Canadian media and leisure firm Corus Leisure’s (OTCPK:CJREF) current pre-This fall replace got here as a damaging shock, as headwinds from the macro slowdown and lingering post-COVID results drove a greater-than-expected downward revision to tv advert income. Along with the near-term stress throughout promoting markets, Corus’ channels enterprise additionally faces long-term aggressive stress amid streaming gamers’ push into ad-supported tiers. This does not think about a recession state of affairs both (more and more doubtless after this week’s Fed assembly), which might virtually definitely drive one other spherical of revisions to consensus estimates for FY23/24.
In sum, the challenged fundamentals imply it is a inventory that’s low cost for a motive. But, the valuation case is maybe too robust to disregard, with its FCF yield (as a % of the market cap) now at >40%. Plus, administration has been proactive on capital returns, implementing an lively buyback program and a high-single-digit dividend yield (backed by a low 20-25% payout ratio). Regardless of minimal upside catalysts on the horizon, affected person, long-term-oriented traders prepared to stay it out ought to do nicely over time.
Unfavorable Replace Suggests Difficult Quarters Forward
Corus just lately disclosed a damaging operational replace, citing a fancy macro setting and lingering results of the COVID pandemic resulting in “significant year-over-year softness” in its This fall tv promoting income. In keeping with its prior commentary, spending within the automotive, well being & magnificence, and journey end-markets stay the important thing supply of weak spot.
Whereas the character of the headwinds is hardly stunning at this level, the extent of the most recent downward revision was a damaging shock, significantly given prior makes an attempt to reset decrease expectations. It appears the current macro slowdown and the prospect of a recession are already having a materially harsher affect on This fall numbers than beforehand anticipated, particularly on the advert aspect of the enterprise. This is smart, for my part – during times of financial weak spot, advertising and marketing budgets are typically the go-to space to curtail spending. An earlier-than-expected pullback poses a fabric draw back danger to the post-This fall steering as nicely, so the near-term elementary outlook is hardly compelling.
Pondering the P&L Impression
The flow-through impact of advert revenues on the P&L, significantly in model promoting (vs. efficiency adverts), is prone to be important. Coming off the FY19 highs of ~$967m, TV promoting income has lagged beneath pre-COVID ranges and appears set to additional decline off the already low FY22 base. Whereas a near-term rebound in journey and promoting spending, significantly as provide chain points ease on the automotive aspect, may provide some aid, the visibility into these enhancements is restricted. Neither is it prone to compensate for the pullback in promoting budgets.
With few levers on the income aspect, administration will doubtless must lean on value changes, primarily on the programming aspect, to mitigate among the EBITDA affect. It will take time, although, and within the close to time period, there may be unlikely to be sufficient flexibility to totally defend margins. Plus, the mid to long-term risk from giant streaming gamers like Netflix (NFLX) and Disney (DIS) rolling out ad-supported tiers will have to be addressed (doubtless through step-ups in content material funding and digital choices), and that would additional weigh on the P&L.
By way of-Cycle Money Era and Capital Return Potential Provide Silver Linings
Whereas the near-term elementary outlook is as bleak because it will get, with few upside catalysts on the horizon to set off a significant restoration within the inventory value, Corus has rather a lot going for it on the valuation aspect. Its money era has usually been robust by way of the cycles, driving an improved stability sheet place and an FCF yield of >40% following the current drawdown.
The elevated capability has allowed for extra buyback exercise, with administration’s choice to stay with an lively repurchase program highlighting its perception within the inventory’s undervaluation. Ought to the inventory proceed to weaken heading into a possible recession, my base case is for administration to additional step up on the buyback entrance. Along with repurchases and debt pay downs through FCF, Corus additionally maintains a horny dividend (now yielding >9%). Because the dividend payout is within the 20%-25% vary as nicely, the yield is probably going sustainable below most financial eventualities; even in a worst-case state of affairs, the corporate has sufficient value levers to maintain the required FCF, for my part.
Interesting Valuation Case Outweighs the Close to-Time period Headwinds
Corus’ newest steering reset may very well be an indication of issues to come back. With the present macro challenges (inflation and rising charges), advertisers are chopping again on spending and end-consumer demand is waning. Within the close to time period, it is arduous to see a case for upward revisions right here, whereas the long-term fundamentals relaxation on administration’s means to navigate a quickly altering media panorama to ship its sustained YoY income progress goal. I am not significantly optimistic on the latter, however neither is the market – Corus inventory at present presents a >40% FCF yield. Plus, the high-single-digit % dividend yield (at a low payout %) is engaging, even with charges on the rise. Coupled with the lively buyback, the entire shareholder return yield is about nearly as good because it will get for Corus shareholders. At this juncture, traders will want a excessive ache threshold to personal this identify, however these prepared to stay it out ought to do nicely over time.