An improving radio market has revitalised confidence in Southern Cross Media ((SXL)), which has provided revenue guidance for the first time at the first half result, anticipating a drop of -6-8%.
UBS cites radio market data which indicates early momentum in 2021, with metro radio markets down -9%, the regionals up 9% and regional TV improving 3%. Still, the data suggests growth for Southern Cross Media was not as strong as the wider metro market in January.
Southern Cross reported first half radio revenue of $81.6m which was down -22%, and while largely driven by the advertising market Macquarie suggests the numbers also imply market share losses as well, -1.0% to 27.3%.
While pleased with the earnings margin in TV, which improved to 23.0% from 14.7%, the broker has a Neutral rating and $2.60 target, requiring a turnaround in market share before becoming more positive on the stock.
The company has observed upward pressure on advertising prices and the broker points out national advertisers have recovered ahead of the smaller enterprises.
With the launch of LiSTNR, Southern Cross intends to expand new digital content and monetise its platform with digital audio advertising and, as Macquarie highlights, digital earnings are typically higher margin given the operating leverage.
The company has also indicated an improvement in its power ratio performance stemming from sales monetisation. The power ratio comprises revenue divided by audience share and then multiplied by total market revenue.
A higher ratio implies a broadcaster is more effective in monetising its platform relative to its audience. The company’s power ratio has risen to 1.11 from 1.09 in the prior half.
Canaccord Genuity notes the balance sheet has also been reconstituted thanks to an equity raising last year and the company can now look to recover its revenue to pre-pandemic levels.
The broker also reduces depreciation and finance costs which means earnings per share should increase. Revenue is forecast to grow by 13% in FY22 and 3% in FY23, which would leave the business around -4.5% below the FY19 level.
Costs
Canaccord Genuity reverts to a sum of the parts methodology to value the shares and retains a target of $2.70 with a Buy rating. Most of the re-vamping of the model comes with the cost base. Hence, Southern Cross Media has an unusual earnings profile in the broker’s estimates, with a decrease in FY22 despite materially higher revenue, attributable to non-repeat items such as JobKeeper.
No benefit in the second half is expected from JobKeeper yet the company has upgraded its cost guidance, reducing non-revenue related costs to $255-260m from $270-275m previously. Non-revenue related costs include the investment in the LiSTNR, market and the full year impact of restructuring.
In the first half group expenses were down -23.6%, reflecting JobKeeper, operational savings and PING (network software).
Canaccord is impressed with the debt reductions as well and expects this should pave the way for a return of the dividend. The broker highlights that prior to the pandemic the business was returning around $60m per annum to shareholders with a 65-85% pay-out ratio, although this could be overly optimistic at present.
Macquarie, too, expects cost cutting will be maintained, even with the absence of JobKeeper. Employee costs have been reduced by a permanent reduction in personnel as well as government support.
The company has indicated a dividend should be forthcoming in October and did not rule out the possibility of paying a catch-up amount to account for the lack of an interim dividend. There will have been a hiatus of 18 months if a final payment emerges for FY21.
Affiliate Agreement
The current affiliate agreement with Nine Entertainment ((NEC)) is due to be renegotiated in June. Speculation centres on whether Nine will require an increase in the current fee it receives from Southern Cross.
There is also a suggestion that Nine is evaluating other options such as switching back to its former relationship with the WIN network and Southern Cross going back to Network 10.
Either outcome could be negative, UBS suggests, noting there is not much profitability in regional TV and it only contributes around $30-35m in earnings. Still, overall, a stronger December quarter signals a better outcome for the rest of FY21, and the broker retains a Buy rating with a $2.50 target.
