DHX Media Inc.

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DHX Media Inc.

Weak Q4 Results Don’t Inspire Confidence -Staying On Sidelines With $5 Price Target

Our Conclusion

Q4 results at DHX were very weak and were accompanied with equally uninspiring EBITDA guidance for 2018. While management argued that a lot of the pain in Q4 (and 2017, for that matter) was self-inflicted and went to great lengths to highlight plans to fix executional missteps, we are not as confident and not willing to give DHX the benefit of the doubt given consistently poor financial results of late. We continue to believe that investors should wait this name out on the sidelines, as we reiterate our Neutral rating on shares while cutting our price target to $5 (from $7.50).

Implications

Very Weak Q4 Results & F’18 Guidance Doesn’t Exactly Inspire Confidence: Q4 revenues of $87.6MM were well light of consensus at $101.7MM, and EBITDA of $23.7MM was nowhere near consensus at ~$40.3MM. Management highlighted poor performance of its TELETUBBIES properties in the U.S. and “executional issues” across its content segments as explanatory factors, but in reality the miss was broad based. The company also provided F’18 guidance targeting EBITDA in the range of $125MM-$155MM for 2018. Not only is that a really wide range, with the bottom end of the range quite low, but it was also light of the Street heading in (~$147MM).

Leverage Remains High; Asset Sales Coming?: DHX exited the year at ~5.4x net-debt-to-trailing-pro-forma-EBITDA. While the company is not at risk of tripping any covenants, the fully loaded balance sheet leaves little leeway for executional missteps like those seen in Q4.
While DHX has hinted that it could look at shedding non-core assets soon, we believe that unless these asset sales materially lower leverage, investors will continue to be spooked by the high debt load and that this remains the central risk to the story.

Despite Massive Sell-off, Shares Still Do Not Offer An Attractive Setup:

Notwithstanding the massive sell-off in shares of late (down ~16% today, and ~25% this week), DHX is still trading at ~9.9x our 2018E EBITDA, and with leverage hovering around ~5.4x this is not exactly an attractive set-up. We do not see a compelling argument to own
shares here, and continue to advise investors wait this name out on the sidelines.