Company Overview: Southern Cross Media Group Limited (ASX: SXL) is engaged in the broadcasting of content on commercial radio, TV, and other media platforms. The Group generates revenue from the development and sale of advertising solutions for clients. It mainly operates in two major segments including Audio: comprising of metro and regional audio, podcasting; and Television: comprising of the regional television business.

SXL Details

Decent Bottom-Line Performance Underpinned by Lean Operating Model: Southern Cross Media Group Limited (ASX: SXL) is a leading media company in Australia. The market capitalisation of the company as on 22 March 2021, stood at ~$525.78 million. The company is one of Australia’s leading media players and has a reach of more than ~95% of the Australian population. It owns 99 stations across FM, AM and DAB radio under the Triple M and Hit network brands. It also provides national sales representation for 23 other regional radio stations.

SXL delivered a resilient performance during H1FY21, with an improvement in the EBITDA, NPAT and operating margins. It reported a revenue of $259.2 million. The impact of the COVID-19 pandemic on metro radio markets was offset by growth in national regional radio revenue to 6.8%, as the company continues to benefit from relatively favourable economic indicators in the regional markets. Its expenses were reduced by 23.6% to $183.9 million as compared to the previous corresponding period, aided by steps to implement a leaner operating model. EBITDA grew by 11.5% to $75.3 million on the pcp. There was a significant improvement in the NPAT of the company to $32.5 million in H1FY21, an increase of 59.3% on H1FY20. There was also a reduction in net debt to $66.4 million, from a level of $131.6 million pcp.

H1FY21 Financial Performance (Source: Company Reports)

Improvement in the Balance Sheet Position: The company reported a reduction in net debt to $66 million, a decrease of ~50% from the June 2020 levels. It benefitted from the deferral of payables of $15 million in H1FY21, which supported the working capital flow. SXL made a debt repayment of $100 million in January 2021.  This placed the company in a comfortable position with leverage ratio at an all-time low of 0.59x based on LTM EBITDA as of December 2020. Moreover, the decent performance in H1FY21 along with a reduction in debt levels will further provide headroom under standard 3.5x of covenant requirement. The interest cover ratio is also at a comfortable level of 9.6x, which is more than 3x under the minimum covenant requirement.

Net Debt Position as of December 2020 (Source: Company Reports)

Acceleration in Digital Transformation to Drive Growth: The company’s launch of LiSTNR platform is spearheading its digital transformation phase by looking to capitalise on the growing digital audio environment. As per research, the number of Australians accessing digital audio has doubled since 2016 and it is estimated to reach ~80% of Australians by 2024. The LiSTNR platform enhances the listening experience of the customers and enables them to discover a world of premium, relevant audio. It is a curated and free audio entertainment app that offers live radio, premium original podcasts, live streaming music channels, news, and information. It is an exclusive in-house application, created after three years of research and development. SXL plans to target ~9.4 million audio-savvy Australians, who are inclined to premium audio solutions with an aim is to address over ~17 million Australians by 2021.

Addressable Market for LiSTNR Application (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 41.22% of the total shareholding, while the top 4 constitute the maximum holding. Allan Gray Australia Pty Ltd and Investors Mutual Limited are holding a maximum stake in the company at 17.37% and 6.42%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported an uptick in net margin to 12.6% in H1FY21 from 6.6% in H1FY20. There was also an improvement in ROE to 5.4% during the period. The liquidity position improved with an increase in the current ratio to 2.78x, versus 1.84x pcp. The cash cycle also improved to 66.1 days from 76 days over the same period. There was a reduction in the debt-to-equity ratio of the company to 0.69x in H1FY21, from a level of 1.11x in H1FY20.

Key Risks: The onset of the COVID-19 pandemic has had a severe impact on the Australian economy and a direct impact on the business of the company. The pace of recovery in operations depends on the duration and the extent of the health-related restrictions in its key markets. SXL operates in a sector where listener behaviours and tastes changes frequently, and this requires the company to adapt and position itself to continue to have strong appeal across the audience.

As per a recent update, the company has announced that Nine Entertainment Co will not extend the current regional television affiliation agreement with SXL, on its expiry on 30 June 2021. It has been broadcasting Nine’s free-to-air television content into the markets of regional Queensland, Southern NSW, and regional Victoria since 1 July 2016. The company is looking forward to discussions with Network Ten to establish a new affiliation in the given markets from 1 July 2021.

Outlook: The company plans to capitalize on an increasing digital audio environment by gaining insights into its audiences’ listening behavior. This will enable the company to deliver targeted audiences with enhanced and curated music experience through its LiSTNR platform. The platform will provide real-time insights about listener routines, needs and preferences, which will empower advertisers to deliver their brand messages in an impactful manner to the target audience. SXL plans to further improve its television segment, with an increase in power ratio through its sales performance, and optimise the earnings aided by the outsourcing of both playout and transmission services.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: The company’s digital audio revenue base grew by ~59% to $5.2 million in H1FY21 on pcp, despite the challenging business conditions. SXL is trading above its average 52-weeks’ levels of $0.994-$2.920. SXL gave a positive return of ~39.31% in the past six months. On a technical analysis front, the stock price has a support level of ~$1.793 and a resistance level of ~$2.661. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms).

We believe the company can trade at a slight discount to its peer average P/E (NTM Trading multiple), considering the decrease in top-line performance and expiry of current regional television affiliation agreement with Nine Entertainment Co. For the purpose, have taken peers such as Nine Entertainment Co Holdings Limited (ASX: NEC), HT&E Limited (ASX: HT1), Seven West Media Limited (ASX: SWM), to name a few. Considering the expected upside in valuation, resilient financial performance in H1FY21, reduction in net debt of the company, and optimistic outlook with the launch of the LiSTNR platform, we recommend a ‘Buy’ rating on the stock at the current market price of $2.020, up by 1.507% as on March 22, 2021.

SXL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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