Southern Cross Media Awaiting Re-Rating

This story features SOUTHERN CROSS MEDIA GROUP LIMITED. For more info SHARE ANALYSIS: SXL

By Chris Shaw

Southern Cross Media ((SXL)), which used to be part of the Macquarie empire as the former Macquarie Media Group, owns a collection of regional media assets spanning both the radio and TV markets that give the conglomerate exposure to more than 7.9 million Australians.

According to Citi, which today initiated coverage on Southern Cross with a Buy rating, this spread of assets gives the company good leverage to any improvement in advertising spending going forward. The assets are also well spread geographically, as Southern Cross's largest regional market is Southern Queensland at around 15% of total revenues.

The other attraction in Citi's view is now the assets are out from under the Macquarie umbrella, the complex financial structure including the likes of management fee has now been removed. This leaves Southern Cross management free to simply focus on operating its media assets.

In Citi's view, Southern Cross is now approaching the cash cow phase of operations, as on the stockbroker's numbers the radio and television operations together should generate a combined EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 32.6% in FY11. At the same time, Citi expects a free cash flow yield of 11%, based on what the broker suggests are conservative forecasts.

This strong free cash flow should mean an increase in dividends, with Citi forecasting a dividend yield for Southern Cross of 4.9% in FY11. This implies a 50% payout ratio, something the broker expects could be lifted over time. As an example, an 80% payout ratio would see a yield of 8% on Citi's numbers.

The other scope for upside in Citi's view comes from potential merger and acquisition activity, as Southern Cross is attractive given it is a television affiliate network. The group holds 14 broadcast licenses and re-transmits programming content from both Ten Network ((TEN)) and Seven Group ((SVW)).

Nothing is expected in this regard short-term as Citi notes any M&A upside would require changes to existing media regulations, but such a process may soon be underway given the Federal Communications Minister, Stephan Conroy, has outlined an intention to reform the current laws starting in 2011.

In terms of risks, Citi suggests there are limited structural threats in the TV and radio markets, particularly in the regional markets that Southern Cross is operating in. This, combined with the completing of the restructuring process as the company extricated itself from the Macquarie stable, means a re-rating remains possible going forward.

In Citi's view the upcoming full year results due next month could act as a catalyst for the stock, as management will be able to present the core business to the market for assessment. Value will be the other catalyst as Citi estimates Southern Cross is trading on an EV/EBITDA multiple of 6.1x and offers an attractive 8.4% yield in FY12.

Citi is forecasting earnings per share (EPS) of 8.3c this year, rising to 16.3c in FY11 and 17.6c in FY12. These estimates compare to consensus forecasts according to the FNArena database of 13.3c in FY10 and 16.9c in FY11.

The database shows Southern Cross is rated as Buy five times and Hold once, this courtesy of JP Morgan. The average price target for the stock is $2.17, while Citi has initiated with a target of $2.10.

Shares in Southern Cross today are slightly weaker, down 0.5c at $1.695 as at 11.40am. Over the past year the stock has traded in a range of $1.575 to $2.31, today's price implying upside of better than 27% to the average price target in the FNArena database.

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