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Which one to pick from these Australian media stocks?

Oct 20, 2015 | Team Kalkine
Which one to pick from these Australian media stocks?

Nine Entertainment Co. Holdings Ltd


 
The results announced by Nine Entertainment Co. Holdings Limited (ASX: NEC) the company were more or less in line with guidance announced previously. Revenues were up 2.6% to $ 1.61 billion and group EBITDA was down 7.6% to $ 287.3 million in comparison to the guidance of $ 285 million-$ 290 million. Net profit after tax before special items was down by 2.9% at $ 140.1 million and specific items after tax came to ($ 732.2 million) resulting in a net loss after tax of $ 592.2 million. Operating free cash flows were up 9.4% to $ 297.3 million and operating free cash flow conversion was up by 16 points to 103%. EPS before special items was down 8.5% to 15 cents per share and the dividend was 9.2 cents fully franked per share. The FDA revenue was negatively affected by the soft advertising environment offset partly by an increased market share. The digital transition and integration are continuing. Net debt was down $ 13.2 million at $ 524.3 million and net leverage was up 0.1x at 1.8x. Interest cover was up by 5.1x to 10.8x.
 
 
Metro Ratings and Revenue Share (Source: Company Reports)

The primary item in special items of ($ 791.8 million) was the write-down of license and goodwill values on the balance sheet. Other items were a one-off charge of $ 13 million representing contract close-out costs. There was also a provision for loss-making inventory under the longer terms of a deal for international output. The company aims to maintain an efficient and conservative capital structure and the fully dividend of 9.2 cents per share represents a payout of 61%. $ 83 million are outstanding on the on market share buyback and the company intends to seek shareholder approval to increase the on market share buyback limit to 20% of issued capital.

As per the latest updates, WIN TV network has taken a 13% share of Nine Entertainment Co in the wake of reform to media ownership laws. This is based on the agreement for sale of part of shareholding of Apollo in NEC to interests associated with WIN Corporation. The transaction is expected to be completed on 9 November, 2015 as per the recent announcement.

We believe that conditions may have bottomed out for this company and there is nowhere for earnings to go but up. Moreover, we expect much more significant contributions from the digital business in the future and rate the stock as a Buy at the current price of $1.585.

 
NEC Daily Chart (Source: Thomson Reuters)
 

Ten Network Holdings Limited



The television broadcaster, Ten Network Holdings Limited (ASX: TEN), has not been particularly lucky with CEOs and has its fifth CEO in five years, after Hamish McLennan moved out of his dual roles of chief executive and chairman. Non-executive director David Gordon has been named as the new chairman, while chief operating officer Paul Anderson has been named CEO, but it’s unlikely that a change at the helm is going to make much of a difference for a company which has struggled for years. The dismal record shows that the company has only managed to earn total net profits of around $ 50 million since 1998 while, during the same period, the issue of shares has risen more than seven times and some $ 1 billion in extra capital has been raised from shareholders for whom the investment would appear to have been a disaster. McLennan was responsible for the transaction with pay TV operator Foxtel, which agreed to take a 15% stake in Ten for which it will pay Ten up to $77 million at 15 cents a share. As part of a series of strategic arrangements, Ten also has the option of becoming a 10% shareholder in Presto, Foxtel’s streaming media service. He was also responsible for the company acquiring a 24.99% stake in Multi Channel Network (MCN) which was then appointed as the sales representative for Ten’s TV and digital advertising sales. The company also proposed a renounceable rights issue to Ten shareholders to raise a further $77 million, which combined with Foxtel’s payment will be used for debt reduction and financial flexibility. It presently has $92.3 million worth of debt at the end of March 2015. There has been news about television industry veteran Bruce Gordon offered to add up to $100 million of new money into Ten Network Holdings.
 
 
Balance Sheet (Source: Company Reports)
 
The company has only 21.5% of the capital city television advertising market, compared to around 40% each for Channels Nine and Seven and it is clear to us that this company's struggle for profitability means that there is no scope for a third channel to make money. Possibly, it could be acquired if the federal government relaxed media ownership rules in Australia but there can be no predicting when this could happen. The stock has fallen about 11.63% year to date (as at 20 October, 2015). We recommend that you “sell” the stock at the current price of 0.190.
 
 
TEN Daily Chart (Source: Thomson Reuters)
 

Seven West Media Ltd


 
The operational highlights for FY 2015 by Seven West Media Ltd (ASX: SWM) included the maintenance of leadership, distribution of content anywhere, anytime, at any place and on any device, the expansion of the production of content on a global basis and the establishment of new revenue streams. The financial highlights were the 11.5% year-on-year decline in profit after tax (excluding significant items) to $ 209.1 million and a loss after tax (including significant items) of $ 1.88 billion. Tight operating cost control resulted in a 2.4% reduction year-on-year and EBIT was down by 12.7% over the previous year to $ 356.3 million and EBITDA margin was 22.9%. The final dividend was 4 cents per share fully franked. The operating cash flows were strong at $ 349 million and there was early conversion of the convertible preference shares and the proceeds of the Pro Rata Offer were used to reduce debt. The company also managed to secure an extension of secured debt to October 2018.
 
 
Financials (Source: Company Reports)
 
The company has written down the value of its goodwill and television licenses, newspapers and magazines by an enormous $2,122.8 million. Newspaper advertising revenues were down 13.3% while magazines advertising revenues declined by 5%. This clearly shows the reduced role of traditional media, and the trend is likely to continue and may even accelerate. The big news is the new 6-year deal signed with the Australian Football League (AFL) for the 2017 to 2022 seasons. It is estimated that the company is paying around $1 billion, with News Corp (ASX: NWS), owner of Fox Sports chipping in $1.2 billion and Telstra Corporation Ltd (ASX: TLS) paying between $250 and $350 million for the digital rights. Foxtel, will broadcast every game live each week, but the company gets 4 live games a week, and the Finals Series. SWM is also set to kick off the upfronts season with “new fronts” and intends to take media buyers and clients in small groups in sessions over a number of days for 2016 plans. The company has been in the news for its collective efforts with the State Government for creation of the virtual reality experience called BigPic360.
 
The fully franked dividend of 13.61% is extremely attractive and we see no reason why the dividend should not be sustained. Accordingly, we rate this stock as a Buy at the current price of $0.725.
 

SWM Daily Chart (Source: Thomson Reuters)

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