Torstar Corporation (TSb-TSX, $6.98 last closing price) is one of the largest holdings in the AFINA Affinity Fund LP and it is also one of the holdings in the AFINA Optima10 Managed Accounts. While print media is going the way of the dinosaur, Torstar’s main media engine, The Toronto Star, carries formidable brand power. In addition, the valuation is attractive and its dividend provides an excellent cash flow stream. Finally, with its significant balance sheet strength, Torstar will eat or be eaten.
The Toronto Star is arguably Canada’s premier news franchise while thestar.com is Canada’s largest online news site. The Toronto Star produces unrivaled investigative reporting with its major role in uncovering the Rob Ford video scandal, initiating Project School Work to uncover excessive spending at the Toronto District School Board and its recent coverage of the The Beer Store to name just a few. While it is a well-known argument that print advertising will continue its secular decline, we believe that the eyeballs looking for a trusted news source will be gradually drawn to thestar.com. Furthermore, Torstar also continues to grow its online advertising revenue through its other franchises such as save.ca, Wagjag, Workopolis and Metroland community websites. Digital revenues continued to increase in Torstar’s Q3/2014 by 4.4% year-over-year and comprised 13.2% of total revenues compared to 11.8% in Q3/2013.
Torstar trades at an attractive valuation. Following the divestiture of its Harlequin business in 2014, we estimate earnings at $0.60 per share in 2015 and $0.55 in 2016. After taking into account Torstar’s $2.87 per share of net cash on its balance sheet, the Company is trading at a P/E of 6.9x 2015 estimated earnings. This earnings stream and estimated operating cash flow of $0.75-0.80 per share supports the Company’s quarterly dividend of 13.2 cents per share ($0.528 annually) for a hefty dividend yield of 7.6%. Perhaps the argument can be made that the dividend should be reduced, however, Torstar is not likely in any rush with $2.87 per share in net cash on its balance sheet.
Did we forget to mention that Torstar has $2.87 per share of net cash on its balance sheet following the 2014 divestiture of Harlequin? This cash position affords Torstar with flexibility to eat or be eaten. Prem Watsa’s Fairfax Financial (FFH-TSX) already owns 22.7% of Torstar as it also recognizes the deep value. Furthermore, Bloomberg News reported on January 23, 2015 that Cerberus Capital Management LP is in talks to acquire Digital First Media Inc., the owner of newspapers including the San Jose Mercury News and the Denver Post. Thus, if Torstar is unable to find a suitable use of proceeds for its substantial cash position, private equity has once again begun to leaf through the pages of the traditional newspapers.