Australia | Feb 18 2008
By Greg Peel
West Australian News ((WAN)) had a fabulous 2006, surging from $8.00 to a high of $17.00 on the back of a booming WA economy. Employment advertising in the mining industry in particular and soaring Perth property prices ensured WAN was pushed to valuation levels which analysts soon became uncomfortable about. 2007 has been a different story, however. While the WA economy remains strong, property prices have levelled out and national advertising has begun to wane. And along came the credit crunch, and economic slowdown fears.
WAN had already fallen toward the $11.00 mark before yesterday’s first half profit announcement. Nevertheless, brokers were not yet convinced valuation had moved to a respectable level, having set a 1/4/5 B/H/S ratio on the stock. However, when WAN announced a big cut to its dividend yesterday the floodgates opened and the stock was trashed down to $9.50. This was enough for analysts to make their moves, and four out of six brokers reported this morning they’d upgraded their recommendations.
The new B/H/S ratio now stands at a more respectable 3/4/3, but it must be noted that none of GSJB Were, Macquarie or UBS – the three Sell raters – updated their views this morning.
WAN announced a dividend of 21c, which was below expectations of 28-30c. The Australian stock market is very flighty at the moment, and any poor results or weakened guidance has been severely punished. WAN’s result missed most analyst expectations. The reason for the dividend cut is that in the past WAN had paid dividends based on “normalised” profit, which makes adjustments for one-off items occurring in the period. If a one-off item reduces the operating profit, WAN has had to dip into retained earnings to make up the shortfall in the interim. But unfortunately WAN’s retained earnings have diminished somewhat meaning it doesn’t have the money to cover the dividend analysts were expecting. Hence the dividend was paid simply on a ratio of operating profit.
That was the bad news. The good news is that while just about every company in Australia is suffering from rising costs, WAN’s costs fell around 6% last quarter as the publisher’s investment in brand new printing presses began to pay off. The sale of a half share in troublesome Hoyts was also a positive. What this means is that WAN’s fortunes from here are very much tied in with newspaper advertising.
The WA economy is still in very good shape, but advertising has plateaued. National advertising is also becoming weaker, but national contributes only a small percentage of revenues. The flagship West Australian News is the driving force. Advertising growth remained strong at about 11% up to December, but there was a small matter of an election to spend big dollars on. Analysts suggest growth has now slipped back to around 6-7%.
This is not too dramatic however, and the new printing plant is expected to bring even further cost reductions. All in all, analysts decided yesterday’s sell-off was a bit overdone. The inevitable target price reductions nevertheless followed, and the average in the FNArena database has fallen from $12.28 to $11.50.
The other reason WAN had been driven to a lofty premium at the beginning of 2007 was the change in media ownership laws, and the stake in the company picked up by the Seven Network ((SEV)). Brokers are split on their views of whether Seven will look to take its 19.4% stake to 100%. Credit Suisse (Neutral) says no, believing Seven will not pay a premium. The analysts have therefore removed a takeover premium from their valuation to arrive at a target reduction from $12.90 to $11.90.
JP Morgan (Neutral) won’t rule out the possibility of a takeover, but suggests one is not likely in the short term. At 19.4% Seven has an effective blocking stake, and has the capacity to “creep” as the WAN share price retreats.
ABN Amro (Buy) sees a lower share price as providing more incentive for Seven to move to 100%, however. Deutsche Bank (Buy) is also still including a takeover premium in its valuation, suggesting the share price will be at least underpinned.