Company Overview: Southern Cross Media Group Limited (ASX: SXL) is involved in the creation of audio content for distribution on broadcast (AM, FM and DAB radio) and digital networks. SXL is also involved in broadcasting free-to-air television content in regional markets. The company provides national sales representation for 23 regional radio stations and broadcasts 92 free to air TV signals throughout regional Australia.

SXL Details 

Lower Debt Levels and Financial Drivers to Aid Future Growth: The company’s decent financial outcomes in FY21 were driven from advertising on its well-known linear broadcast media assets such as 99 FM, AM, and DAB+ Triple M and Hit Network radio stations and 92 television signals, which are reaching 95% of Australians. Net debt level of the group is at its historic lows, and it has attained significant headroom against banking covenants. This was evident by the debt repayment of $275 million in FY21, which resulted in a reduced debt facility to $250 million. In addition, the leverage ratio was also decreased to 0.43x in June 2021 as compared to 1.24x in June 2020. The company recorded free cash conversion of 122.2% and 138% in FY21 and FY20, respectively, which was backed by working capital cycle and restrained capital investment. Looking forward, the company would continue to focus on delivering high quality earnings with strong cashflow conversion. In addition, SXL will be focused on the improvement of high-value economic formats in order to increase ratings and revenue.

FY21 Operational and Financial Highlights:

• For the year ended 30 June 2021, the company recorded a fall of 2.2% in revenue to $529.1 million. Audio and Television revenue fell by 3.1% and 0.3% to $359.7 million and $169.0 million, respectively. Backed by the recovery in the media markets, revenue for 2HFY21 improved by 16% over the 2HFY20.
• EBITDA for the year rose by 16.4% to $125.9 million, which helped in improving EBITDA margin to 23.8% against 20% in FY20.
• On the back of audience growth and improving monetisation in live radio streaming, digital advertising revenue soared by 40% to $15.4 million. In addition, it was supported by the successful launch and maturing of its new LiSTNR platform.
• For the month of July and August 2021, audio revenue rose by ~20% against pcp and television revenues have obtained internal targets for the said period.
• The company declared a fully franked dividend of 5.0 cents per share, which reflects 85% of the second half NPAT. This was at the top end of its policy to pay dividends of 65% to 85% of NPAT. The company is also planning to maintain dividends within the said range in future periods.

Net Debt Trend (Source: Analysis by Kalkine Group)

Refinancing of Debt Facilities: As announced on 9 December 2021, the company has successfully refinanced its syndicated debt facility for a further four years ending January 2026.

• The said facility would comprise an amount of $250 million, which would be utilised to repay the existing drawn debt of $128 million.
• The debt financing has been given by five banks (1) Australia and New Zealand Banking Group Limited, (2) National Australia Bank Limited, (3) Westpac Banking Corporation, (4) Mizuho Bank Ltd, and (5) Sumitomo Mitsui Banking Corporation.

Top 10 Shareholders: The top 10 shareholders together form around 59.47% of the total shareholding, while the top 4 constitute the maximum holding. Allan Gray Australia Pty Ltd and Ubique Asset Management Pty Ltd are holding a maximum stake in the company at 19.36% and 14.40%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: SXL recorded a net margin of 9.1% in FY21 as compared to 4.6% in FY20. In addition, the company’s ROE rose to 7.8% in FY21 against 4.9% in FY20. On the liquidity side, cash cycle for the year stood at 40.1 days against 45.6 days in FY20. On the leverage side, debt-to-equity ratio improved to 0.37x in FY21 as compared to 0.91x in FY20.

Liquidity and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Stiff Competition: The company’s operational and financial health could be impacted by the rising market share of its peers in the industry in which it operates.
• Technology Risk: The company is exposed to a risk arising from the extreme change in technology, which could change the way of doing business.
• New Products: SXL’s business could also be impacted by the entry of new products in the market, which are more compelling than Linear Radio.

Outlook: The company earns a major portion of revenue from audio segment, and hence, it is planning to grow earnings with the help of increased production and monetisation of digital audio and further investment in its LiSTNR platform. It is also focused on enhancing the content offering, and on increasing the breadth of its offering via the use of its digital radio spectrum. For FY22, the company anticipates a reduction of 23 - 24% in revenue-related costs and financing costs are likely to decrease by further ~20% to ~$17 million. As a result of the core sales and refresh finance system, the capital expenditure is likely to increase to ~$35 million in FY22. SXL anticipates its television earnings to be broadly neutral under the new affiliation agreement with Network 10 against the previous Nine affiliation.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of SXL is currently trading below its 52-week low-high average of $1.750 - $2.640, respectively. The stock has been corrected by ~2.31% and ~14.63% in the past one and three months, respectively. The stock has been valued using a P/E Multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the COVID-19 Led uncertainties and fall in topline, etc.  For the purpose of valuation, peers such as Nine Entertainment Co Holdings Ltd (ASX: NEC), HT&E Ltd (ASX: HT1), and Seven West Media Ltd (ASX: SWM) have been considered. Considering the expected upside in valuation, lower debt levels, rising EBITDA, growing audience, optimistic long-term outlook, and current trading levels, we recommend a ‘Buy’ rating on the stock at the current market price of $1.870, as on 17 January 2022, 11:15 AM (GMT+10), Sydney, Eastern Australia.

SXL Daily Technical Chart, Data Source: REFINITIV 

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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