DBRS Confirms Corus Entertainment at BBB/BBB (low), Stable Trends

DBRS has today confirmed Corus Entertainment Inc.’s (Corus or the Company) Issuer Rating at BBB and Senior Unsecured Notes at BBB (low). The trends remain Stable. The confirmation acknowledges improvement in key credit metrics as a result of debt reduction over the past year, while recognizing the ongoing challenge in growing advertising and subscription revenue. The ratings continue to be supported by Corus’s established Canadian market positions in television and radio, reflecting the cyclical and mature nature of the market, as well as the evolving competitive environment.

The Company’s Senior Unsecured Notes (BBB (low)) are rated one notch below its Issuer Rating (BBB), as Corus’s bank debt ranks senior to its notes. The banks hold as collateral a first ranking charge on all assets and undertakings of Corus, and certain of Corus’ subsidiaries, as designated under the credit agreements. Although the Company currently only has $40 million withdrawn under its credit facility, DBRS notes that the Corus may increase the draw on its revolver to fund growth and/or for general corporate purposes over the next few years.

Corus’s consolidated earnings profile remained relatively stable, with total revenues increasing by 2% to $842 million in F2012. Merchandising sales growth made up for flat advertising revenue and a decline in pay-TV subscribers year-over-year. Gains within the television segment were largely due to increased Beyblade sales, while radio segment revenue was down 2%, driven primarily by advertising revenue declines in Manitoba and Ontario. Stable operating margins of approximately 34% resulted in consolidated EBITDA of $290 million in 2012 (+1% year-over-year). In terms of financial profile, lower capex and film-related investments lent to increased free cash flow generation, which was used primarily for debt repayment. An $85 million reduction in bank debt, combined with steady operating income, resulted in a decrease in gross debt-to-EBITDA to 1.9 times from 2.2 times over the period.

Going forward, DBRS expects Corus’s earnings profile to remain relatively stable over the near term. That said, DBRS notes that the Company’s revenue and operating income growth over the long term will be heavily dependent on its ability to increase advertising revenue and pay-TV subscribers, given the less predictable nature of the Company’s merchandise sales. DBRS forecasts that revenues will range from flat to 2% higher in F2013, or between $840 billion and $860 million.

In regards to Corus’s television segment, the Company is focused on growing revenue from its women-focused and family networks. Advertising revenue within the Kids division may also benefit from increased demand for toys, entertainment and food ad space (strongly correlated with the pace of the economic recovery). Pay-TV subscribers are expected to rise nominally, based on aggressive promotions and increased programming-related investments. DBRS expects year-over-year declines in the merchandising segment, as significant gains made by Nelvana in F2012 will be difficult to match, especially as Beyblade sales continue to decrease. Revenue within the Company’s radio segment is expected to pick up modestly as a result of increased advertising demand. As DBRS expects operating margins to remain fairly stable at approximately 35%, consolidated operating income should remain steady or rise modestly, ranging from $290 million to $300 million in F2013.

DBRS also expects Corus’s financial profile to remain stable over the near term based on the Company’s strong free cash flow generating capacity. Cash flow from operations should continue to track operating income in F2013, ranging from $170 million to $190 million, though this figure could be slightly lower depending on the Company’s investments in film and programming rights. Capex requirements in F2013 are expected to remain around $15 million, as per management guidance. In terms of dividends, DBRS expects Corus to raise its annual dividend by 5% in early F2013; cash dividends are expected to track at roughly $60 million. As such, DBRS forecasts that the Company may generate free cash flow between $90 and $110 million in F2013. DBRS expects that free cash flow, and perhaps some incremental debt, will likely be used to fund acquisitions as opportunities arise, with the remainder directed towards repurchasing shares. If Corus’s credit metrics are challenged by weakness in operating income and/or significantly higher debt levels, the Company’s ratings could come under pressure.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating the Television Broadcasting Industry and Rating the Radio Broadcasting Industry, which can be found on our website under Methodologies.