DHX.TO DHX Media Ltd.

Sector financial performance:

This company, which primarily creates kids and family content and distribute by TV and digital channels earning revenue from advertising, licensing fees (copy rights and trademarks of consumers’ products), consumer products, and affiliate fees (including subscription), has been grouped into kids content maker – music& cartoon sector in video &audio goods and service industry.
It seems that demand for subscription for paid linear kid’s channels has been weak and presented a general downturn trend for most of companies in this sector. To lower costs of subscribers and deal with declining demand for TV channels, the linear platform operators of distribution decrease bundles of channels, which caused large difficulties for many less popular TV channels such as kid channels in maintaining their viewers. In the downward trend of TV industry, companies’ revenue of advertising has declined accordingly as well.
However, strong demand for high quality content has been able to bring revenue for companies in this sector by distributing them in more popular channels (including Netflix).
Some of companies have also found a way to regain subscription for their channels in third party OTT platform.
Demand for consumer products seems to have declined significantly.
The general decrease in subscription of paid TV has hurt profitability of those TV channels makers in this sector, which seems not to be offset by increased revenue from OTT and content distribution for companies in this sector. The typical company in this sector has an about 36-40% gross margin in 2018 with a SG&A as percentage of sales of about 20% and operating margin of 16-20%.
The typical enterprise price/EBI ratio is 32 (12 months trailing)/29(forward based on first quarter performance).

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Company performance:

It seems that its demand for its paid TV channel (subscription) has been continuingly declining since 2015. However, demand for its content from other distribution, especially digital platform, has grown fast during the same period of time and seems to be offsetting the declined revenue of its consumer product and TV channels.
The first three quarter of fiscal 2018 compared with 2017(ended Mar 31, 2018)
Organic revenue increased 40% attributable to the increase of 81% in digital platform distribution of content offset by decrease in consumer products related revenue and paid TV revenue.
Fiscal 2017 compared with fiscal 2016
Organic revenue decreased 2% attributable to the decrease in consumer products related revenue and paid TV revenue offset by increase in digital platform distribution of content.
Fiscal 2016 compared with fiscal 2015
Organic revenue increased 15% attributable to the increase in digital platform distribution of content and increase in consumer products related revenue offset by decreased in paid TV revenue.
Its gross margin has been down to about 36% in 2018 (12 month trailing) as a result of acquisition and shifting of revenue to third distribution.  Its SG&A as percentage of sales decreased to about 19%. And we have seen that its operating margin down to 15% in 2018.

Stock performance

Currently this company has an enterprise price/EBI ratio of about 32(12 month trailing).  We think this stock may be overvalued compared with its peer of about 22 ratio.

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