Shares in Southern Cross Media continued to fall yesterday in the wake of Friday’s earnings downgrade (that wasn’t a downgrade, but was, as you will see).
The shares fell another 2.5% to $1.16 yesterday after a similar sized fall on Monday. That was after the after the 5.4% slide on Friday in the wake of the statement. That means the shares have fallen nearly 27% from the $1.55 price at the start of 2017.
In a statement to the ASX, Southern Cross said its full-year earnings will be at least $9 million below previous guidance and below last year’s $168 million, news that sent the shares down 5.4% to $1.22, the lowest they have been since last August.
But the company said lower debt and lower interest and other cost cuts would push net after tax profit up on the previous year’s $77.2 million. So you can see it was both a downgrade and an upgrade.
The update was issued along with news of the sale of some of its NSW TV assets to rival WIN which will buy Southern Cross’s northern NSW TV operations in a deal worth $55 million. That deal has been off and on for much of the past year. Proceeds from the sale – which includes $45m on completion and $10m on the first anniversary – will help to “further reduce leverage and financing costs, while enhancing future balance sheet flexibility”, the media group said.
In other words the interest saved from repaying debt will tickle profit higher.
Southern Cross warned pre-tax operating earnings for 2016-17 would fall short of the $177 million to $183 million forecast in December, saying “challenging and short” TV and radio advertising markets would push earnings slightly below the 2015-16 level.
The company said the new guidance on its earnings excludes the impact of the profit or loss on disposal of assets during the year – including the TV assets to WIN Television – “and the likely positive impact of the reduction in television and radio licence fees proposed in the Federal Budget”.
The statement shows that the downgrade disease has infected the once solid-looking Southern Cross Austereo (SCA), a regional TV and metro radio operator that up till Friday, had seemingly been resisting the pressures of falling revenue and no growth in legacy media markets.
Southern Cross joins the likes of Fairfax Media, Seven West Media, News Corp, Nine Entertainment, Prime Media and of course the Ten Network in revealing weak figures or warning of sharp falls in profit or losses for the 2016-17 financial year.
Like its peers, especially in broadcast TV and radio, ad spend is weak to falling.“Metro markets have declined 2.2% over the period from January to April and are trading flat for the financial year to date. Regional radio markets continue to grow albeit at lower than historical levels. SCA has maintained or grown its commercial share in both sectors,” the company said.
“Regional TV markets continue to be challenged and have declined further in recent months. The market has contracted by mid-single digits in the financial year to date and is forecast to deliver weaker revenue as the industry cycles over increased spending from last year’s Federal Election.
“SCA has achieved solid year-on-year growth in revenues following the switch to Nine affiliation along the eastern seaboard from 1 July 2016. Completion in coming months of the roll out of Nine’s regional news bulletins throughout Queensland will provide further revenue and ratings potential.”
SCA added that it had made a “concerted effort” to reduce net debt over the past 18 months and, “as a result of lower financing costs, trading NPTA [net profit after tax] is expected to show positive year-on-year growth”.
But if revenue continues to fall or grow weakly at best, cost cutting and lower interest bills will not provide sustainable profit growth. You only have to look at the Ten Network to know what the end looks like if that’s the future strategy.
