Treasure Chest: Market Underestimating Downside Risk For Southern Cross

This story features SOUTHERN CROSS MEDIA GROUP LIMITED. For more info SHARE ANALYSIS: SXL

By Greg Peel

When Southern Cross Media Group ((SXL)), owner of 78 radio stations across the country, 19 regional free-to-air television licences and 80 entertainment websites, posted its first half result back in February, brokers for the most part thought the result was a fairly solid one. Efficient cost management had helped to offset falling radio and TV ratings and a generally weak Australian advertising market.

Underpinning SXL’s value, in broker views, is the group’s takeover potential in light of easing of cross-media ownership laws the Coalition government might undertake, as is its wont.

But SXL ratings slipped through FY13, slipped further in the first half of FY14 and, according to the latest survey, have not yet stopped falling. In FY13, SXL’s metro radio business generated around $120m more in revenue than major rival Australian Radio Network and around $30m more in earnings. Its radio audience share has now declined to 23% from 28% over calendar 2014, and TV ratings have continued to edge down.

As a result, Credit Suisse yesterday downgraded its earnings forecasts significantly to sit 20% below consensus for FY15. The broker cut its target price to $1.20 from $1.40 and retains Underperform. The broker does not include a takeover premium in its valuation given this would mean current “reach” rules would have to be abolished.

Citi, on the other hand, does see SXL as an attractive M&A target, pending required regulatory changes, but suggests that attraction is diminishing along with SXL’s earnings trajectory. Citi, too has slashed forecasts, and has followed up with a cut to its FY15 dividend forecast to 4.5cps (consensus 8.8cps) as the company focuses on paying down debt.

The big hit came for SXL when its flagship 2DayFM radio network last year suffered the defection of its ratings-winning Kyle & Jackie O Sydney breakfast team. Never mind that management had stood by bad-boy Kyle every time he played the tool and offended half the population, standing him down for token sabbaticals while feigning disgust. Sandilands was a consistent ratings winner, and that’s all that matters, as was obvious when the team was poached by KIIS FM.

Losing a flag bearer will always hit a broadcasting company, and it takes time to recover. But after making several talent changes, 2Day is yet to stabilise. Radio audience losses are not just confined to Sydney breakfast given SXL’s net metro share is down 12% in Melbourne as well as 40% in Sydney for an 18% group loss, Citi notes.

SXL’s metro combination of 2Day and TripleM is now ranked number three in Sydney behind rivals ARN and Nova, two in Melbourne and two in Brisbane, having held number one position in all three for no less than five years. While, unlike ARN and Nova, SXL stretches to five-city “national” coverage, this implicit premium is also being eroded, Citi believes.

Southern Cross now faces an uphill battle of rebuilding ratings against stronger competitors, Citi suggests, which could take years to play out. While SXL shares are already down 29% year to date, Citi has today downgraded to Sell, “as the market is yet to appreciate the potential downside risk”.

Citi has cut its target to $1.05 from $1.50.

This leaves the FNArena database consensus target at $1.54, but that average is weighted towards the five brokers covering SXL who have not updated their views since the February result. CIMB tenuously held onto an Add rating last month despite slashing forecasts, while Citi and Credit Suisse are now both on Sell (or equivalent). Three Buys and two Holds make up the balance.

 

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