Southern Cross Media Group Limited (SXL), engaged in the creation and broadcasting of content on free to air commercial radio, television (TV) and online media platforms across Australia, is in full swing to be considered for stock consumption in our view. SXL has a tremendous range of media products and services, including its Today Network and Triple M Local Works.
As per the FY14 results, SXL reported revenues of A$640.8m, a fall of 0.3% on prior year revenues of A$642.6m with reported EBITDA of A$179.7m, down 14.8% on prior year EBITDA of A$211.0m. NPAT was down 408.0% to a loss of A$296.0m due to impairment of intangibles and investments, compared to the prior year NPAT of A$96.1m. SXL declared a 3.0cps dividend. The decline in EBITDA reflects SXL’s increased investment in brand-imaging, marketing and promotions in line with the aim to sustain and grow its market share.
Metro radio market share declined from 34.4% to c.33.0%; and Regional Revenue declined 0.7% to $380.1m with 1% EBITDA growth to $120.5m. Regional radio growth was hit by submissive national markets.
The Company expects 1H15 revenue and EBITDA to decline 5-7% and 10-15% respectively vs the pcp. We expect a prolific EPS and FCF CAGR in the coming years. SXL hopes for a 33% plus share in FY15 if they continue to see the existing ratings improvements. The otherwise low single digit growth expected in 1Q15 appears to get a kick-start from The Commonwealth games. Then, Triple M network appears to be a star performer for strengthening and growing the share. Local regional revenues continue to provide an upswing in revenue in 1Q15. Benefits of the debt refinancing are expected to reduce financing cash-flows to $40-42m in FY15f. The FY15f capex of $27-30m, then $24-25m from FY16f onwards is being anticipated. Further, the Company expects a FY15 revenue split of 48%:52% for 1H:2H.
SXL’s Entertainment Platforms (Source - Company Reports)
From challenge standpoint, SXL is facing some operational issues which particularly deal with its metro radio ratings and revenue share risk. We might see further metro revenue loss in 1H15 before the recovering in 2H15 (vs the pcp). Something to ponder upon is also the resignation of two directors associated with Macquarie Group in view of hidden intentions towards their 26% shareholding. Further, key risks to the Company are ad market growth/share, the affiliate fees/agreement, radio talent, debt, and marketing spend to launch new metro radio programming.
SXL Brands (Source - Company Reports)
Nonetheless, favorable comps expected across the metro and regional segments will boost growth in 2H15, as understood from the stable metro ratings with a chance of recovering the metro revenue share. Further, radio segment looks encouraging on a long-term structural basis.
There is a possibility that SXL may be considered as an M&A target (as part of on-going speculations) which would be dependent on implications from TV audience reach rules and/or 2-from-3 media ownership rules. Such a strategy may fall in line with SXL’s belief in the merits of industry consolidation, but at the moment, the talk is only in the air. It is however prudent to note that SXL shares equal market shares with its competitors, Nova/DMG and ARN/APN. This makes us believe that SXL has full capability to outshine in the near future irrespective of the current topsy-turvy profile.
SXL Brands (Source - Company Reports)
In the same spirit, we note SXL’s decision on initiatives such as a DRP and deferring capex spend (i.e., entering into a DRP Shortfall Placement Agreement to help issue shares to offset up to 100% of dividend distributions) and announcement on the sale of a Sydney property mortal asset, which appear to be rescue operations to improve Company’s net debt position.
Radio Ratings (Source - Company Reports)
We would also like to bring attention to the key highlights exemplified by SXL’s management in a recent Streetevent - Even with reported revenues being down, the adjusted revenues take into account discontinued operations from last year and were actually up 0.5%, owing to strong local sales results and steadying television revenues. The Company has held costs to a reasonable 3.2% increase given the heavy marketing investments. The tax dispute with the ATO has also been settled providing a spark to SXL’s balance sheet and cash flow certainty. The successful refinance of the syndicated debt facility in 2014 was another catalyst. SXL thus expects that the interest outflows will reduce to between AUD40m to AUD42m in FY15. Planned asset sales are expected to deliver AUD8m to AUD10m in cash in FY15. Net debt is down a further AUD11.8m on December 2013.
SXL Daily Chart (Source - Thomson Reuters)
In terms of performance, various shows of this number one radio brand (nationally), (including the no. 1 breakfast show) are doing ostensibly good. The Company further aims to complete the successful regeneration of the Today brand; optimize capital management; and drive meaningful operational improvements to have solid underlying free cash generation.
Factors that can outplay for SXL entail improved ratings performance for Regional TV, improved revenue share performance in metro radio, and any potential corporate activity in view of potential regulatory changes on broadcast reach cap. A significant turnaround in the ad market, would also be a big game changer.
It is clear that SXL is making efforts to benefit from cost initiatives implemented in FY14 for driving annualized savings in excess of $6m (incremental ~$3m in FY15), as reported by the Company. Given the entire situation in terms of potential growth momentum and deeds of the present reaping fruits in the longer-term for a perkier tomorrow, we put a BUY recommendation for this stock at the current price of $0.99.
Note - The following report was covered in Kalkine Daily on 26/09/2014
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