Today, I thought I’d challenge the conventional belief that all “old world” media is going the way of the dinosaur.
No doubt print media and parts of free-to-air TV are facing substantial structural headwinds from Netflix, Twitter, Facebook etc. That is well-known and most likely discounted into the relevant stocks.
What is less recognised is that radio and outdoor advertising is going from strength to strength. Yes, we do still listen to the radio in the car (or in the tractor) and look at outdoor billboards as we drive along.
Interestingly, despite different growth drivers, all “old world” media has been tarred with the same “structural headwind” brush in terms of P/E. That is why my investment team and I have been scouring through the trading damage, looking for mispriced “old world” media assets that will actually deliver both earnings and dividend GROWTH over the next few years.
The stock we have recent bought after doing our sector research is Southern Cross Austereo (SXL $957 million market cap). This mid-cap industrial is undervalued in our opinion and its sustainable fully-franked dividend alone should support it at current prices.
We see 5 clear catalysts that should lead to SXL being re-rated
1) Net debt is down to $350m, so this stock is no longer highly geared. They also have $100m of franking credits and with the corporate tax rate changes, no point keeping them from shareholders.
2) They will now be selling Nine product not the third ranked Ten product on their regional TV networks.
3) In my view, much like how the outdoor ad segment has grown share significantly, I feel radio could see a similar uplift from its current share circa 8% of advertising spending.
4) I think there is zero chance SXL has interest in buying NEC. Could NEC bid for SXL to diversify away from free-to-air more? Sure, NEC owns 9.9% of SXL already.
5) SXL own around 67 transmission towers. These could prove attractive to infrastructure funds, just like how they value mobile phone towers on big prices.
Let’s start by looking at what SXL is.
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The clear attraction is SXL are generating strong metro ratings, which leads to a greater revenue share of a growing overall marketplace in radio.
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The most interesting and positive strategic development for SXL was a new broadcast affiliation deal with Nine (NEC).
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Our analysis of this deal is it’s a win/win for SXL and NEC, but more so for SXL. In the short-term it leads to us upgrading our FY17 forecasts for SXL by +3%. Sure, not much, but its growth in what is considered and priced as a “growthless” industry.
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NEC & SXL have formed a new affiliation agreement in the regional QLD, Southern NSW and regional Victorian markets. The deal means SXL with broadcast Nine’s metropolitan content in these three regional markets for the next five years from July 1st. In return, SXL pays Nine an affiliation fee of 50% of its TV advertising revenue. Also, as part of the agreement SXL will also provide sales services for Nine’s NBN channel in Northern NSW and NTD9 in Darwin. Nine and SXL will also pursue other opportunities to mutually grow their businesses (you can see why I think a merger is likely eventually). Before this deal, Nine provided content to WIN Corporation in these regional markets, while SXL broadcast TEN product.
The consensus analyst view of the new agreement is that the switch in affiliation in these three markets will result in a revenue uplift of $55m in FY17 due to high ratings/revenue share from Nine’s content. To put this in context, pre the new deal, SXL’s revenue share in these three markets was 21% versus WIN’s 30%.
Obviously, costs rise too in the first year and analysts estimate the incremental expenses to be up around $50m in FY17 due to the higher affiliation fee (50% versus 30% with TEN), an increase in variable costs due to higher revenue share, and an increase in employment costs due to a larger sales force.
This all translates to EBITDA estimates being increased by +5% to +7% over FY17-FY18, and I would state that we are using conservative revenue and cost estimates. I think these EBITDA upgrades will prove conservative as the deal proves itself through time.
This all translates to a FY17 P/E of 10.4x and dividend yield of 6.3%ff. EV/EBITDA is a cheap 6.9x FY17
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It’s also worth noting that SXL’s balance sheet has improved dramatically and will continue too, making the dividend yield more sustainable. The DRP has also been suspended which is a good sign.
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Putting this all together, we see the potential for solid, ground out, total shareholder returns from SXL over the years ahead. Broker valuations are around $1.35 but there’s no reason to believe SXL can’t head towards $1.50 while paying 6%ff along the way.
The technical picture also looks very encouraging with SXL about to break out of a well-defined trading range. Again, a technical breakout of this trading range would set the next technical target around $1.50.
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We own SXL for a re-rating over the next few years. It’s pretty hard to get de-rated from a P/E of 10x and pretty easy to get re-rated to 12x. The sustainable dividend yield alone at 6%ff pays us for the risk of owning the stock and in this new lower cash rate environment should underpin the stock at current prices. I would point out again consensus SXL earnings just got revised UP, which is highly unusual for an “old world” media stock.
In summary, we believe SXL will be re-rated for the following reasons. Momentum in Metro Radio ratings, potential regulatory changes over the next 12-18 months, and the improvement in Regional TV revenue share. “Tune in” for a 6%ff yield with the potential for capital growth.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
