• Resuming Coverage Following the $19.5 Million Equity Financing: In the wake of DHX Media Ltd.'s (DHX) acquisition of Cookie Jar Entertainment (CJE), DHX remains one of our favoured names. While the shares have appreciated an impressive 49.1% since the CJE deal was announced, we continue to see unappreciated upside in the name (our PT suggests a 23.5% return). We resume coverage taking into account the impact of the equity issuance, the Q4/F12 financial results and the consolidation of our initial expectations for CJE. We are raising our PT $0.15 on DHX to $2.10 and reiterating our previous BUY rating (note that our PT had also recently been increased by $0.30 on August 21 following the CJE acquisition announcement).  
  • Q4/F12 Results and Initial F2013 Guidance: While we were on restriction, DHX reported its Q4/F12 financial results, for a more detailed summary please refer to our October 1 breaking brief. Overall, we saw the quarter largely as a non-event, with financial results coming in largely in-line with the consensus expectations. Not surprisingly, investors were primarily looking for greater clarity on the transformative CJE acquisition.  
  • Forecast Revisions:
    • Preliminary CJE Estimates Included in Our Forecasts: In our F2013 forecasts, we include eight months of CJE consolidation, which drives our revenue/adj. EBITDA/EPS forecasts to $120.8 million/$24.6 million/ $0.08 moving to $146.8 million/ $33.8 million/$0.16 in F2014. Within our forecasts we include modest revenue growth from CJE (2.0%/4.7% in F2013/F2014), which we tend to view as revenue synergies, driven by greater library scale and enhanced distribution relationships. Management has targeted $8 million in annual cost synergies over 12 months, from which we conservatively forecast $1.8 million will be recognized in F2013 and $7.5 million in F2014. We expect these synergies will result in some friction costs, which we estimate at $4 million between F2013 and F2014.
    • Equity Financing and Related Dilution: The proceeds from DHX's $19.5 million equity issuance are being used to reduce the leverage associated with the CJE acquisition (which involved a $5 million cash payment and the assumption of $66 million of debt). We currently forecast that as of the closing of the acquisition in Q2/F13 DHX will have a very manageable pro-forma net debt: adj. LTM EBITDA of 1.5x.  
  • Valuing DHX: Our revised $2.10 PT is based primarily on a DCF analysis using a 6.5x terminal EBITDA multiple and an 11% discount rate (parameters which we relaxed to reflect DHX's improved scale, growth opportunities and lower risk profile following the acquisition). DHX currently trades at 10.8x/8.0x/6.2x pro forma estimated F2012/F2013/F2014 EV/adj. EBITDA, which, after backing out full synergy expectations and associated friction costs, moves to 7.6x/5.8x/ 4.7x. For perspective our $2.10 PT is equivalent to 7.0x/5.9x F2013/ F2014 pro forma adj. EV/EBITDA post synergies and friction costs.

Rob Goff, CFA   

Telecom & Media Analyst