Ten Runs Hard But Comes In Third

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

-Soft first half TV earnings
-Cost cutting discipline welcomed
-Turnaround will be hard and take time
 

By Eva Brocklehurst

Ten Network Holdings ((TEN)), the unfortunate third sibling in commercial TV's free-to-air family, produced another weak earnings report, showing TV earnings down 38.5% in the first half. Brokers welcomed the discipline surrounding cost control but were less keen on the substantial risks ahead, as Ten seeks to turn fortunes around. Ten's TV revenue share was just 21% in the first half. Citi remarked that this is the lowest commercial share of any TV broadcaster in recent times. The previous low was set by Ten back in 2002.

In terms of the strategy, Macquarie found it a bit hard to fathom. Pursuing an older demographic – 18-49 year-olds – may make sense given the traditional 16-39 year-old demographic could erode because of a shifting use of technology, but it won't be easy. Macquarie said the previous management tried to do this by improving news and live sports and found it too hard. Moreover, Seven West Media's ((SWM)) Seven Network and the Nine Network are already entrenched in this space and have much more stable schedules. CIMB suspects the strength of competitor networks and the lack of a strong audience on which to build will make it hard to grab a sustainable share.

Even the potential gains in advertising from the election spending leading up to the September 14 poll are unclear, according to UBS. UBS views Ten as the biggest loser in a fragmented TV market, noting a turnaround will require content investment and time. Sports rights are not up for grabs, except for cricket, and local content is a multi-year strategy. Regarding the company's good cost cutting discipline, CIMB also makes the point that costs could start to rise again if the network is successful in bidding for a major sporting event, such as cricket. On this score JP Morgan believes it would be a good way to get a slightly older audience but is not hopeful. Nine has the first right of refusal and will be hard to budge. The broker also flags the fact that Ten's regional affiliation agreement with Southern Cross Media ((SXL)) expires mid 2013. Management did say they were negotiating "in good faith" with SXL and that was all they were prepared to divulge.

Citi thinks the worst may be behind Ten as the first half sustained a capital raising, an asset disposal, redundancies, loss of revenue share and change in management. A new, simpler structure should provide a clean slate going forward. The broker expects FY13 will be the peak in cash outflow. Citi had previously upgraded Ten to a Buy, reflecting better advertising, improved operational performance and cash profile. Execution risks are there but the broker believes Ten is set to do better. Citi expects TV advertising to improve in the second half and audience ratings to stabilise.

The beginning of Ten's second half (last month) coincides with the start of the official ratings season and launch of a number of key franchises such as MasterChef and Ten is confident costs (ex selling) for FY13 will show a 6% decline. Despite this, for BA-Merrill Lynch the company requires a sustained improvement in ratings trends before advertisers will provide more support and revenue share will lag ratings share in the medium term.

The only other Buy rating on the FNArena database is Credit Suisse. This broker thinks the company is heading in the right direction and the financial position looks better. Moreover, a cyclical uplift in TV advertising spending is not factored into the share price, in Credit Suisse's view. The Hold ratings number two as well – JP Morgan and Deutsche Bank. The remaining four are lined up to Sell. One of these, CIMB, thinks the stock will slip into loss in the second half as ratings and market share remain weak. Whatever the outlook, most brokers believe Ten has its work well and truly cut out to turn around in the medium term.

In sum, there are two Buy, two Hold and four Sell recommendations. The consensus target is 30c, which suggests 4.8% downside to the last traded share price. The range of targets on the database is 18c (Merrills) to 40c (Citi).
 

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