TVA Group Inc (TSX: TVA.B) is a Canada based communications company. Along with its subsidiaries, the firm operates in three segments including Broadcasting & Production segment which includes the operations of TVA Network, marketing of digital products, commercial production services and distribution of audiovisual products. The Magazines segment publishes French and English language magazines in various fields such as the arts, entertainment, fashion, and sports and markets digital products and provides custom publishing, commercial print production, and premedia services. The Film Production and Audiovisual services segment provides soundstage and equipment rental, dubbing, postproduction and visual effects services. It derives the majority of the revenue from Broadcasting and Production segment.

Revenue Mix

Business Segment

Source: Annual Report

Investment Rationale:

• Market share expansion: TVA Group’s market share for the period of July 1 to September 30, 2020 increased by 3.2 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-point increase.

Source: Company Filing

• Lower debt with solid interest coverage ratio: The company has significantly lowered debt in its balance sheet with Debt/Equity ratio of 0.17x. However, 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, which implies that the company is generating sufficient profit to easily service its interest obligations. Further, the group’s net debt as on September 30 stood at CAD 31.9 million, a reduction of 23% from December 31 reported Net Debt of CAD 41.5 million.

Source: Company Profile

• Solid margin improvement in Q3FY20: 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 an ROE of 3% in the Q3FY20 against 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.

Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Stock is hovering in the bullish zone: Shares of TVA were hovering above the 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs and EMAs, which implies a strong bullish trend in the stock. Moreover, at the last close, TVA’s Price/200-day SMA ratio stood at 1.24x implies that the stock is trading approximately 24% away from the crucial long-term support level. A higher spread between the current market price and 200-day SMA support level reflects a long-term bullish trend in the stock. Also, the Moving Average Convergence Divergence (MACD), a leading momentum indicator is rising in TVA stocks with the difference between 12-day EMA and 26-day EMA is positive and MACD oscillator was hovering well above its 9-day SMA signal. This is another bullish trend in the stock.

  Technical Chart. Source: Refinitiv (Thomson Reuters)

• Strong Relative Strength: TVA shares were strongly outperforming the benchmark S&P/TSX Composite Index over the past 1-Year, YTD, 3-Month, and 1-Month. The relative outperformance stood at 62%, 45%, 30% and 18%, respectively.

1-Year Relative Performance of TVS Shares. Source: Refinitiv (Thomson Reuters)

• 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. Further breakout of COVID-19 might continue to affect the group’s advertising 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 was 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, including unfavourable variances in accounts receivable, content rights payable and tax credits and government assistance receivable, partially offset by favourable variances in accounts payable and accrued liabilities in addition to audiovisual content, combined with the CAD 7.778 million decrease in adjusted EBITDA. 

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 82.70% 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 a significant discount compared to the industry median. The stock is available at a forward EV to Sales multiple of 0.2x against the industry median of 1.8x. In terms of EV to EBITDA, the stock is trading at a forward multiple of 1.5x against the median of 7.7x, while the stock is available at a forward Price to Earnings multiple of 3.5x against the industry median of 7.9x.

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation: The group’s market share for the period of July 1 to September 30, 2020 increased by 3.2 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-point increase. Also, TVA Network maintained its lead among over-the-air channels with a 23.5% market share, more than its two main over-the-air rivals combined. 3 of the top 5 shows in Quebec during the third quarter of 2020 were on TVA Network; La Voix stood out again with an average audience of more than 1.5 million.

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, technical indicators are quite strong in TVA shares with stock traded well above the crucial short-term as well as long-term support levels and MACD is rising.

Moreover, despite a significant margin improvement and increased market share, the company is trading at a significantly discounted valuation. Therefore, given the decent quarterly performance of the company on a sequential-quarter basis, technical strength, discounted valuation and risk associated, we have given a “Speculative Buy” recommendation at the closing price of CAD 2.14 on December 15, 2020.

Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at December 16, 2020 price as well.

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