With one sentence in a trading update yesterday, regional TV and radio operator, Prime Media Group has put pressure on all its peers, large and small.
In revealing what could amount to a 19% fall in interim earnings, Prime said it "will also review the carrying value of all tangible and intangible assets as required in light of the deteriorating economic and market conditions. This review is not yet complete."
This impairment test, as it is called, will be the big test for many boards this half year.
The usual consideration of earnings, dividend policy and payout ratio will be pushed into the background as boards are forced to look at the asset value sin their balance sheets in light of the performance in the trading account.
And a solid trading result, won’t necessarily stop a cut in asset values if the board has advice or feels that the outlook for the company is for tougher times.
A growing number of US and UK media companies, for instance, have cut the carrying values of their intangibles and goodwill.
Gannett, America’s biggest newspaper owner, cut its by around 50% or up to $US5.9 billion in the 4th quarter report last week. CBS last year chopped $US14 billion from its intangible values, Time Warner, over $US20 billion.
This Friday it’s the turn of the huge News Corp to reveal what its directors have done.
Failure to cut any value from its $US33 billion in goodwill and intangibles won’t be accepted by some investors.
That’s why Prime’s acknowledgement of the process is of interest.
If it doesn’t cut, it will be questioned by analysts who see at least two years of poor to falling earnings for Australian media companies.
And, its not just media companies that are subject to the process.
Listed investment company, Argo Investments revealed a $30 million write-down in its interim result yesterday.
CEO, Rob Patterson explained:
"Accounting Standards also require us to assess whether there is any objective evidence that any of our investments are impaired. In view of the severity of the global financial crisis, a number of the company’s long-term investments are having their business models challenged to the extent that we are not currently satisfied that the cost of these investments will be recovered in the future,” Mr. Patterson said.
“The accounting cost base of these investments has therefore been reduced to their market value at 31 December, 2008, resulting in unrealised impairment losses after tax of $30.1 million, compared with nil in the previous corresponding period. As the Company’s policy is to revalue its investments continuously through the Investment Revaluation Reserve, the impairment losses have no effect on Argo’s net assets,” he said."
Fairfax Media is another with the same task to convince the market that the asset values contained in the balance sheet as at December 31 are realistic and reflect future profit earning potential
Prime is due to release interim results on February 20.
It said yesterday it now expects earnings before interest and tax (EBIT), pre-significant items, of about $27 million for the six months to December 31, compared to $32.2 million in the prior corresponding half.
The company said it expects EBIT in its core television operations to be about 8% below the prior comparable period.
Prime said it was "aware of market commentary that deteriorating market conditions will impact entities with significant exposure to advertising expenditures”.
The group’s licensed viewing areas cover regional locations in most states of Australia. The majority of its programming is supplied by the Seven Network which has already warned of a first half profit drop of up to 50%.
Prime also said, as previously flagged, that it would record a non-cash charge in relation to an interest rate swap contract entered into in 2007.
Prime has said in the past that this contract had generated gains of about $10 million but, due to recent reductions in official cash interest rates, these gains had reversed and total recognised charges would be about $27 million.
This would not affect the cash interest expense for the group, it said.
Other significant items, as previously advised, would include the elimination of Prime’s investment in Destra Corporation, which is in receivership.
Figures out last week showed the regional TV market fell by around 1.3% in the six months to December, compared with a large 5.3% fall in metro TV advertising.
Prime’s main markets of regional NSW though fell 2.35% and Victoria by nearly 0.50%.
Prime shares traded at $1.05 yesterday.
