We tally up the performance of all the Australian Microcap Funds in our quarterly Microcap Fund Performance Review. As part of this monthly newsletter, we will pick out one microcap fund and give a quick snapshot of the fund along with one stock that looks interesting currently from the fund’s portfolio.
This month’s microcap fund snapshot is of Prime Value Emerging Opportunities Fund. I asked Richard Ivers, Portfolio Manager at Prime Value about one of the more interesting microcap stocks in the portfolio and he highlighted GTN Limited (GTN: ASX)
Firstly, what does GTN do?
GTN provides real-time information to radio and television stations (affiliates) across Australia, Canada, UK and Brazil. Information is typically in the form of local content, such as live traffic reports. It pays a fee to the affiliates and in return is given advertising slots at the time it provides the traffic information. These can then be sold to generate revenue. Gathering the information typically requires aerial surveillance (helicopters) and access to road authority information.
This information is increasingly valuable as it provides local, time-sensitive information that keeps audiences engaged in a digitised world. Traffic information is particularly valuable for an in-car audience which is c. 60% of the radio market.
It’s a highly profitable business for GTN, generating $100m of revenue at 40% EBITDA margin in Australia alone.
Why does Prime Value like GTN?
GTN has multiple attractive qualities.
It benefits from scale, having proprietary information that can be sold across multiple affiliates.
In each market it operates, it is the largest player and has affiliate agreements for up to 18 years that make it difficult for a competitor to establish a position or for affiliates to group together. This creates a barrier to entry.
By offering to advertise across multiple affiliates, it has greater reach than one alone. This is attractive to advertisers looking to reach a mass market and results in a pricing premium.
Australia currently contributes c. 85% of earnings and is nearing maturity. However, moderate revenue growth will drive significant earnings growth as costs are largely fixed. The largest expense is affiliate payments and in Australia, these are now largely fixed under long-term agreements. The Southern Cross (SXL.ASX) agreement is for another 18 years, ARN (HT1.ASX) 4 years and Nova was recently renewed for 3 years with a moderate cost increase in FY19.
Canada and Brazil are GTN’s high growth markets and could deliver significant upside in the coming years.
Canada is growing solidly but would accelerate if GTN can reach an affiliation agreement with Rogers (RCI.TSX), the last significant network missing to date. This would significantly increase advertising inventory and more importantly pricing across the country. GTN generated significant pricing growth in Australia after it contracted Southern Cross and Canada could see a similar benefit.
Brazil is currently small at 4% of group earnings but is growing very strongly. FY18 revenue increased by 25% but was significantly negatively affected by the Soccer World Cup. We expect growth to accelerate in FY19. New regions and stations are being added in a cost-controlled manner and the market of 200m people is very large.
Importantly, GTN’s financials are also attractive. It’s a capital-light business with high returns on incremental capital deployed. Cashflow conversion is strong and the business has little debt.
The recent sell down by 40% shareholder GTCR has removed a stock overhang and liquidity should improve given it now has 100% free float. Its profile should also rise given it’s not particularly well know.
Who is the management team behind GTN?
GTN has local management in each of its 4 regions.
Two key management at the group level is Bill Yde (CEO) and Scott Cody (CFO & COO).
Bill has 35 years’ experience in the radio and media industry and was the founder of GTN. So his knowledge and understanding of the business industry and business are profound. He holds almost 4m shares.
Scott has over 30 years’ experience in the radio industry and he has a detailed understanding of the business.
Management is incentivised on EBITDA, EPS and relative total shareholder returns.
Does the valuation for GTN stack up in Prime Value’s view?
We think GTN fits squarely in the growth at a reasonable price (GARP) bucket.
We estimate GTN’s FY19 EBITDA will be $53m (+10% on pcp) which converts to normalised EPS of 15cps. At $2.10 the stock is trading on a PE of 14x and yielding 6%. We estimate a cashflow yield of c. 8%.
This compares favourably to the Small Industrials PE of 17x and yield of 4% while GTN offers superior growth.
Earnings growth of c. 10% p.a. is sustainable for a number of years on reasonable assumptions but would accelerate if Canada or Brazil deliver on their potential.
Upcoming catalysts include a positive AGM trading update, a strong FY19 result (it’s cycling a weak 2H19) and possible Canadian affiliation agreement.
