Second quarter results are in for Corus Entertainment (TSX:CJR.B), with the media company handily beating profit estimates.
But Corus needs to focus on cost reduction within its flat to declining revenue environment, says analyst Aravinda Galappatthige with Canaccord Genuity, who on Thursday reiterated his “Hold” rating and one-year target price of $9.00 for Corus.
On Thursday, Corus announced its Q2/18 financials, which boasted an EBITDA of $112.8 million, up ten per cent and well ahead of the consensus of $97.6 million.
“We are pleased with this quarter’s results and the steady progress we are making against our strategic plan,” CEO Doug Murphy said. “Moving forward, Corus remains focused on maximizing and monetizing our high-value audiences, and we have a solid roadmap in place to position the organization for success over time within a changing media landscape.”
Yet Galappatthige points out that the company’s consolidated revenue of $369.5 million, while above his estimate of $361.1 million came in flat year-over-year.
“The headline for Q2/F18 was that while pressures still exist on the TV ad side, the results were much more stable than the market feared based on the steep downswing in the stock price in the run up to the quarter,” says the analyst in a note to clients.
“We believe concerns around Corus’ balance sheet (together with ad outlook) are largely responsible for the steep downturn in the share price since the release of Q1,” he says. “Our forecasts only have leverage easing to 3.4x by year-end F2018 (3.2x with sale of H+S). Given that the dividend yield is up to 19 per cent, one can make a case for slashing the dividend by at least 50 per cent and re-routing the cashflow to faster de-leveraging. This would de-risk the stock in the near-term and offer Corus an opportunity in the medium-term to start shifting its asset mix towards more growthy businesses either through organic investment or M&A.”
Galappathige’s “Hold” rating comes with a $9.00 target price, which represents a 50.3 per cent return on investment as of publication date.