Australia | Mar 28 2008
By Chris Shaw
Ten Network ((TEN)) may be the king of the key 16-39 year demographic in terms of television viewers but as Citi notes the company has long suffered from a lag effect between its ratings and its revenues. The group’s latest earnings result highlights this, as normalised net profit after tax of $86.9 million came in below most broker forecasts in the market even after the company extended its market share in the December half to 30.8% from 30.3% previously.
JP Morgan suggests most of the shortfall can be attributed to the Eye advertising division where start-up costs were higher than expected, while television revenue according to the broker was largely as expected. The overall impact was for the broker to lower its earnings estimates by 5.8% in FY08 and 4.6% in FY09, an outcome far less severe than the 9% and 29% cuts made by ABN Amro on the back of expectations of higher costs throughout the group’s operations.
The major issue clouding the outlook for the company is an anticipated slowdown in TV advertising, ABN Amro taking the view the 4% fall in TV earnings for the half raises question marks over the longer-term given such an expectation. As a result the broker has downgraded the stock to Sell from Hold following the result, suggesting at around 17x earnings the stock remains expensive.
Macquarie is similarly negative on the outlook and suggests the company is not as well placed as others in the sector to withstand the earnings impact of a slowdown in adverstising, Merrill Lynch matching Macquarie’s Sell recommendation with one of their own on the basis earnings risk is firmly to the downside if the advertising market actually does slow down.
According to Deutsche Bank, management’s timing in terms of going on a spending spree just as the advertising market is weakening doesn’t bode well for earnings and it too rates the stock as a Sell, while Credit Suisse is similarly negative given it expects higher costs to impact on profits in coming periods.
This leaves JP Morgan and Aspect Huntley out on a limb in terms of Buy ratings, the former suggesting the company is actually doing a reasonable job in terms of cost containment at the same time as it appears to be enhancing its revenue share.
The broker is also positive on the longer-term outlook for the Eye operations, though shorter-term the increased start-up costs and the moves into the US and UK markets temper its enthusiasm. The broker’s Buy rating therefore is more of a valuation call as its estimates the shares are worth around $3.06.
JPM’s price target has been set at a modest premium to this at $3.20, which is well above the average price target according to the FNArena database of $2.34, down from $2.59 prior to the half-yearly result. The database shows a wide range of price targets, with Deutsche the lowest at $1.85 but a number of brokers grouped around the $2.00 level. The median share price target according to Thomson One Analytics is $2.60.
Overall the database shows the stock is rated as Buy twice, Hold twice and Sell five times, investors today selling the stock down slightly in a weaker overall market. As at 1.25pm the shares were 6c lower at $2.14, which compares to a range over the past 12 months of $2.12 to $3.26.