- Strong dividend yield of 9.3% supported by solid free cash flows
- Trends of cord-cutting are currently improving in Canada
- New focus on content production is synergistic with broadcasting operations and provides a runway for growth
Corus Entertainment Inc. was created when it was spun off from Shaw Communications in 1999. Corus provides broadcasting services and also produces content for TV, radio and digital media. The company currently focuses on TV properties and operates several channels through its ownership of Canadian broadcast licences. Corus also operates many radio channels that primarily serve the English-speaking urban market in Canada. Finally, the company produces content through Corus Studios and Nelvana, and is in the process of transitioning from a broadcasting company to a more vertically integrated media and content company.
Corus's low capital intensity coupled with relatively stable inflows generates solid and predictable free cash flows. We believe that cash generation will grow quickly over the next two years, which should be sufficient to cover the attractive dividend yield of 9.3% as well as to facilitate the company's continued deleveraging.
While we acknowledge that the TV industry faces challenges as more content is being viewed online, we see improving trends in the Canadian TV industry as it relates to cord-cutting. Moreover, we view Corus's slate of content as attractive, as evidenced by the ratings of its channels ranking among the leaders in Canada (excluding sport channels).
It is also worth noting that the company's new focus on content production is highly synergistic with its broadcasting operations and provides an interesting runway for growth. While production is a new focus for management, broadcasting operations—an established business model that provides more reliable and sustained cash flows than production—remain the core business.
In our view, Corus has room to grow both its top line and profitability. We also anticipate significant free cash flow improvement, which should support the company's dividend and balance sheet position. We value Corus based on three valuation methods, which results in our target price of C$15.00.