Australia | Sep 25 2009
By Chris Shaw
CanWest, the major shareholder in the Ten Network ((TEN)), has announced the sale of its 50.1% stake in the company, a move the market expects will remove a potential share overhang in the stock given the group has long been a rumoured seller due to its own financial issues stemming from the global financial crisis.
While this is usually positive for the remaining shareholders, there is but little excitement about the move with respect to Ten, largely as brokers covering the stock continue to see the shares as expensive at current levels. This comes despite some initial guidance for FY09 suggesting a result somewhat better than had been expected.
On the back of the guidance, which is for a result in EBITDA (earnings before interest, tax, depreciation and amortisation) terms of $151 million, Citi has lifted its earnings estimates by 12% this year, 17% in FY10 and 16% in FY11 to earnings per share (EPS) outcomes of 6.2c, 5.4c and 8c respectively, the changes reflecting signs of a stronger advertising market.
Others have followed suit, Bank of America Merrill Lynch increasing its EPS numbers by 6-8% in FY10 and FY11, also as a result of management giving indications the advertising market’s fundamentals are beginning to improve. Its new estimates puts the broker’s EPS numbers at 6c this year, 7.2c in FY10 and 9.7c in FY11.
Consensus EPS forecasts according to the FNArena database now stand at 3.8c this year and 5.9c in FY10, though it should be noted not all brokers to cover the stock have updated their numbers to reflect the earnings guidance offered yesterday.
Among those that have updated their models, value remains the big issue as Bank of America Merrill Lynch notes even assuming an 8% improvement in the metropolitan TV advertising market in the second half of FY10, which would be better than the broker’s current estimate of a 3% improvement, such scenario would only lift its valuation on the stock to around $1.40 against its current valuation of $1.21.
This suggests there is little upside in the stock as $1.40 would be only around 2% higher than yesterday’s closing price, at which the broker estimates the shares are trading on a 25% premium to the All Industrials ex Banks index. This compares to its historical average of parity to that index, leading the broker to reiterate its Underperform recommendation.
Others agree the stock is expensive, Credit Suisse also taking the view the current valuation premium is difficult to justify as there remains significant earnings sensitivity to TV ratings. The broker did point out the stock is highly leveraged to any economic recovery however, estimating if FY11 advertising revenues came in 2% above its current forecasts there would be around 12% upside to its EPS numbers in that year.
While the broker has lifted its target to $1.28 from $0.85 on the back of increases to its earnings numbers and the CanWest sale, Credit Suisse retains its Underpeform recommendation while suggesting the current share price already factors in a significant amount of good news with respect to both ratings and advertising.
JP Morgan rates the stock as Neutral, the broker suggesting the removal of the CanWest overhang is a positive for remaining shareholders as the registry has been cleaned up and there is now no majority shareholder. But it too struggles with finding value and suggests it is too early to turn more positive on the shares as there needs be evidence of improved performance before the stock re-rates.
Citi was the only broker to adjust its rating post the result, upgrading to Hold from Sell while lifting its target to $1.35 from $1.15. This means the FNArena database now shows a total of four Holds, four Sells and one Buy courtesy of GSJB Were, though it shold be noted this rating has not been updated for the CanWest transaction.
Morgan Stanley is not part of the daily FNArena coverage but it too rates the stock as Overweight against an In-Line industry weighting as in its view the company is well placed to lift its ratings share and its share of the advertising market. As well, Morgan Stanley argues the best time to buy TV assets is at the bottom of the TV advertising cycle, which it suggests is the situation at present.
The average price target on the stock according to the database is now $1.17, up from $1.03 previously. Morgan Stanley’s price target is $1.50. Shares in Ten today as at 12.25pm were down 0.5c at $1.36, which compares to a range over the past year of $0.615 to $1.68.
