Robust ThemeDec 09, 2019 2020-04-08 7:40
Hemisphere Media Group
Hemisphere Media Group (HMTV)
Courtesy of Tijuana Jackson Academy
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Stock Price - $12.59, Intrinsic Value - $23.91, Recommendation – Buy
Strong Growing Target Market
Hemisphere is a direct beneficiary of the US Hispanic population growth, which is expected to grow from 61 million in 2019 to 75 million by 2030. In fact, Hispanics have accounted for 52% of the total US population growth and continue to outpace other non-Hispanic groups.
Hemisphere owns and operates five leading US Hispanic cable networks including Cinelatino, Pasiones, WAPA America, CentroAmericaTV and Television Dominicana. Additionally, it operates Cinelatino and Pasiones in Latin America, WAPA TV in Puerto Rico and Spanish language distribution company Snap Media. Perhaps the most important asset for the company is its acquisition of Pantaya, the leading Spanish langue service streaming service.
Pantaya is the OTT subscription service which features movies and original series in Spanish and currently boasts over 900,000 subscribers, with $46 million in revenues in 2020. Hemisphere completed the acquisition of Pantaya earlier this year (Hemisphere already owned 25%), at a valuation of $124 million from Lionsgate, which is a 4.x multiple on FY20 revenues. Considering the fact that Pantaya has become the destination for US Hispanics to seek premium Spanish content suggests that the company can generate substantial value from the acquisition.
The company expects significant synergies from the acquisition and sees an opportunity to leverage its reach for cross promotion through dynamic windowing. Hemisphere can also use its production scale, deep catalogue of content and promotional strength to meaningfully accelerate subscriber growth in the future. Hemisphere estimates that it can grow active Pantaya subscriptions to 3 million over the next four years, with the service contributing over 40% of the company’s revenues by FY25.
Financials and Valuation
Hemisphere has seen significant disruptions in revenue growth such as the hurricanes in Puerto Rico and the impact of the pandemic. The company should see a significant boost in revenues over the next few years on account of significant tailwinds from its acquisitions and general improvement in macroeconomic activity. Revenues are expected to improve by 32% in FY21, primarily on account go the $40+ million boost from Pantaya. The company is also seeing better visibility of advertisement revenue, which has recovered from its abysmal state back during the height of the pandemic.
The company’s cable networks in Columbia and Puerto Rico have seen a strong rebound, with resilient advertisement spending despite the current conditions. Hemisphere believes that things will improve through the year as more consumers get vaccinated and prepare to spend their disposable income. At the end of 2020, the company had $92 million in cash and over $200 million in debt, but since then the company has taken on an additional debt of $50 million while depleting its cash reserve. This puts the company at a Debt to EBITDA of 3.5x.
Based on a Discounted Free Cash Flow Valuation, we estimate that the company’s fair value is around $24.86. When we conduct a comparable valuation and Residual Income Valuation to reinforce the model, we find that the company’s valuation ranges between $16.83 and $33.17. Hemisphere is thus trading at a discount compared to the potential revenues it can generate after its acquisition.
Hemisphere has significant potential to grow following its acquisition of Pantaya. This acquisition allows the company to consolidate its offerings with a strong portfolio of news, tv shows and movies. More significantly, the company should see an increase in revenues of 30%, which hasn’t been factored into the company’s current valuations yet. Hemisphere offers a significant opportunity at a substantially cheap valuation and is a strong buy.
Hemisphere Media Group is a pure-play Spanish language media company which focuses on U.S Hispanic and Latin American markets with a portfolio of broadcast and cable television networks, digital platforms and content distribution.