publication.

Leung thinks NeuLIon will generate EBITDA of $3.1-million on revenue of $94.8-million in fiscal 2017. He expects those numbers will improve to EBITDA of $8.7-million on a topline of $101.6-million the following year.