Ten Network Not Rating Well Enough For Brokers

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-Ratings improvement difficult
-Limited financial capacity
 

By Eva Brocklehurst

Ten Network Holdings ((TEN)) reported a lacklustre first half result. The loss of $8.0m and TV revenue growth of 4.4% elicited a subdued response from brokers, who see not much in the way of catalysts for the upside in the near term. The least that's expected is a move into the black in FY15, although the likes of Credit Suisse and JP Morgan expect some loss to still be recorded at the bottom line.

A turnaround in ratings is looking less likely to Credit Suisse. There appear to be few opportunities in the near term. The AFL is locked up until 2017, there are no US output deals up for renewal and the broker does not think the Commonwealth Games will draw a large, permanent audience. There are two options for Ten, in the broker's opinion. Either increase investment in local content and event TV, or run a smaller, more profitable business on a lower revenue share by reducing costs and shifting the sales force to a more direct model. Either way, the stock looks expensive and the broker retains an Underperform rating. Moreover, a takeover or merger candidate seems unlikely to appear given the regulatory constraints, in Credit Suisse's opinion.

UBS acknowledges the company has decided to re-invest in content this year and broaden its audience reach, but a recovery in ratings is expected to take time and investment. Therefore, the broker's forecasts only factor in an eventual recovery in TV revenue share back to 24% by FY18, from the current 21%. At current prices, UBS thinks the market is factoring Ten returning to a 27% share and this looks difficult without top tier sports content or dominant news and breakfast programs.

Deutsche Bank was not surprised by the result, which only beat expectations in terms of operational revenue because costs were driven down.The broker observes event TV, such as the Big Bash Cricket and Sochi Winter Olympics, were successful but transient, and general entertainment disappointed. The broker's earnings forecasts do not factor in a material recovery in revenue share at this stage. Citi also found the outlook subdued. The broker thinks free-to-air TV is stuck in a holding pattern. With ongoing content investment required in the second half, this suggests that, without a lift in ratings and revenue share, the business will burn through $28m in cash across FY14, based on Citi's forecasts. The turnaround is taking time and the execution risk is high, in the broker's opinion. The only tailwind is likely to be a number of recent content acquisitions and renewed focus on general programming.

The Big Bash and Sochi gave the network a much-needed fillip but the outlook has since deteriorated, in Macquarie's view. The broker can't find much to be optimistic about, given there's aggressive ongoing competition from the Seven ((SWM)) and Nine ((NEC)) networks. Macquarie's advice to Ten is to trade off cost reductions against the need for investment in new programming to improve ratings. The broker expects net debt to rise to $100.6m by the end of the second half because of weaker earnings, timing fluctuations in programming and the impact of onerous contracts on cash flow.

The result highlights CIMB's negative outlook. The broker thinks Ten has a tough task because of a lack of compelling content. Moreover, the company has limited financial capacity to acquire new content. It would appear that existing franchises, such as Master Chef and The Biggest Loser, are up for review as the company seeks the space to invest in new shows. CIMB prefers those stocks in the sector that are taking share, such as Nine, and those exposed to more defensive media like radio, such as Southern Cross Media ((SXL)). At the current share price the broker thinks further downside risk exists for Ten.

In terms of Ten's advertising market BA-Merrill Lynch is more optimistic, estimating 3% growth in the ad market, mainly from banks, retail and telecoms, which will be supported by housing activity and a more robust competitive environment in telecoms. The broker assumes a positive turnaround from FY15, but also thinks the stock is expensive when considered on a FY16 forecast enterprise value/earnings multiple of 25 times. So, an Underperform rating is retained. There's one potential upside factor that may feature, in Merrills' view. This is early monetisation of the digital opportunity coming from multi-screen viewing. Ten operates three channels. The primary one is Ten and there are two digital channels, One and Eleven.

FNArena's database contains a sea of red ink. No Buy ratings, two Hold and six Sell. The consensus target of 24c suggests 10.5% downside to the last share price and compares with a target of 28c ahead of the results. Targets range from 15c (CIMB) to 35c (Citi).
 

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