BBTV keeps $22.50 price target at Eight Capital

Eight Capital analyst Suthan Sukumar is staying bullish on media tech company BBTV Holdings (BBTV Holdings Stock Quote, Chart, News, Analysts, Financials TSX:BBTV), saying in a resumed coverage report on Wednesday that a now-closed financing round should free up management to pursue M&A opportunities.

Vancouver-based BBTV provides end-to-end online content management and monetization services to content creators who run the gamut from individual creators on platforms like Instagram and TikTok to corporations like the NBA.

The company completed an IPO this past October of shares at $16.00 for gross proceeds of $172.4 million. With the offering, BBTV bought out BroadbandTV shareholder RTL for full control of the business, which in 2020 grew its revenue by 23 per cent to $459.0 million.

With a market cap of $156 million, BBTV’s share price has mostly dropped lower over the past half-year, falling from $15.00 in early January to where it now trades in the high-$7.00 range.

BBTV on Tuesday announced the closing of a previously announced bought deal and private placement offering, with the $35 million offering involving $20 million in the convertible private placement and $15 million from the convertible bought deal.

The total convertible offering (17,270 debentures) have a five-year maturity and come with a seven-per-cent interest rate annually, due December 31 of each year and the offering converts to common equity at a rate of $10.55 per share. BBTV can force the conversion if its share price closes above $20.00 for 20 consecutive days, although there would be interest to pay for the remainder of the first three years of conversion. The $20-million private placement is with a Canadian trillion-dollar institutional asset manager. Along with the convertible, BBTV extended about $29 million of an existing long-term debt related to the RTL deal to a new five-year expiry in 2026.

The company plans to use net proceeds for working capital including organic growth initiatives, potential M&A transactions and to pay down the Company’s existing secured debt.

“This financing package provides significant strength to our balance sheet and enables us to pursue organic and inorganic growth initiatives integral to our strategic business plan,” said Shahrzad Rafati, Chairperson and CEO, in a press release.

“We are grateful and delighted to welcome a number of new institutional investors including a large Canadian trillion-dollar asset manager who has acquired our notes within a ‘long only’ fund. We view the strong support we’ve received as validation of our efforts to help creators all over the world grow and engage with audiences and ultimately achieve greater financial success,” Rafati wrote.

Looking at the financing, Sukumar said the participation in the financing round by a large, trillion-dollar asset manager ($20 million) along with insiders signals a “strong vote of confidence” on BBTV and highlights a “highly attractive risk-reward on shares.”

“We view the transactions as a significant catalyst as they: (1) eliminate a near-term debt overhang by deferring maturity of the company’s convertible debt from 2022 to 2026; and (2) provide greater balance sheet flexibility, allowing the company to ramp growth investments in its higher-value Plus Solutions segment and pursue strategic acquisitions to complement and accelerate the overall organic growth opportunity.

Looking ahead, Sukumar is calling for BBTV to generate 2021 and 2022 revenue of $497.2 million and $595.1 million, respectively, and 2021 and 2022 adjusted EBITDA of negative $9.0 million and $5.2 million, respectively.

With the renewed coverage, Sukumar has asserted a “Buy” rating and $22.50 target, which at the time of publication represented a projected 12-month return of 186 per cent.

Sukumar said he expects BBTV’s high-margin Plus Solutions to remain the company’s core investment area, with a revenue ramp to come in the second half of 2021.

“While direct sales remains the largest growth driver within Plus, management also expects robust growth in content management and mobile apps, particularly the former, as lifting of COVID-19 restrictions allow content production activity to rebound,” Sukumar wrote.

On M&A, Sukumar said investors can expect BBTV to be active in the near to mid-term, as the company has a large pipeline of targets.

“While initial transactions will likely be more niche, tuck-in in nature, we believe they will be aimed at accelerating Plus growth via technology led deals to expand end-to-end capabilities and monetization opportunities, bolstering existing capabilities and bench strength in key Plus verticals like content management and mobile apps, or more broadly enhancing direct advertising revenue growth via owned content and branded entertainment assets,” Sukumar wrote.

On a comparative basis, Sukumar estimated BBTV to be currently trading at 4x 2022 gross profit, which represents a “steep discount” to specialty media players at 6x, adtech players at 14x and streaming/social media platforms at 16x. Sukumar’s $22.50 target implies a 9x multiple, which the analyst said is a premium to its specialty media peers given BBTV’s tech-enabled operating model but is still a discount to adtech and streaming/social media peers given the early days of the company’s progress with Plus Solutions and with room to expand as Plus gains greater traction and drives higher-margin revenue growth.

Disclosure: Cantech Letter’s Nick Waddell owns shares of BBTV and the company is an annual sponsor of the site.