Australia | Oct 31 2011
– Ten Network's full year result viewed as disappointing
– Earnings estimates down as ad market conditions remain soft
– Turnaround will come but may take a year
– Stockbroker opinions remain divided
By Chris Shaw
Having previously guided on full year earnings, yesterday's report of full year EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) of $173 million by Ten Network was not a great surprise for the market.
The result was still viewed as disappointing though, Deutsche Bank attributing the weak result to the adverse impact of a change in strategic direction implemented by previous management team and further deterioration in ad market conditions.
The poor decisions of the previous management was reflected in an increase in the previously announced restructuring charge of $46.1 million to $85.4 million. The increase is due primarily to further provisions for sports contracts.
On the back of the result, and given ongoing weakness in ad market conditions, stockbrokers have in general lowered earnings estimates for Ten. As examples, Deutsche has lowered its FY12 earnings estimate by 4.3%, while JP Morgan's numbers come down by 11% and BA Merrill Lynch by 19% for the same period.
RBS Australia's estimates have been reduced by a more significant 33% given an expected decline in TV revenue and a small loss of market share, while Citi has gone the other way and lifted forecasts for FY12 by around 5%.
Consensus earnings per share (EPS) estimates for Ten Network according to the FNArena database now stand at 7.2c for FY12 and 8.6c for FY13.
With a number of bad contracts being written down, FY11 was effectively a year of restructuring for Ten Network. This leads Citi to suggest it is now a waiting game with respect to when audiences may improve and the ad market recover.
As Citi points out, there is upside risk to earnings at present from any broad-based recovery in Ten's markets, but such an outcome appears too early to call at present. Citi suggests the earliest any sign of progress is likely to be seen is February of next year, when new programming starts.
BA-ML agrees, taking the view gains in ad market share for Ten are more likely in 12 months time as Ten is currently holding back on some programming for next year, new shows tend to take some time to settle and advertisers may choose to wait for some evidence of ratings recovering before committing.
For both Citi and BA-ML this means a Neutral rating for Ten Network is appropriate, but there are alternative views. JP Morgan and UBS both retain Buy ratings on Ten, the former given good cost control and expectations of an eventual improvement in market conditions and the latter due to longer-term value at current levels.
In contrast, RBS Australia has downgraded to a Sell rating from Hold previously, the move also being something of a valuation call. The cuts to RBS's earnings estimates mean valuation for Ten falls to $0.90 from $1.06, while a further discount for ongoing market share risks is factored in when setting a price target. RBS has reduced its target to $0.81 from $0.95, which suggests the stock is expensive at current levels.
Overall the FNArena database shows Ten Network is rated as Buy three times, Hold four times and Sell once, with a consensus price target of $1.03. This is down from $1.09 prior to the full year profit result. Targets range from RBS at $0.81 to Credit Suisse at $1.34.
Shares in Ten Network have moved inside a trading range over the past year of $0.80 to $1.66. Friday's price implies upside of around 14% to the consensus target in the FNArena database.
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