Description

ZoomerMedia is a diversified media company focused on the 45+ demographic, run by the legendary Moses Znaimer.  Management has spent the last three years growing high margin revenue streams, cutting costs throughout the business to improve profitability, and monetizing non-core assets.  In the process they’ve grown a business that generated ~$300k in EBITDA with $9 million of cash in FY17 to a business that did $10.4 million in EBITDA with $28 million of cash in FY20.  

This dramatic transformation in the business over the last 3 years has largely gone unnoticed by investors -- the modest increase in share price is roughly in-line with the increase in cash on the balance sheet -- and shares now trade for only 3.3x EBITDA and 5.4x FCF, a steep discount to their intrinsic value.  

I believe the company is worth around $0.20 per share, which would put the valuation at 10x EV/EBITDA and 16x FCF.  

Shares trades as ZUM on the TSX Venture Exchange in Canada and as ZUMRF on OTC Markets in the US.

Overview

ZoomerMedia owns a very wide range of media assets all targeted at the 45+ demographic: television properties, radio stations, magazines, websites, conferences, and trade shows.  I believe that most investors, however, are only familiar with their eponymous magazine and as a result make the mistake of thinking this is a magazine company -- even though magazines are only 8% of revenues, are arguably their worst assets, and are of negligible value IMO. 

The company has a market cap of $63 million with $28 million of cash and equivalents, giving the company an enterprise value of $35 million.  For $35 million, investors get:

• A relatively stable television business generating $15 million in EBITDA.

• A high margin, high growth membership/royalty business with $2.8 million in EBITDA.

• A large number of other media businesses that collectively lose money and obscure the value of the company’s two core assets.

• A relatively high corporate cost burden ($5.1 million) that also obscures the value of the company’s two core assets.

Television

Although perceived as a magazine company, ZoomerMedia is largely actually a highly profitable, relatively stable television business -- with this segment generating over 60% of revenues and the vast majority of EBITDA.  I believe that part of the reason this misconception exists is because none of the channels are actually branded Zoomer.  In total, ZoomerMedia owns 5 television properties: Vision TV, ONE, TVL Channel 5, JoyTV, and FAITH TV.   

Vision TV is responsible for the vast majority of the group’s EBITDA and value.  It broadcasts multi-faith, multicultural, and general entertainment programming for the 45+ demographic and has national distribution.  It has a bit of a unique economic model in that not only does it generate revenues from subscriber fees and commercial advertising, but it also generates fairly significant revenues from selling airtime to various faith groups (roughly 1/3rd of TV revenues).

ONE’s programming is focused on yoga/meditation, fitness, and health and wellness.  It also has nationwide distribution.

TVL Channel 5 is a television channel guide in Ontario and New Brunswick.

JoyTV and FAITH TV both have multi-faith religious and family-oriented entertainment programming with JoyTV available in British Columbia (Vancouver, Victoria, the Fraser Valley) and FAITH TV in Manitoba.

ZoomerMedia acquired the television group in 2010 for $25 million and it’s proven to be a very savvy investment for the company.  In spite of the headwinds facing television over the last 10 years, they’ve been able to manage the revenue attrition to fairly modest levels.  The TV group did $35.2 million in revenues in FY2011 and $31.3 million in FY2020.  Over the last four years in particular, however, the business has relatively stabilized at $30-32 million in revenues.  Generally speaking, they’ve been able to offset weakness in subscriber fees with increased commercial advertising.

The company’s largest improvements in television, however, have come from cost improvements.  They’re reprogrammed channels to reduce content costs and outsourced certain operations to improve profitability.  As a result, they’ve increased EBITDA at the television group to around $15 million, a level they’ve achieved in each of the last 3 years.

CARP: Membership & Royalty

ZoomerMedia owns the marketing rights for CARP -- Canadian Association for Retired Persons -- and this is the most significant hidden asset inside of the company.

A little background is needed to understand the membership & royalty segment.  CARP was founded in 1983 by Lillian and Murray Morgenthau.  It was modelled after the AARP and is Canada’s largest advocacy organization for older Canadians.  It was formed as a non-profit, but the Morgenthau’s had also created a few for profit companies around it, to fund the operations of the non-profit: in particular, they had a business called Kemur that published the CARP magazine, and Fifty-Plus which held their website operations.  

In 2008, when the founders were in their 80s and ostensibly looking to pass the torch, Moses Znaimer essentially acquired CARP.  He bought the for-profit companies, acquired the CARP marketing rights (technically until 2099), and was appointed president of CARP.  These assets were merged with a few others in the original formation of ZoomerMedia. 

I will refer to this membership & royalty business as CARP for simplicity, but just to be clear, this business is technically the combination of the operations of the CARP non-profit + royalties derived from the CARP marketing rights; and both of these are consolidated in the financials under the membership & royalty segment.

CARP was doing $2.2 million in revenues when it was “acquired” in 2008, and ZoomerMedia has grown the business to around $5.0 million in revenues.  What’s most exciting about CARP, however, is the long-term growth potential.  CARP’s marketing rights were an extremely under-monetized asset IMO -- they use these marketing rights to generate royalty revenues from affinity partners for use of the CARP name -- and I believe ZoomerMedia is still in the very early innings of growing this high margin franchise.

Consider that the AARP has $1.7 billion in annual revenues, or roughly $2.2 billion CAD.  To be clear, the two markets are not totally analogous: AARP has been around a lot longer, and AARP plays a role in helping members access insurance after retirement but this same opportunity doesn’t exist in Canada given the government-run healthcare system).  As such, $220 million -- 10% of the US -- is not a reasonable target for CARP.  But remember that CARP is only generating $5 million in revenues today, a shockingly small amount relative to its counterpart south of the border.  Could that $5 million in revenue grow to $20 million, or to $40 million?  I don’t think either of those figures are unrealistic, and both represent tremendous upside at extremely high incremental margins.

Four years ago CARP was roughly breaking even.  Management has been aggressively growing the royalty revenue stream at a double digit rate in each of the last 4 years -- a 16% CAGR over this period -- which has added around $1.5 million in essentially 100% margin revenues.  They’ve also reduced around $1 million in costs at the non-profit, which directly benefits ZoomerMedia as it reduces the subsidy that they provide.  With the strong royalty revenue growth and cost savings at the non-profit, over the last four years they’ve grown the roughly breakeven CARP business to around $2.8 million in EBITDA.

With double digit royalty revenue growth, 50-60% EBITDA margins, essentially 100% incremental margins, no capital requirements whatsoever, and a potentially massive runway for growth from a highly under-monetized asset, it’s not difficult to get excited about the long-term potential of CARP. 

Other Businesses

While the company possesses a number of other businesses, I don’t believe that any of them have particularly material value, and as such aren’t worth delving into in any detail.

The company owns a number of radio stations that in a normal year are decently profitable.  In FY19 they did around $800k in EBITDA, but due to COVID revenues fell 23% in FY20 and they lost $500k in EBITDA.  These definitely have value, but it’s not terribly material relative to the other parts of the business.

The company has two magazines, Zoomer and On The Bay.  They’ve arguably proved to be more resilient than most magazine businesses, although revenues have certainly trended down.  Fortunately management has aggressively managed the costs here, and they returned this segment to modest profitability of around $300k in FY20.

Finally, the company has an Other segment that includes websites, trade shows, a television production and distribution company, and a number of entities that create television programming for Vision TV and One.  This segment lost $1.8 million in FY20, although they’ve reduced the losses by cutting costs here as well.  

It’s difficult to have much insight into the Other segment because such a wide array of businesses are included there.  While I am not expecting any material value to come from this segment, I also wouldn’t entirely rule out the possibility of there being a valuable asset in there somewhere.  In September 2018, the company launched a SaaS platform to manage customer experience orchestration named Darwin CX that they offered to external magazine publishers.  It was losing over $1 million per year, although the business obviously had strong growth prospects as it was suddenly sold in May 2020 for $7.5 million.  The monetization of Darwin CX was probably the most significant driver of share appreciation in 2020 as this sale increased EBITDA, reduced capex, and increased cash balances significantly for a business that likely no investors were assigning any value to.

Valuation

ZoomerMedia generated $10.4 M in EBITDA in FY20 and I believe they can grow this at a respectable rate going forward (~10%-ish annual growth), primarily driven by CARP royalty revenue growth.

Bridging to FCF, the $10.4 M in EBITDA is reduced by $2.1 M in lease payments, $250k in capex, and $1.6 M in taxes, yielding around $6.5 M in FCF.

At $0.095 per share, the company has a market cap (including the preference shares + accounting for in the money stock options using treasury method) of $62.7 M. Subtracting out $28.1 M in cash and equivalents, yields an enterprise value of $34.6 M.  With $10.4 M in EBITDA and $6.5 M in FCF, the company currently trades for only 3.3x EBITDA and 5.4x FCF.

As stated earlier, I believe the company is worth around $0.20 per share, which would put the valuation at 10x EV/EBITDA and 16x FCF.  A sum of the parts valuation easily supports this as well.  I believe that the television business is worth at least $75 million (5x EBITDA), CARP is worth at least $34 million (12x EBITDA), and there is $28 million in cash and equivalents.  Even ignoring all other assets, those three add up to a value of $0.21 per share.

Management and Share History

It’s somewhat surprising how under-the-radar ZoomerMedia has remained considering how notable its founder, CEO, and majority shareholder is.  Moses Znaimer is arguably one of Canada’s most successful media executives of all-time.  He is best known for co-founding and building Citytv.  After CHUM acquired Citytv in 1981, he helped launch numerous channels there throughout the 1980s and 1990s, including: MuchMusic, Bravo, Space, FasionTelevision, CablePulse24, etc.  His mark on the Canadian media landscape has been so significant that a portion of Queen Street in the heart of Toronto’s downtown core was renamed to Moses Znaimer Way in 2011 in his honour.

There was a lot of investor interest in the company back in 2008 when the original assets were vended in and shares traded in the $0.30-0.40 range.  But without dynamic revenue growth or material profitability investor interest waned over the last 10 years and shares sank lower and lower.  Over the last 3 years, however, they’ve grown a breakeven business to record levels of EBITDA at $10.4 million.  And after 4 consecutive years of double digit royalty revenue growth, I think they’ve proven that they have an exciting growth vehicle in CARP that has the potential to materially increase its EBITDA going forward.  

Ownership

Insider ownership is extremely high and significantly aligns management with outside shareholders.

Between common and non-voting preference shares (convertible one-for-one), Moses Znaimer has around 423 million shares, 65% of the total outstanding.

Between common and non-voting preference shares, Fairfax Financial owns 176 million shares, 27% of the total outstanding.  Fairfax paid $0.10 per share for their shares back in 2009 when ZoomerMedia was raising the capital to buy Vision TV.  This was the only time ZoomerMedia issued shares since its formation.

Risks

• While the television business has generated relatively stable EBITDA over the last 3 years, any future headwinds to commercial advertising could make it more difficult to offset subscriber fee losses.

• They could lose a major CARP affiliate partner and be unable to replace them at similar revenue levels.
  
  

• Operating losses in the Other segment could increase due to greater spending on a project that, unlike Darwin CX, proves unsuccessful.
  
  

• They could invest their large cash balances on a poor acquisition.

Catalyst

• Continued strong results inline with FY20 levels will demonstrate sustainability of recent profitability improvements.
   

• Continued strong royalty revenue growth at CARP will cause investors to start focusing more attention on this valuable hidden asset.
  
  

• Sale of another, possibly EBITDA-negative, non-core asset, similar to the Darwin CX sale.
  
  

• Exiting a loss making business that is currently weighing on EBITDA.
  
  

• Potential distribution of a large one-time dividend.
  
  

• Announcement of a compelling acquisition.  The company has proven to be a shrewd acquiror, and so if they did announce an acquisition I believe it would be viewed quite favorably.
  
  

• Sale of the whole company to a larger media entity.  Moses Znaimer is 79 now, so this is becoming more and more likely every year.  The heightened focus on cutting costs and shedding non-core assets over the last few years certainly makes one wonder whether he has already started preparing the company to be sold.