Small Caps | Mar 21 2017
This story features SOUTHERN CROSS MEDIA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SXL
Brokers believe APN News & Media is in a superior position in two of the brightest segments of Australian advertising – radio and outdoor. Canaccord Genuity initiates coverage on the stock.
-Full ownership of Adshel to provide a springboard for growth
-Ability to integrate outdoor and radio advertising formats
-Potential for further consolidation in outdoor market
By Eva Brocklehurst
APN News & Media ((APN)) has reformed. Brokers believe the company is now in a superior position in two of the brightest sectors for Australian advertising – radio and outdoor.
Over the last year the company has divested print assets in Australia, offloaded its New Zealand print and radio business and emerged as a radio and outdoor advertising company. The re-organisation has helped to refurbish the balance sheet and this is now capable of funding growth.
The buying out of Clear Channel Communications in the Adshel joint venture should provide the business with a springboard for capital investment and growth in a way that was not possible under the previous structure, brokers assert.
Canaccord Genuity observes the previous set-up in which each received around $10m per annum in dividends did not suit either business. In the case of Clear Channel, the dividends did not make much difference to its increasingly difficult debt situation while APN News & Media, with only Australian radio left in its portfolio, lacked a credible equity growth story.
With the reasoning behind the buy-out clear it now raises the question of valuation. The acquisition of Adshel may have appeared pricey but Canaccord Genuity suspects this is not as problematic as initially feared. The acquisition was dilutive to earnings, accentuated by an equity raising at a 20% discount. Outdoor stocks warrant higher earnings multiples than radio and television stocks and the Adshel valuation appears in line with the multiples applied to peers in the outdoor sector.
Moreover, Adshel was not equipped for capital growth requirements under the previous ownership but had a good track record of growth and the broker discerns a clear relationship between revenue growth and capital expenditure in the business. Canaccord Genuity, not one of the eight monitored daily on the FNArena database, initiates coverage on the stock with a Buy rating and $3.25 target.
Digital revenue growth has underpinned Adshel and brokers expect this to continue. UBS upgraded to Buy at the time of the 2016 results, as the business reflected a better debt balance with higher Adshel contributions. Credit Suisse also envisages plenty of growth ahead for Adshel, which grew operating earnings by 21% in 2016 and revenue by 17% as it continues to ramp up its digital roll out.
The broker forecasts 11% pro forma operating earnings growth in FY17 for APN News & Media. This will be driven by strong growth at Adshel, modest growth at Australian Radio Network and the removal of the onerous Hong Kong bus contract. Management noted at the time of the results that the forward bookings were strong and advertiser activity is returning to normal.
Australian Radio Network
The company's radio business, Australian Radio Network, operates in a competitive environment in which it holds a similar market share to its peers Southern Cross Media ((SXL)) and Nova Entertainment.
Credit Suisse forecasts a 3.5% increase in operating earnings for Australian Radio Networks out to FY19. In addition to the mature radio business, the company's ability to fund the capital needs of a faster-growing outdoor business supports, in the broker's view, the proposition that the two formats work well together, as advertisers are able to use digital formats in promoting radio.
UBS suspects the growth story in the radio business is almost over and the main game from this point on is maintaining ratings share. The broker expects Australian Radio Network to track the radio advertising market closely in FY17 and believes the re-signing of Kyle & Jackie O to a five-year contract back in August 2016 is critical to the maintenance of ratings share.
The company has demonstrated its ability to re-vamp the radio cost base and Macquarie believes the outlook is improving. An improved ratings outcome is likely in the current half year and this should translate into improved revenue trends down the track, in the broker's opinion.
Outdoor M&A Activity
In the outdoor segment AdShel is the leading street furniture operator in Australia and Canaccord Genuity estimates it holds a 19% share of industry revenue. The company's management has voiced strong opposition to the proposed merger between APN Outdoor ((APO)) and oOh!media ((OML)) on competition grounds.
The broker wonders whether APN News & Media will look at further consolidating this market in the event this transaction goes ahead. The company recently denied reports it was preparing to bid for QMS Media but the broker believes this could be a combination worth considering, given the likely benefits of paring a radio business with a billboard operator.
There are five Buy ratings on FNArena's database. The consensus target is $3.37, signalling 27.7% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 4.6% and 4.1% respectively.
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