Australia | Nov 30 2009
By Andrew Nelson
A little heralded and commented upon two-day investor conference has those analysts attending thinking good thoughts about the recovery prospects for APN News & Media ((APN)). By most accounts the company’s operating environment is beginning to show improvement, while the push to on-line seems to be continuing a-pace.
The conference saw management take the opportunity to reiterate its 2009 net profit guidance in the range of $90-$95m versus consensus forecasts that currently range from $93-$97m. The three Australian brokers covering the event; UBS, Credit Suisse and Deutsch Bank, have all kept their forecasts unchanged, with no dissent noted on the earnings line.
The stock rates a 0.4 on the FNArena Sentiment Indicator based on 5 Buys, 3 Holds and 1 Sell. UBS and Credit Suisse hold two of the Buys, while Deutsch Bank sits at Hold. Deutsche’s comments post the briefing seem fairly positive, hence the Hold is a valuation call given the stock is currently trading 11.4% above the broker’s target.
In fact, this seems to be the stock’s problem when looking at the averages posted by the nine brokers in the FNArena database that cover it. As at yesterday’s close, the stock was trading at a 0.3% premium to the current consensus target price, although it is a 13.9% discount to UBS’s number and at a 3.8% discount to the target published by Credit Suisse.
On Credit Suisse’s numbers, the stock is trading on an FY adjusted, fully taxed FY10 PE of 12.5x, while UBS has the stock trading on a PE of 10.8x FY10 and 9.8x FY11. “Undemanding” and “attractive” are the words these two brokers use to describe their current valuation metrics. And with Fairfax and West Australian Newspapers trading on PERs of 15.4x and 17.8x respectively, on CS’s numbers, there’s little wonder why they like the valuation case.
Credit Suisse is convinced that the company’s trading environment is beginning to show improvement, especially in Publishing and Outdoor. The broker notes both divisions had seemingly returned to normal trends in the 4Q. The Australian publishing business has also surprised to the upside over the past four weeks, notes the broker, with advertising revenues now getting close to last year’s levels.
The Australian radio division is also enjoying improving conditions, notes Credit Suisse, who points out the company expects CY09 radio advertising to be better than the current year to date decline of 3.9%. However, while trends in the New Zealand radio market are also improving, the broker points out that APN still expects the market to be down 10% on the previous year.
Analysts at Deutsche think the restructuring of the Australian and NZ publishing businesses will play a big part going forward given the company’s push to a centralised content generation model, which it thinks should help improve an already “strong competitive advantage in regional markets”.
The broker also notes that APN is repositioning its Mix network to target a younger demographic, which management at least believes will lead to a deeper audience engagement. Meanwhile, the broker also holds out some extra optimism for Outdoor, with a new measurement system due to be introduced early next year possibly leading to more advertisers accepting the medium.
What Deutsche really zoomed in on, however, was the company’s increasing focus on on-line, which it sees as a key. “Finda”, an ad funded local marketplace for news and community information is being further developed, while “Sella”, an auctions and classified site in New Zealand will also be available in Australia next year.
However, while a move in the right direction that is showing some promising early signs, the broker thinks these initiatives are still early stage projects that at best will only help recover lost ground in the on-line space. UBS concurs with the earnings argument, saying it doesn’t expect either Finda or Sella to be material to earnings, even over the medium term.
What UBS does think is that overall, APN offers a good exposure to an economic recovery that seems to be in progress. Highly cyclical print classifieds and outdoor advertising revenues, for which it has a positive outlook, will help drive earnings moving forward, says the broker.
UBS notes that in Australian and NZ publishing, weekly revenues are closing the gap with the prior year’s run rate. In fact, the broker estimates that with much lower costs now in both divisions, earnings are probably tracking above last year right now. In Outdoor, while it admits the volatility remains high, forward bookings into 1Q10 are up also up year on year.
The broker does cite some structural concerns about newspapers longer term, but it notes that these fears are more than offset by positive earnings momentum in the medium term. What does the broker like? Solid regional exposure where print to on-line issues will be slower to play out, plus the group’s ability to diversify revenues via Radio and Outdoor.
Credit Suisse also ultimately see the stock as a recovery play, saying the pace of economic recovery and an advertising recovery in Australia and New Zealand remain the keys for APN. The broker also thinks that one of the key overhangs on the stock, the stake held by Independent News & Media, also appears to be easing
Analysts from Deutsche also chime in on the recovery argument, saying real estate in NZ is improving, while it also sees some early signs of a job recovery in commodity related regional markets. Another plus, it notes, is that the retail category and Radio has remained resilient through the downturn.
One audible hiccup was heard by at least one broker during the investor conference, however, and it was that not only didn’t APN pay a 1H09 dividend, its payout ratio remained “under review” The board is expected to make a decision on the final dividend in February, however UBS notes that CFO Peter Myers said it was unlikely that APN would return to the historic payout levels of 80-90%.
As at 11.50 today, shares in APN News & Media were trading 1c lower at $2.36 versus a 12-month trading range of $0.89 – $2.71.
