DBRS Confirms DHX Media at BB (low) with Stable Trend

DBRS Limited (DBRS) has today confirmed DHX Media Limited’s (DHX or the Company) Issuer Rating at BB (low), and its Senior Unsecured Notes rating at BB (low)/RR4, with Stable trends. The confirmations reflect the Company’s strong brands, the underlying stability and growth potential of children’s content and the potential associated with the growing popularity of digital distribution platforms and on-demand viewing. The ratings also consider the pending regulatory headwinds, increasing competition, exposure to ever-evolving consumer preferences, and risks associated with growth through acquisition.

Revenues rose by 127% to $264 million and adjusted EBITDA increased by 146% to $90 million in F2015, owing primarily to the near full year inclusion of the Family Channel and other acquisitions, but also strong organic growth across most business lines. As expected, the debt balance increased to $283 million in F2015 up from $75 million in the prior year, to finance these acquisitions. As a result, DHX’s lease-adjusted gross debt-to-adjusted EBITDAR ratio rose to 3.32 times (x) in F2015 compared with 2.37x in F2014; while adjusted EBITDAR coverage declined to 5.16x in F2015 versus 9.15x in F2014. Otherwise, on an organic basis, DHX is inherently a free cash generating company.

DBRS expects DHX’s earnings profile to continue to improve within the current rating category as the Company benefits from increasing global demand, leverages its strong brands to grow its digital distribution and merchandising and licensing channels and extracts greater value from its integrated platform. This will offset heightened uncertainty stemming from upcoming regulatory changes. As such, DBRS expects consolidated revenues to rise to between $270 million and $300 million in F2016. Adjusted EBITDA margins are expected to remain in the low to mid-30% range. As a result, DBRS expects adjusted EBITDA to grow to between $90 million and $100 million in F2016. Over the medium term, upcoming regulatory changes (i.e., skinny basic and pick-and-pay) and broader trends of cord cutting in favour of over-the-top services will result in less earnings predictability and perhaps a slow erosion of subscription revenues and gradually cause television broadcasting to account for a smaller proportion of overall revenues.

DBRS believes DHX’s financial profile could strengthen over the medium term based on its increasing cash generating-capacity which could be directed toward debt reduction. However, due to the Company’s growth orientation, DHX could also use much of its built up financial flexibility to continue undertaking debt financed acquisitions. In F2016, DBRS expects cash flow from operations to grow to between $45 million and $55 million. Capital expenditure requirements and cash dividends are expected to rise, but will remain fairly modest. As such, the Company is expected to generate free cash flow (before changes in working capital) of between $30 million and $40 million in F2016. DBRS believes that the Company’s strengthening earnings profile and inherent free cash generating capacity leaves the potential for positive rating action over the medium term. However, the lower probability outcome is that financial flexibility is eroded meaningfully due to weaker-than-expected operating income and/or more aggressive financial management (due to large debt-financed acquisitions), which would put pressure on the ratings should lease-adjusted gross debt-to-adjusted EBITDAR rise above 4.0x, in a sustainable manner.

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 Companies in the Television Broadcasting Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.