TVA Group Inc. (TSX: TVA.B) is a Canada-based communication company, and a subsidiary of Quebecor Media Inc. The company operates via four business segments: Broadcasting, Film Production & Audiovisual Services, Magazines, and Production & Distribution. In the Broadcasting segment, the Corporation creates, broadcasts and produces entertainment, sports, news and public affairs programming and is engaged in commercial production.

Revenue Mix

Business Segment

Source: Annual Report

Investment Rationale:

• Stock Hovering in a Long-term Bullish Zone: Shares of TVA.B is featuring a price return of ~8% on a YoY basis, 40% in the past six-month, ~27% in a last three months and posing a negative price return of ~6% in a month over period. This indicates that after a spectacular rally, the stock entered the consolidation phase in the past one month, but the long-term technical indicators are still signalling a bullish price trend. At the last traded price of CAD 2.05 (on February 09, 2021), its shares traded well above the long-term crucial support level of 200-day SMA of CAD 1.75 and 100-day SMA of 1.84. Moreover, the Price/200-day SMA ratio stood at 1.17x, implies that the stock is approximately 17% away from the long-term support point, which indicates that the bull run is still intact despite the last couple of losing streaks in the TVA.B counter. Meanwhile, in the past three trading session, its shares were taking strong support at the short-term crucial support level of 50-day SMA. This implies that there is strong support in the stock at its 50-day SMA.

 Technical Chart. Source: Refinitiv (Thomson Reuters)

• Strong Sequential Quarter Performance: The company reported decent performance improvement at all the broader financial metrics front, with revenue jumped by 15% in the third quarter to CAD 119.5 million, gross profit nudged by 97% to CAD 43.4 million, and company turned profitable at operating level with operating income of CAD 13.3 million against the loss of CAD 0.9 million in the previous quarter. Moreover, the turned profitable at the bottom line as well, with net income for the Q3FY20 stood at CAD 8.4 million vs loss of CAD 2.7 million a quarter before. The company reported Basic EPS of CAD 0.19 against a loss per share of CAD 0.06 in the previous quarter.

Source: Refinitiv (Thomson Reuters)

• Achieved Pre-Pandemic Margin Profile: The company margin profile reached to pre-pandemic level driven by sequential quarter improvement in revenue and prudent cost management. The Broadcasting and Production EBITDA margin in the Q3FY20 was at 17.4%, approximately 1340bps higher on a sequential quarter basis, and broadly in line with December 2019 quarter EBITDA margin of 17.4%. Also, Production and Film segment EBITDA margin improved significantly in the third quarter and moved towards the pre-pandemic level. We believe that vaccine rollout and things coming back to normal would benefit the group’s each of the segment in the coming quarters.

• Solid Improvement in Margin Profile: In the third quarter of 2020, the company recorded a solid improvement in the margin profile after two straight bad quarters led by COVID-19 pandemic. EBITDA margin improved significantly from 7% in Q2FY20 to 19.4% in Q3FY20. Moreover, Operating margin and Net margin turned positive after two consecutive negative quarters. Also, the company reported a ROE of 3% in the Q3FY20 against reporting negative ROE in the past two quarters. The improvement in margin profile and ROE was mainly because of improved business sentiment post lockdown restrictions lifted. However, add revenue is still quite low because of that the company has not able record performance at par with the previous year.

Source: Refinitiv (Thomson Reuters)

• Market Share Expansion: TVA Group’s market share for the period of July 1 to September 30, 2020 increased by 3.2 percentage points to 41.5%, compared with 38.3% for the same period of 2019. TVA Group’s specialty services had a combined market share of 18.0% in the third quarter of 2020, compared with 14.7% in the same period of 2019, a 3.3 percentage point increase.

Source: Company Filing

• Lower Debt: The company has significantly reduced debt in its balance sheet with Debt/Equity ratio of 0.17x. Given the market capitalization of the company, a lower debt significantly minimizes the balance sheet risk. Also, together with a lower debt to equity ratio, the company’s interest coverage ratio stood above 8x, implies that the company is generating sufficient earnings to easily manage its debt obligation. Further, the group’s net debt as on September 30 stood at CAD 31.9 million a reduction of 23% of from December 31^st reported Net Debt of CAD 41.5 million.

Source: Company Profile

• Risk Associated with Investment: Many of the company's activities were curtailed to comply with Quebec government directives. Among other things, the health crisis and the measures to curb the spread of the virus caused a significant decline in advertising revenues; a large reduction in the sporting events broadcast by the "TVA Sports" specialty channel, including in particular postponement of the NHL playoffs to the third quarter; a reduction in the publication frequency of some periodicals; and the suspension of most of our content production activities. Continuation of such a trend would affect the group’s revenue. 

Q3FY20: Financial Highlights

Source: Company Filing

• Operating revenue during the quarter declined 4.8% to CAD 119.53 million on a YoY basis, driven by 42% decrease in the Film Production & Audiovisual Services segment revenue, and 39.2% decrease in Production & Distribution segment revenue. However, revenue losses during the quarter were partially offset by 5% increase in Broadcasting segment revenue.

Source: Company Filing

• Adjusted EBIDTA was down 25% on a YoY basis to 23.36 million, primarily because of lower revenue.

Source: Company Filing

• Further, the group’s net debt as on September 30 stood at CAD 31.9 million a reduction of 23% of from December 31^st reported Net Debt of CAD 41.5 million.
• Net available liquid assets at the end of Q3FY20 stood at CAD 42.87 million consisting of a CAD 45.57 million unused and available revolving credit facility and CAD 2.93 million in cash, less a CAD 5.62 million bank overdraft.
• Quarterly cash flows related to operating activities at CAD 54.167 million decreased for the three-month period ended September 30, 2020 compared with the same period of 2019, due primarily to a CAD 45.363 million net unfavourable variance in operating assets and liabilities.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 82.7% of the total shareholding. Quebecor Inc, Jarislowsky Fraser, Ltd. and Fidelity Management & Research Company LLC holds the maximum interests in the company at 64.86%, 8.46% and 8.34%, respectively. The institutional ownership in the TVA stood at 17.76%, and ownership of the strategic entities stood at 64.95%.

Source: Refinitiv (Thomson Reuters) 

Valuation

On the valuation front, the stock is trading at steep discounted valuation as compared to the industry median. The stock is available at a forward EV to Sales multiple of 0.24x against the industry median of 1.9x. In terms of EV to EBITDA, the stock is trading at a forward multiple of 1.82x against the median of 8.5x, while the stock is available at a forward Price to Earnings multiple of 3.17x against the industry median of 10.7x.

 Source: Refinitiv (Thomson Reuter)

Stock Recommendation: Given the solid performance of the company on a sequential quarter basis, we believe that the company would reach to pre-pandemic level financials in the next one or two quarters. Q3FY20 was largely better than Q2FY20, with revenue surged by 15% in the third quarter to CAD 119.5 million on a q-o-q basis, gross profit nudged by 97% to CAD 43.4 million, and company turned profitable at operating level with operating income of CAD 13.3 million against the loss of CAD 0.9 million in the previous quarter. The company reported Basic EPS of CAD 0.19 against a loss per share of CAD 0.06 in the previous quarter.

The company reported decent performance in the third quarter of 2020, with solid margin improvement after two consecutive quarter of significantly lower or negative margins, driven by the COVID-19 led challenges witnessed by the company. Moreover, the company has a strong balance sheet with lower debt contribution, which can easily be managed, given the strong earning generation ability of the company.

Also, the long-term bullish trend is largely intact with stock trading approximately 17% above its 200-day SMA support levels and consistently taking strong support at the short-term crucial support level of 50-day SMA as well.

Therefore, considering the solid performance of the company on a sequential quarter basis, improving EBITDA margin profile, long-term bullish technical indicator, and a discounted valuation against the industry median, we recommend a “Speculative Buy” rating at the closing price of CAD 2.05 on February 09, 2021.

1-year Price Chart (as on February 09, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 10, 2021 price as well.

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