Ten Network Holdings Limited (ASX: TEN) raised over $154 million of fresh capital in order to decrease its debt and improve its financial flexibility so that it can smoothly invest in its programs. Around $77 million worth of new shares would be issued to Foxtel at $0.15 per share, enabling Foxtel to acquire around 15% stake in the company.  Meanwhile, Ten Networkselected Multi Channel Network as its sales representation and even has the proposal to acquire over 25% stake in Multi-Channel Network. The group also has the option to become a 10% shareholder in Presto, an online streaming service.
 
First half of 2015 highlights
 
The group’s first half of 2015 television revenues reduced by 1.6% to $309.8 million to $315 million in the first half of 2014. Meanwhile, the group’s television expenses also decreased 2.1% on a year over year basis to $302.3 million in 1H15, on the back of management costs and restructuring of operations. Ten Network intends to continue to focus on cost management, although it is quite challenging due to fixed output deals. Ten Network estimates to decrease its television costs (ex-selling costs) by 8% yoy for the entire fiscal year 2015. As a result the group’s EBITDA plunged 25.7% on a year over year basis to $75 million in the first half of 2015. Accordingly, the loss before tax fell to $6.3 million in 1H15 as compared to $5.2 million in 1H14.

 
Ten Networks has been successfully improving its 25 to 54 and total people audiences, which represented 24.7% revenue share during January 2015. The group launched several new formats like I’m A Celebrity… Get Me Out Of Here, Family Feud, Shark Tank, Gold Coast Cops, Studio 10 and Gogglebox Australia. The Great Australian Spelling Bee and The Bachelorette would be launching this year. The KFC T20 Big Bash League also witnessed solid growth during the summer of 2014-15.

Meanwhile, the tenplay mobile apps were downloaded by more than 2 million ever since its inception, and witnessed an increase of 23% yoy of unique visitors to 14.6 million unique visitors in the first half. Page views also rose 64% to 134.6 million as compared to the corresponding period of earlier year. The video views surged 52% yoy to 66.3 million in 1H15. Tenplay advertising revenues surged 29% on a year over year basis during the first half of 2015. Also, the management is making efforts to convince the Federal Government to atleast review the Australia’s license fee to fight the current challenging environment.
 
 
 
Audience growth for Ten Network as compared to its competitors (Source: Company Reports)
 
On the other hand, the group incurred $251.2 million of television license impairment charges for the first half of the 2015 financial year. This has impacted the group’s loss after tax which decreased to $264.4 million in the first half of 2015. On the balance sheet front, the group maintained its cash at $20.6 million in the first half of 2015. But, the overall net debt also increased to $92.3 million as at February 2015, as compared to $80.5 million of net debt in December 2014 and $35.9 million as at February 2014. Moreover, the group generated an operating cash outflow of $18.1 million as of Feb 2015, as compared to operating cash flow of $10.1 million in the corresponding period of 2014. Therefore, we believe that the group’s balance sheet is also not enough strong despite the recent fund raisings, to withstand the competition from alternate forms of entertainment and declining revenues.


TEN Daily Chart (Source - Thomson Reuters)
 
Outlook

Ten Network Holdings has been declining since more than a decade, and plunged over 87.1% in the last five years. The major impact on the stock is mainly due to changing behavior by viewers who are shifting away from free to air television to alternate forms of entertainment like pay-TV and online viewing services, mainly for Netflix. The situation is not improving for free to air television firms and the negative outlook is estimated to continue going forward as even the advertising revenues have also been shifting to these alternate forms of entertainment. Accordingly, the group delivered a negative year to date returns of over 4.4%.
Although the stock has rallied around 10.3% in the last four weeks, we believe this is a short term rally as the competition from alternate forms of entertainment firms like Netflix is quite strong which would consequently impact the group’s stock in the long term. Based on the foregoing, we give a “SELL” recommendation to the stock at the current price levels of  $0.215.

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