Good grief,
DHX! 😔 Well, if you're investor in either or both of DHX's 5.875% convertible debentures and their common shares, you know by now that on Thursday, the beleagured Halifax-based media company
pre-announced its fiscal Q4 earnings and they were ... just terrible. Considering most analysts had expected something in the neighbourhood of $125 million in EBITDA, you can see why DHX's pre-announcement of EBITDA in a range of $97 million and $99 million hasn't sat very well. This is, of course, on the heels of essentially missing every quarter in the last year as well as numerous changes in the executive suite.
Bay Street responded by slashing estimates (again) for the coming year, and right now has about as much confidence in DHX management as it does in Charlie Brown actually kicking the football that Lucy is holding. It's hard to believe that just a year ago, shares of DHX were in the $7 range; they closed Friday at $1.22, and the convertible debentures at $75.50. This is definitely not what we had in mind when we rated the DHX converts as the top debenture on our Peanut list many moons ago. SIGH.
Official 2018 fiscal year-end results for DHX are expected before market open on September 25, at which time management is expected to provide an update on the board of directors' outstanding strategic review which, to date, has only yielded the sale of half of its most valuable asset (Peanuts, to Sony Japan) and the combination of its various classes of shares into a single stock ticker. Ho-hum, to say the least. I'm just speculating, but I wouldn't expect much in the way of additional strategic review announcements on the 25th. Chopping the dividend (which is hardly exciting if you're an investor) makes sense since the company needs to conserve cash. As for a sale, I can't see one happening unless it's some kind of fire sale since, as evidenced by its disappointing financial results in the last year, the legacy business is really struggling right now.
And, I think, this is the crux of the problem. Based on the bread crumbs available at this point, Peanuts, Strawberry Shortcake, and Wildbrain seem to be performing just fine. Everything else in the portfolio, however, has been somewhere between a moderate and massive disappointment. In an environment where streaming services such as Netflix, Hulu, Amazon, etc. need content and are willing to pay for content, DHX should be doing much better - management needs to execute and it, quite frankly, hasn't. To add fuel to the fire, debt levels are high. In Thursday's press release, management implied that post-Sony Japan transaction, outstanding is about five times EBITDA. This is pretty high leverage, but it doesn't appear that the company is in any immediate danger in violating outstanding debt covenants. This said, it would make existing shareholders and convertible debenture-holders much more comfortable if it could stabilize its legacy business.
So where do we go from here? Hopefully on September 25th, management has no more negative surprises. If you're an existing shareholder and/or debenture-holder (like I am), you're looking for evidence that the company can actually turn things around and meet expectations in the coming fiscal year. Despite the issues in the legacy business, Peanuts remains an excellent asset. Peanuts generates over 40% of its revenue from the Japanese market according to DHX, and now that Sony Japan owns 39% of Peanuts (DHX owns 41%, and the Schulz family owns 20%), they will be highly motivated to further grow licensing opportunities in that market. For what it's worth, and this is anecdotal of course, but when my wife and I were in Japan this past summer, Charlie Brown and Snoopy were everywhere.
For now, I don't think DHX is at very high risk of insolvency so I'm sitting tight on the debentures (but not adding more) for now. The shares are obviously a candidate for tax-loss selling for those holding it in taxable accounts, and things could get uglier before they get better. If it wasn't already abundantly clear, I'm treating anything DHX has highly speculative at this stage. Your mileage may vary.
As always, remember this blog is for information only. Please remember
to consult a professional investment advisor before making any
investment decisions.
Picture of the Day
My investment in DHX Media has me in serious need of Zen. This view calms me down. The famous floating torii gate at Itsukushima-jinja Shrine, Miyajima, Japan. Copyright © 2018 Felix Choo / dingobear photography. Picture is available for licensing at Alamy Images. Picture may not be reproduced without permission.
