Nine Entertainment Co Holdings’ takeover bid for Fairfax Media (read my verdict on the proposed merger here) has prompted speculation that a wave of sector consolidation is imminent. The talk centres on other TV owners merging with print media companies, but radio could provide a few surprises.
Radio has been somewhat forgotten in the listed media landscape as investors clamour for new media assets and traditional ones with a twist, such as outdoor advertising.
Nearly 10.5 million Australians listened to radio in 2017, up 200,000 from a year earlier, according to Commercial Radio Australia. Nine out of 10 of those listened to radio as much, or more, in summer. And almost 88% of people listened to an AM/FM/Digital Audio Broadcast via a free-to-air broadcast or online, according to an Edison Research survey.
I like radio’s long-term prospects, as capital cities become more crowded, adding to traffic congestion and commuting times. Almost 90% of people Edison surveyed (over 18) listened to radio in their car in the previous month.
This is not to downplay the risks facing radio as more consumers move away from free-to-air content and to on-demand material, such as podcasts. But these trends show there is more life in radio than the market is factoring into valuations.
Two companies to tune in to
Southern Cross Media Group (ASX: SXL) and HT&E (ASX: HT1), (formerly APN News and Media) are the main ways to play the radio theme. Southern Cross has 78 commercial radio licences and owns the Hit and Triple M networks. The company also owns 104 mostly smaller television channels.
HT&E is more diverse. It owns the Australian Radio Network, Adshel (an outdoor-advertising and street-furniture provider that oOH! Media is acquiring for $570 million) and some small digital investments. Radio is worth about 46% of HT&E’s revenue and Adshel provides a roughly similar amount.
Southern Cross Media’s one-year total return (including dividend reinvestment) is 6.3% and its five-year annualised return is almost zero.
Southern Cross’s performance, however, is improving. The stock is up 20% since late March and key investors, such as Allan Gray Australia, have added to their stake.
HT&E’s total return is up 13.2% over one year. Like Southern Cross, HT&E has rallied this year (after falls in the previous year), partly on expectations of radio-sector consolidation and the Adshel news.
Southern Cross offers the better value at current prices. The company sees “emerging green shoots” in its crucial 2Day breakfast program in Sydney and has expanded its afternoon drive programs to create revenue opportunities.
Nine and Southern Cross Austereo boosted their partnership in April 2018, with the latter taking on representation of Nine’s TV sales in northern NSW. The agreement builds on other affiliate deals and further strengthens the Nine/Southern Cross relationship.
I like Southern Cross’s potential in podcasting. Almost one in five Australians are using podcasts and the company’s new PodcastOne network has had 22.5 million downloads since launch. The network has delivered more than 500 podcasts from 35 unique content providers.
Large media players, such as the Australian Broadcasting Corporation, cannot get enough of podcasts, judging by their rush to create content in this form. There seems to be a noticeable push back to longer-form, original content that is well suited to low-cost podcasting.
Southern Cross would make a neat fit with a free-to-air TV group. Nine sold its 10% stake in Southern Cross in 2016 after striking a five-year affiliation deal. It might not have the stomach for another takeover after the Fairfax play, but a radio group with large FM networks and a promising podcasting business has appeal.
With or without a takeover, Southern Cross looks slightly undervalued at the current price. A handful of broking analysts (too small to rely on) value the stock on average at $1.15, but that looks a little pessimistic against the current $1.28. More will be known when the company reports full-year earnings on August 23.
Southern Cross has solid medium-term prospects and could benefit in the short term from media takeover speculation.
Chart 1: Southern Cross Media Group (SXL)
Source: ASX
- Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor All prices and analysis at August 1, 2018.
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