Australia | Nov 18 2010
By Chris Shaw
First quarter earnings for WA Newspapers ((WAN)) of $23.5 million were slightly higher than the previous corresponding period but it was a lower result than the market had expected, reflecting a combination of slightly weaker sales and higher than expected costs.
Advertising revenue did nevertheless increase by 7.3% in the quarter, with both real estate and employment classifieds delivering solid increases for the period. This was partly offset by a 2.1% fall in circulation revenues and a large than expected 5% increase in group costs.
Deutsche Bank notes management placed the blame for the result on uncertainty surrounding the proposed Resource Tax and the federal election, as these factors caused advertisers to hold back on spending during the period compared to what had been expected.
Goldman Sachs also saw advertiser uncertainty as the issue, pointing out 1Q sales for WA News of $102.4 million were 5.7% lower than it had forecast. Within this, sales at the flagship “The West Australian” came in 8% below the broker's forecast.
This wasn't the only factor in the view of JP Morgan, as weaker "other" revenue also contributed to the lower than expected result. The main driver of this was a decline in commercial printing revenue following a change in contract structures.
With the election now out of the way a return to more normal conditions is expected from the second quarter of FY11 in the view of UBS. In support of this view the broker notes management has indicated the first two weeks of November saw strong growth in both local and national advertising.
While conditions look set to improve UBS has trimmed its earnings estimates for WA News by 4.5% for FY11 and by 3.5% in FY12, the broker's earnings per share (EPS) forecasts now standing at 49c in FY11 and 55c in FY12.
This is down from 51c and 57 respectively and compares to consensus earnings forecasts for WA News according to the FNArena database of 50c and 55.2c respectively. Despite cuts of 5% and 4.3% to its FY11 and FY12 numbers post the update, Goldman Sachs remains above the market with its EPS forecasts of 53.7c and 63.1c. This reflects an expectation the company will benefit from a strong cyclical tailwind thanks to the strong Western Australian economy.
Credit Suisse retained its FY11 forecast of 50c in EPS terms but notes as some forecasts in the market had been for a result as high as 57c for the full year, some cuts to numbers post the quarterly update are no surprise.
Given cuts to forecasts, including 4.6% and 8.2% reductions to Macquarie's forecasts to EPS estimates of 49.5c and 51.7c respectively, valuation has become something of an issue for WA News. This is particularly the case for Macquarie, as the changes to its numbers mean its target has fallen to $6.96 from $7.52.
The changes to earnings forecasts across the market mean the consensus price target for WA Newspapers has fallen to $7.27, down from closer to $7.50 prior to the trading update.
At a closing share price of a little over $7.00 yesterday, Macquarie estimates WA News is now trading on an earning multiple of 14 times, which is above the market multiple. It also compares unfavourably to multiples for peers such as Fairfax ((FXJ)) and APN News and Media ((APN)) of around 10 times.
To reflect this Macquarie has downgraded to a Neutral rating on WA News from Overweight previously, the only change in rating among those in the FNArena database to cover the stock. The database shows Seven Hold ratings and one Buy. Goldman Sachs also rates the stock as a Buy but is not in the database.
The Buy comes courtesy of JP Morgan and reflects a combination of a 6.6% fully franked dividend yield, double digit earnings growth expectations for both FY11 and FY12 and exposure to the Western Australian economy.
The returns offered by WA News are not enough according to RBS Australia however, who agrees with the Macquarie view the stock is not offering any great value given it is trading at a premium to peers of around 40% at present.
BA-Merrill Lynch offers a similar argument and suggests outperformance in the short-term at least is unlikely given trading over the coming Christmas period is expected to be subdued. With WA News shares trading in line with its revised valuation of around $7.20, down from $7.40, Deutsche Bank agrees any significant outperformance is unlikely.
Shares in WA Newspapers today are weaker and as at 11.30am the stock was down 38c or 5.4% at $6.67. Over the past year the stock has traded in a range of $6.24 to $8.44 and the current share price implies upside of around 7% to the consensus price target in the FNArena database.
