Don't Give Up On Lions Gate Just Yet

Morgan Stanley has started coverage of Lions Gate Entertainment Corp. (USA) LGF with an Overweight rating and $25 price target, as it believes the 50 percent downside in the shares over the last 12 months creates a buying opportunity, while Starz STRZA subscriber growth and uptick in film performance could boost fundamentals.

“Post merger, the investment thesis revolves primarily around Starz, which is showing top line strength from new, higher-margin digital distribution platforms (e.g., Amazon.com, Inc. AMZN),” analyst Ryan Fiftal wrote in a note.

Fiftal said Lions Gate and Starz would benefit from a strategy of doing away the subscription of expensive pay-TV bundle as a prerequisite to access its services.

The analyst noted that Starz (23 million–24 million TV subscribers) is already nearing 1 million OTT subs at accretive economics, only 10 months post launch. Further, studios that own their intellectual property are poised to serve rising global demand for premium content.

Fiftal expects nearly 20 percent three-year recurring EBITDA CAGR from FY17 to FY20 on organic growth, especially Starz and synergies.

“[W] see opex synergies, mean reversion to more ‘normal’ film studio profits, and healthy TV studio growth driving recurring EBITDA from ~$550 million in CY17E (PF, ex-synergies) to ~$850 million in CY20E (~15 percent 3yr CAGR) and FCF/share from ~$1.50 in CY17(PF) to ~$2.50 in CY20E (~19 percent CAGR),” Fiftal highlighted.

Shares of Lions Gate closed Friday’s trading at $20.01.