Southern Cross Media Still Suffering Breakfast Indigestion

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Event-Driven

The recent 8% downgrade to fiscal 2017 EBITDA guidance has dragged shares in no-moat-rated Southern Cross Media to 6% below our unchanged AUD 1.20 fair value estimate, a discount to our intrinsic assessment not seen since July 2016.Near-term earnings momentum is hardly inspiring, impacted by weak advertising conditions. However, the group's operating fundamentals remain solid in terms of advertising shares of the radio and regional television markets it toils in. Furthermore, the financials fundamentals are equally solid, with interest cover at over 9 times and net debt/EBITDA remaining below 2 times post the recent asset sales, down from over 3 times two years ago. These fundamental attractions are likely to come to the fore, if Southern Cross' stock price continues to drift from current levels.We believe the group's national radio assets spanning capital cities (Today, Triple M) and regional towns (including Hot FM, Sea FM) could entice significant interest. Appetite may be especially high from structurally-challenged and diversification-hungry television or newspaper companies, if the proposed media reform becomes law. The consistent 8% share of the Australian advertising pie that radio has maintained since 1997 is something to be envied, compared with newspapers' decline from 41% to 12%, and TV's from 36% to 27%.Critically, the recent stock price decline has pushed Southern Cross' fiscal 2018 EBITDA multiple to 7 times, a far cry from the 8 times-plus commanded only five months ago. Granted, that alone does not eliminate the risk of the group pursuing acquisitions. Indeed, management has admitted to its interest in buying NZME's New Zealand radio business, one that operates in many small, dispersed markets, just like Southern Cross' regional radio stations.However, with a market capitalisation value of AUD 870 million versus AUD 1.2 billion at the start of the year, it is possible the potential hunter may become the hunted.Analyst: Brian Han

The recent 8% downgrade to fiscal 2017 EBITDA guidance has dragged shares in no-moat-rated Southern Cross Media to 6% below our unchanged AUD 1.20 fair value estimate, a discount to our intrinsic assessment not seen since July 2016.Near-term earnings momentum is hardly inspiring, impacted by weak advertising conditions. However, the group's operating fundamentals remain solid in terms of advertising shares of the radio and regional television markets it toils in. Furthermore, the financials fundamentals are equally solid, with interest cover at over 9 times and net debt/EBITDA remaining below 2 times post the recent asset sales, down from over 3 times two years ago. These fundamental attractions are likely to come to the fore, if Southern Cross' stock price continues to drift from current levels.We believe the group's national radio assets spanning capital cities (Today, Triple M) and regional towns (including Hot FM, Sea FM) could entice significant interest. Appetite may be especially high from structurally-challenged and diversification-hungry television or newspaper companies, if the proposed media reform becomes law. The consistent 8% share of the Australian advertising pie that radio has maintained since 1997 is something to be envied, compared with newspapers' decline from 41% to 12%, and TV's from 36% to 27%.Critically, the recent stock price decline has pushed Southern Cross' fiscal 2018 EBITDA multiple to 7 times, a far cry from the 8 times-plus commanded only five months ago. Granted, that alone does not eliminate the risk of the group pursuing acquisitions. Indeed, management has admitted to its interest in buying NZME's New Zealand radio business, one that operates in many small, dispersed markets, just like Southern Cross' regional radio stations.However, with a market capitalisation value of AUD 870 million versus AUD 1.2 billion at the start of the year, it is possible the potential hunter may become the hunted.Analyst: Brian Han

Hunter May Become the Hunted as Southern Cross Shares Drift Below Our Intrinsic Assessment