Tag Archives: Media

article 3 months old

Weekly Broker Wrap: The Outlook For Australian Equity Investing

-Restructuring to drive value
-Industrial stocks look stretched
-Cyclical stocks not expensive
-Tourism sector upbeat
 

By Eva Brocklehurst

Australia and China have something in common. Both economies are retreating from an investment binge and the process will weigh on growth in the years ahead, according to Credit Suisse. In terms of Australian company sales, these will slow too and there is limited scope to raise margins. The analysis from Credit Suisse suggests investors should focus on those companies prepared to help themselves, specifically which companies are expected to restructure their asset bases in the near future.

Corporate profitability in Australia is already high by historical standards and growth is expected to be slow. The options for cutting costs and raising profitability further are limited. The traditional drivers of revenue such as emerging market industrial production and domestic economic activity are not expected to provide the impetus over the next year or so. China is moving away from being investment-led and, in the same vein as Australia's slowing mining investment, the transition is unlikely to be smooth and will result in lower growth. So, it's all about low-growth investing. Credit Suisse lists companies which are expected to embark on significant restructuring to drive value independent of the broader economy. This means these companies will become more streamlined, require less capital and could benefit from a re-rating.

The case of Caltex ((CTX)) is conversion to a less volatile, capital light business. Brambles ((BXB)) is de-merging the Recall document storage business to concentrate on the pallets business. Amcor ((AMC)) is de-merging the Australasia & Packaging Distribution business. The company will then have an under-leveraged balance sheet with the option to acquire more growth. Telecom NZ ((TEL)) is selling AAPT, the Australian business, and Credit Suisse believes AAPT will be better off in the hands of a local owner. Telecom's management could then return the proceeds to shareholders. UGL ((UGL)) is de-merging the DTZ property business. DTZ is growing rapidly, unlike the remaining engineering segment, which could be a target for a merger once it's separately listed. Finally, National Australia Bank ((NAB)) is expected to eventually sell its UK business, Clydesdale Bank. A successful spin off could help create up to $4.5bn in value for shareholders, according to Credit Suisse, although the timing of the divestment remains uncertain.

UBS thinks the Australian industrial stocks, ex financials, are looking stretched. The absolute price/earnings ratio has risen to 16.9 times and is around 13% above the long-run average. The stocks also look expensive relative to the broader Australian market and to global peers.The question is whether the current high valuations signal an earnings upswing over the next couple of years. There is certainly some expectation of that factored in but the broker found that the return on equity (ROE) for the sector was not particularly depressed while margins appear quite normal in an historical context. It's hard to make a case for earnings expectations being too low or that there's upside for returns and margins beyond FY14.

There's plenty of stocks with below average returns and/or margins concentrated in the mid cap segment, which are relying on a cyclical upturn that is yet to happen.The potential upside appears concentrated among mid cap cyclicals such as Qantas ((QAN)), Boral ((BLD)) Toll ((TOL)), Harvey Norman ((HVN)) and Aristocrat Leisure ((ALL)) to name some. These are turnaround stocks, in the broker's view, that are battling tough conditions so there is a risk of disappointment.

Cyclical stocks are fairly valued, not expensive, in Deutsche Bank's opinion. Cyclical industrials have re-rated strongly over the past year and no longer trade at the 5-10% discount to defensives that was the case for several years. Instead they trade at a 5% price/earnings premium. The broker continues to see value because the medium-term outlook has brightened considerably and suspects expensive evaluations are taking account of backward looking analysis, which is lumbered with a poor earnings environment that's been in place for the past 5-6 years. Deutsche Bank expects 14% growth for cyclicals in FY15 and FY16 compared to 6-8% for defensives, making cyclicals relatively cheap. OK, the broker does expect some mild downgrades could be possible but, even so, a reasonable earnings growth gap should persist between cyclicals and defensives. Deutsche Bank thinks that years of resource-dominated growth has led to pent-up demand elsewhere. Housing and business capex have not known growth for five years and consumer spending trends are the worst in 50 years. 

Some attractive cyclical industrials that are considered cheap on a 12-month forward price/earnings basis are Downer EDI ((DOW)), Orica ((ORI)), Lend Lease ((LLC)), Myer ((MYR)), Challenger ((CGF)), Automotive Holdings ((AHE)) and Southern Cross Media ((SXL)). Those offering value on the basis of strong growth forecasts for FY15 include BlueScope ((BSL)), Macquarie ((MQG)), Crown ((CWN)), Sims Metal ((SGM)), Adelaide Brighton ((ABC)) and Flexigroup ((FXL)). In terms of low margins relative to history, where these could rise significantly, Deutsche Bank lists BlueScope, Boral, Crown, Tabcorp ((TAH)), Sims, Navitas ((NVT)) and Fletcher Building ((FBU)).

Citi attended its own recent Australian investment conference and notes the retailing industry theme involved an acceptance of a changing landscape. Grocery customers are still price conscious, leaving little option other than to manage costs and improve products. In discretionary retailing with the growth in online and the arrival of more global brands in Australia, differentiating the offering was considered critical. In property, the residential market is seen picking up but at an uneven geographical spread. There is strength in inner Sydney but this not representative of the national picture. Building activity demand is reasonable but also uneven across cities and regions. Mining company presentations highlighted varied conditions. Mining services noted some easing in cost cutting and fewer reductions in the scope of works, pointing to some stabilisation, although the focus remains on lifting efficiency.

Tourism was upbeat. There was agreement that conditions were improving and the outlook was good. Outbound travel by Australians was expected to persist at high rates, more so because of cheaper airfares, enhanced by low-cost carriers, than the high Australian dollar. Inbound travel was also picking up, from the US as the economy improved, amid some positive signs from the UK and Europe. Media continues to find the going tough. On the media panel, the executives confirmed there had been no improvement in advertising spending in recent months and only some stronger interest around events next year provided any encouragement. The infrastructure panel emphasised the need for new approaches towards projects, to ensure that required infrastructure was put in place in coming years. The plans of the new federal government were considered encouraging.

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article 3 months old

Weekly Broker Wrap: Insurance, Health Care, Advertising And Gaming

-Not easy building scale in insurance
-Sonic best placed with Obamacare
-Decline in print ads continues apace
-Aristocrat well placed in US market
 

By Eva Brocklehurst

There's no such thing as an insurance cycle, according to CLSA. The definition is too simple. There are many interlocking cycles dependent on the type of insurance, geography and a host of other factors. So that makes for an oversimplification when talking about a cyclical earnings "high" and consequently downgrading the sector. Having said that, CLSA does not dispute that there's a top forming but maintains it's important to de-construct how the down leg will play out. Moreover, what's more interesting is how long it takes for mounting competition to take hold.

The broker speculates that 5-10 years from now, Insurance Australia's ((IAG)) and Suncorp's ((SUN)) market share in personal lines will have dropped to 50% from 70%. Such a reduction does not spell doom, in CLSA's view. Natural perils set the home and motor insurance segments apart. Cars can be moved. Houses cannot. Large capital expenditure is required to cover home insurance. In contrast, cars are, in the broker's words, "a breeze". The analysts, therefore, query why the Challenger brand success in motor insurance should necessarily be translated to success in personal lines. Building an insurance book means facing greater headwinds than the incumbents. This has a big impact on time and capital. Here, IAG and Suncorp have advantages of massive scale. The analysts observe that QBE Insurance ((QBE)) is very good at what it does as Australia's premier commercial insurer and is probably protected against a rapid drop off in rates.

Deutsche Bank believe the competitive threats to IAG and Suncorp are on the rise. Conceding there is little risk these trends will stop these two from delivering record underlying margins in FY14, the broker does envisage risks to top line Gross Written Premium targets. Expectations that margins will hold up out to FY16 does not take enough note of the emerging competition.

Aside from yield, the broker finds limited value appeal in either IAG or Suncorp, with Sell and Hold ratings respectively. IAG and Suncorp averaged 7.1% GWP growth in home and motor insurance in FY13, less than half the 15.7% achieved by competitors in these classes. The broker estimates a collective 180 basis points of lost market share in FY13, leaving IAG with 28% share and Suncorp with 30.7%. Challenger has been most successful in targeting pockets of more attractive risk, in Deutsche Bank's view. QBE is following suite, in a way, looking to target lower risk drivers through Australia's first telematics offering for motor vehicles. Deutsche Bank retains a preference for QBE among general insurers.

While the so-called Obamacare in the United States - actually the US$1.4 trillion Patient Protection And Affordable Care Act - does not replace private insurance, which covers 55% of the population, CIMB suspects the legislation is accelerating a consumer-directed approach to the provision of health benefits. This is a move away from employer-sponsored insurance and shifts responsibility for payment and selection of health care services to employees. Over the past five years, the growth of consumer-directed plans has accelerated.

What does this mean for the Australian health care players in the US market? The broker considers Sonic Healthcare ((SHL)) the key beneficiary in terms of volume expansion in laboratory services and preventative services provided without out-of-pocket expenses. The implications for CSL ((CSL)) are more negative, despite the fact that most products are critical to the treated population. This is because of higher costs, growing discount programs and more restrictions requiring evidenced-based patient outcomes. As well, ResMed ((RMD)) faces increased headwinds from the impact of competitive bidding on the durable medical equipment channel. Cochlear ((COH)) is more disadvantaged than perceived at first glance. Top rate health insurance coverage is required to drive the uptake of implants in adults. Increased excise tax on devices might help too.

Australian agency advertising spending declined in September as political advertising eased in the wake of the federal election. Credit Suisse notes metro advertising spending in newspapers declined 32% in the month and this represents the fifteenth consecutive double-digit contraction and the worst monthly result on record. Regional newspaper advertising spending fell 20% while magazine advertising spending fell 15%. Digital remains the major engine of growth with a 19% year-on-year growth rate. TV advertising growth moderated but remains positive. Metro free-to-air spending grew 1% year-on-year, regional declined 3% and Pay TV spending rose 4%.

Of the stocks in the sector, Credit Suisse likes Seven West ((SWM)) as a strong micro story in traditional media and Ten Network ((TEN)) for its leverage to a recovery in ratings and free-to-air advertising. Carsales.com ((CRZ)) has strong exposure to digital advertising, which is maintaining strong momentum. JP Morgan notes metro TV advertising is returning to more normal trends and the start to FY14 was slightly above Seven West's guidance. Metro newspapers are still challenged and this implies that the difficult conditions for Fairfax Media ((FXJ)) and News Corp ((NWS)) will continue. Moreover, the broker believes that negative revenue trends at Fairfax will require further cost cutting. JP Morgan has an Overweight rating for Seven West and Prime Media ((PRT)) an Underweight rating for Fairfax and SEEK ((SEK)).

CIMB has surveyed the slot machine market at the G2E conference, held in Las Vegas during 24-25 September. CIMB surveyed industry participants to obtain feedback on the new machines that were presented by the manufacturers at the conference. Key findings were that replacement rates in 2014 may be higher than current market is allowing, 34% of respondents indicating replacement rates may increase by 5% year-on-year. New product feedback was positive and Aristocrat Leisure (ALL)) was a clear winner (not rated), with 22% of respondents indicating they were most impressed by its new product. CIMB would not be surprised if there was a shake up of market share in North America and Aristocrat could be a beneficiary.
 

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article 3 months old

Weekly Broker Wrap: AGMs, Investment, Advertising, Electricity And Telcos

-Some likely AGM surprises 
-Bullish investor sentiment rises
-Online beats print advertising
-Electricity competition ebbs
-Telstra grows market share
 

By Eva Brocklehurst

It's that time of year again. Companies are fronting shareholders for the annual reporting of their hits and misses. Hopefully, missing most of the missiles that shareholders are likely to throw around. Macquarie has taken a look at where the surprises may spring from this year.

Starting with residential A-REITs, don't expect upgrades is Macquarie's advice. Despite "amazing" house prices being reportedly achieved at auction, guidance is likely to be merely reiterated. Macquarie singles out Stockland ((SGP)) and Mirvac ((MGR)) as doing well. A large portion of FY14 residential sales revenue was already bedded down back in June through pre-sales. Moreover, up to one fifth of any improved volumes will be the sale of impaired inventory and this does not contribute to operating profit. Macquarie reminds investors that residential earnings are but a small proportion of these businesses and the majority involves rent collection.

On the industrial front, the broker highlights the potential for an upgrade for Ansell ((ANN)). Existing guidance of 10% earnings growth in FY14 is considered conservative, given how the second half of FY13 panned out. Recent strong industrial activity could provide a tail wind and, even if management steers clear of specific figures, generally positive commentary would be well received by the market. Toll Holdings ((TOL)) is not expected to provide an indication of earnings growth and this will underscore Macquarie's suspicions that business conditions have not improved. Meanwhile, news about the Maule's Creek mine approval should be a positive for Whitehaven ((WHC)) by the time the AGM is held on November 4.

Another focus for AGMs is the two strike rule on executive remuneration. Macquarie notes 10 companies are on watch for a second strike, after incurring the first in 2012. A second consecutive strike - when more than 25% of shareholders vote against adopting the remuneration report - triggers a spill motion on the board. The companies in line for a second strike are Lend Lease ((LLC)), Fairfax Media ((FXJ)), Kingsgate Consolidated ((KCN)), Cabcharge ((CAB)), Peet ((PPC)), Austal ((ASB)), Macmahon Holdings ((MAH)), Redflex ((RDF)) Rialto Energy ((RIA)) and Cochlear ((COH)).

Macquarie is wary of Cochlear. Cochlear doesn't usually give guidance but there is a possibility for some negative commentary and downgrades to market expectations because of weak underlying trends. Cochlear is also one of the companies that Goldman Sachs has removed from its global SUSTAIN Focus list. Stock selection for the list is driven by returns on capital, momentum, strength of  the industry position and the level of management engagement. Cochlear was removed from the global list as competition intensified and, relative to global medical technology peers, returns declined alongside market share. Goldman continues to believe Cochlear as a well positioned company in an attractive industry, with a market leading position in a segment with high barriers to entry. As it is one of the highest returning companies within the broker's Australian coverage the stock is still on the regional SUSTAIN Focus list.

[Note: Cochlear is the most shorted stock on the ASX at present - Ed]

Russell Investments'  Investment Manager Outlook survey shows bullish sentiment is rising for both international and Australian shares, with managers preferring international shares (71%) over Australian shares (65%). It means there's greater confidence in the global recovery. Russell remains cautiously optimistic on the domestic share market in the near term. The survey also reveals the exporting sector of the market to be a major beneficiary of Australian dollar depreciation over the past six months. A total of 81% of managers believe the currency will settle between US81c and US90c in the next 12 months. Managers expect declining commodity prices, economic growth and diverging interest rate movements will drive the Australian dollar going forward.

The managers' preference continues to be cyclical assets on a sector level, with the biggest shifts in bullish sentiment seen in energy, moving up to 77% from 42% in the last survey, and materials, up to 58% from 39%. The energy sector has benefited from recent oil price gains. Bearishness prevails for A-REITs, domestic bonds, cash and the Australian dollar. Share markets hold the best investment opportunities both domestically and overseas, according to the participants.

Online classifieds have overtaken Australian print advertising in terms of spending for the first time, growing 10% in FY13 while print declined 23%. Online now represents 50% of total classified advertising revenue. JP Morgan estimates that the online classifieds market was around $705m in FY13 versus $702m for print. News Corp ((NWS)) and Fairfax are most exposed to the material decline in print classifieds. Newspapers are spearheading the decline. Since FY08 the loss, or migration, in print classifieds has primarily occurred at the metro (-15%) and suburban (-28%) levels. Real estate is the largest migration opportunity and here REA Group ((REA)) and Fairfax's Domain online will best benefit. The broker is more comfortable about REA's depth price increases and favours this stock (Neutral) above Fairfax (Underweight).

What is apparent to JP Morgan is the deflationary impact from the migration of advertising dollars online, particularly in regard to employment. Despite the strong growth in online advertising, total classified expenditure has declined by around a compound 8% over the past five years. Given the migration of job classifieds, government policy changes on job advertising and weak employment conditions JP Morgan estimates the print employment classifieds market has fallen below $100m for the first time.

Churn eased substantially in the electricity retail market in September, with 20,000 fewer accounts switching suppliers compared with August. At 19.9% the churn rate is below 20% for the first time since February 2012. Underpinning the ebbing in churn is the cessation of door-knocking by the large players, as well as diminished activity in the second tier of the market. Despite the fall, the local market's churn rates remain well above other comparable markets overseas and other industries such as telcos and insurance. The sharpest contraction was registered in NSW, as churn dropped to 15.5%, a 20-month low. Victoria is still the national market's most competitive region, with churn around 700 basis points higher. JP Morgan thinks a number of factors are coming into play which should bring some relief to the electricity retail market. It may be too early to call a sustained decline in churn but there is sufficient evidence that the competitive intensity is easing.

The Australian telco sector revenue went backwards in FY13 (-1.3%). This is the first time a decline has been witnessed since FY06, according to JP Morgan's estimates. Mobile was the cause (-2.5%) and not fixed products (0.1%). There were mitigating circumstances behind the drop in mobile spending but the broker observes growth in subscriptions has become more skewed to lower-revenue categories such as wireless broadband. This could mark an inflection point for mobile revenue growth. With handset and wireless broadband subscriber growth maturing, revenue upside from here will depend on price, and to some extent on subscribers which do not use too much scarce capacity.

Telstra ((TLS)) remains well placed and grew its share of spending in FY13 for the second year running. To JP Morgan this is a signal of the company's ability to extract value from the consumer appetite for network quality. The question is whether the others can do the same in such a way that grows revenue. Telstra also benefited from the rebound in fixed broadband revenue and increased its share in the product. JP Morgan retains a Neutral rating on Telstra on the grounds that not much more can go right, even if there is no sign of much going wrong.

In the case of Optus ((SGT)) the company has been prioritising margin over share but the broker suspects that, if it loses too much revenue, then the trade-off will simply not work. TPG Telecom ((TPM)) had another good year for share growth and this underlines how well the business is run. Nevertheless, in JP Morgan's view, the current valuation understates the threat to margins from the NBN. iiNet ((IIN)) faces a similar challenge from the NBN but here the operating momentum is weaker with the broker noting a slippage in subscriber share.
 

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article 3 months old

Will Advertising Return To ‘Normal’ Soon?

-Ad outlook turns more positive
-TV, radio most rewarded
-Share price upside for some
-Potential media reforms?
 

By Eva Brocklehurst

Australia's federal election has now passed and advertising agencies can get on with doing more mundane things, like selling product. The election spending provided a welcome injection of funds into the market and Citi notes feedback from management and industry players has turned incrementally more positive for the second half of 2013. Lead indicators of advertising spending continue to signal improvement in advertising conditions, with consumer confidence moving higher, equity markets rallying and interest rates supportive.

JP Morgan believes the FY14 outlook is dependent on whether the positive trend in the advertising market continues now the election has passed, or whether weakness returns. Most traditional media companies under coverage gave a relatively solid outlook for advertising in the first half of FY14 after the FY13 results but, in order to become more positive, the broker wants business and consumer confidence to improve sustainably. It remains to be seen how well companies which pulled advertising in the lead-up to the election come back with their purses open.

JP Morgan notes advertising data continued to strengthen in FY14 although, excluding political advertising, the underlying FY14 market is flat. August bookings were up 6.1% but political increased by 331%, with strong increases from metro TV (8%), regional TV (12%) and digital (19%). Given the subdued start to FY14 by a number of major advertising categories such as retail, banking, finance and motor vehicles, and the one-off impact from the election, underlying conditions are considered still weak.

August was the third consecutive month of growth in advertising bookings and both JP Morgan and Credit Suisse note TV and radio benefitted most. Metro newspapers failed to benefit from the increased political spending and the declines continued. Newspaper bookings declined by 15% in August, while magazines were down 18%. Credit Suisse observes it was the fourteenth consecutive double digit contraction in metro advertising spending in newspapers. Regional newspaper advertising decline moderated to be down 2% in August. In contrast, digital advertising shows no signs of slowing, up 19% in August. Credit Suisse notes growth was evenly split between traditional display and new platforms such as mobile and online video.

Goldman Sachs has made no change to forecasts in the wake of the August ad data. The broker finds the last few months have produced a flattening in underlying growth although the latest consumer sentiment survey indicated a promising 4.7% improvement in September. The broker would rather wait and see how the ad market performs in September and October, to exclude the election babble and get a better gauge for the December quarter and first half of FY14. Currently Goldman is expecting the underlying ad market to deliver a flat first half and more modest recovery in the second half of around 3.2%.

Citi does not expect all media players to be equally rewarded in the improving outlook. Forecasts already reflect a recovery in advertising for FY14, but trading multiples are lagging in the broker's view. Category battles are looming ahead of the December quarter and October and November will be critical for sentiment. TV advertising is expected to rise 6.8% and radio 4.8% in the second half, outperforming on a relative basis to other media, alongside continued robust growth in online advertising, driven by search and mobile.

The broker expects share price upside to come from multiple expansion on the back of renewed confidence in the outlook. The stocks on Citi's radar are Seven West Media ((SWM)) and Southern Cross Media ((SXL)). The broker also likes the quality assets of Carsales.com ((CRZ)). Ten Network ((TEN)) is seen in turnaround mode while the broker is Neutral on Fairfax Media ((FXJ)) and APN News & Media ((APN)). The Sell rating on SEEK ((SEK)) is a valuation call as the stock is seen priced for a material improvement in volume.

Credit Suisse likes Seven West as a strong story in the traditional media sector while Ten is viewed favourably for leverage to a recovery in ratings and advertising. Carsales.com has strong exposure to digital advertising which the broker observes is maintaining strong momentum throughout the current cyclical downturn. JP Morgan retains a preference for the Free-To-Air category and is Overweight on Seven West and Prime Media ((PRT)) while Underweight on Fairfax because of the current negative revenue trends and a view that, excluding Domain/Stayz, the company's digital assets lack strong growth. The broker is also Underweight on SEEK, given a view that 2013 employment volumes continue to look challenged.

JP Morgan has also looked at what the new government might have in the way of media regulatory reform. Reforms are more likely in FY15 and, according to JP Morgan, could include scrapping of the 75% reach rule, which could trigger industry consolidation and a review of the FTA licence fee, currently 4.5%. The former is considered quite likely with minimum local content requirements attached. A parliamentary committee has supported removal of the rule with the view that it had become redundant with the advent of the internet and converging media. The support for the scrapping of the rule relies on legally enforceable undertakings on local content requirements in regional Australia. The most likely beneficiaries of the reach rule being scrapped are Prime Media and Southern Cross, in the broker's view. 

The licence fee reduction cannot be ruled out but is considered less likely. Should it happen, JP Morgan expects there would be further legislative requirements such as increased Australian content obligations. In the broker's modelling, a 0.5ppt and 1.0ppt reduction in the fee means FY15 earnings estimates rise by 2% and 4% respectively for Seven West while for Ten estimates rise by 6% and 12% respectively.
 

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article 3 months old

Weekly Broker Wrap: Telematics, Media, Broadband, Wealth and Transport

-Telematics take up likely to be slow
-What's likely on media reform agenda?
-Broadband returns decline, mostly for Telstra
-What issues ahead for diversified financials?
-Picking the best in subdued transport sector
 

By Eva Brocklehurst

What is telematics? Morgan Stanley has a survey which shows that 20% of Australian motorists are ready to give telematics insurance a go. Telematics measures how, when and where you drive in order to price insurance more precisely for the individual. The insured connects a BlackBerry-sized device to the car and that connects with GPS and mobile networks. All cars made from 2000 onwards are capable of telematics. The device can track location, and driving behaviour such as accelerating and braking as well as swerving and lane-switching. An actuarial logarithm then translates this data into a behavioural risk score. Presto! You're measured for insurance.

Morgan Stanley observes that, unlike the UK where the market is three years old, Australia does not have widespread market pricing failures that would accelerate the adoption of telematics. Moreover, in the US and UK insurance combines bodily injury and motor, making the economics more compelling. Telematics has a 0.6% share of the UK market and in the US, where penetration is higher, it's estimated at 2-3%. So it's not likely to take off like a rocket.

Morgan Stanley thinks that once telematics gains initial acceptance here it will fuel its own growth as community rating systems break down. The insurer absorbs the costs of the device which could cost $100 but Morgan Stanley thinks the economics make sense on a policy over $900. Telematics calls for more underwriting and more data handling, including the cost of connecting to a mobile network. The potential to bundle with CTP green slips would make it even more attractive. The benefits for insurers include the fact that less risky drivers are likely to select telematics first, and there'll be higher retention of such customers once they're "connected". Morgan Stanley thinks, eventually, car manufacturers, or telcos for that matter, risk displacing direct motor insurers if they do not enter this market. While the analysts at Morgan Stanley think this option is inevitable it is unlikely to grow fast. They estimate the current market potential is around 7%, but expect this to rise as technology gets cheaper and major insurers get involved.

The change in the federal government has caused JP Morgan to put a spotlight on potential media regulation reform. Such reforms are more likely to occur in FY15. The potential list includes the scrapping of the 75% reach rule and a review of the 4.5% FTA licence fee. The scrapping of the 75% reach rule is likely to be a trigger for regional and metro consolidation in the industry. In June a parliamentary committee supported the removal of the rule. The committee was of the view that the rule was becoming redundant with the advent of the internet and converging media. JP Morgan considers the most likely beneficiaries of the scrapping of the rule would be Prime Media ((PRT)) and Southern Cross Media ((SXL)). In the case of the potential review of the Free-To-Air licence fee, JP Morgan rates a reduction as a one-in-three chance.

In a speech to parliament earlier this year the now Minister-elect for Communications/Broadband, Malcolm Turnbull, noted that Australian FTA fees were relatively high by global standards. Should these fees be reduced further, JP Morgan would expect further legislative requirements for FTA stations, such as increased Australian content obligations. Modelling for a 0.5% and 1% reduction scenario, the FY15 earnings estimate for Seven West Media ((SWM)) rises 2% and 4% respectively. For the Ten Network ((TEN)) it rises 6% and 12% respectively.

Australian telcos may have attractive dividend yields of 5.3% for FY14 forecasts but Morgan Stanley thinks the 10-year government bonds at 4% offer a justifiable alternative. Slowing Free Cash Flow growth and the decline that's expected in broadband industry returns underpin the broker's Underweight call on Telstra ((TLS)). In contrast, NBN-driven regional share gains should see increasing returns for the likes of iiNet ((IIN)) and the broker is Overweight on that stock. Profit taking has been dominant in the telco sector recently but Morgan Stanley still views iiNet, TPG Telecom ((TPM)) and Singapore Telecom ((SGT)) as attractive.

Why does Morgan Stanley think Telstra's returns will decline? Telstra's competitors have new mobile pricing plans which could see a potential change in market share and this is yet to be priced in by the market. Based on the broker's analysis these are not domestic price decreases, so a seven times EV/EBITDA multiple is still applied to Telstra's mobile business, in line with global peers. Changes to international roaming fees are one genuine change to the industry, which could inspire consumers to move away from Telstra. Morgan Stanley expects Telstra to gain 0.5 percentage points of mobile market share in FY14. 

What the broker finds a major problem with is the market pricing in declining returns for all players. Broadband industry returns are set to decline, yet smaller ISPs, such as iiNet are expected to increase returns and take regional market share. Hence, Telstra's price/earnings ratio should contract to 14 times from 15 times on slowing cash flow growth, in the broker's view. The company's 3-year FCF compound annual growth rate should slow to 7-8% from 12-15%. Historically this measure is a predictor of multiples expansion and, hence, a slowing rate means multiples compression.

Citi has changed some calls on the diversified financial sector in the wake of reporting season. The broker lifted ratings on Perpetual ((PPT)) to Neutral and dropped Henderson Group ((HGG)) and IOOF ((IFL)) to Neutral. The broker became significantly more positive on Challenger ((CGF)), lifting it to Buy, following the best annual result in a very long while.

What has Citi deduced from the results overall? Equity market performance is still key to the sector performance with Henderson, IOOF and Perpertual earnings strongly leveraged to markets. ASX ((ASX)) and Computershare ((CPU)) are positively leveraged to trading and corporate actions. Citi maintains Computershare is the most leveraged it has ever been to short-dated interest rates. Despite the low interest rates, annuity sales momentum also looked strong in June and continued into July and August. While not out of the woods, the broker suspects funds management may be past a turning point.

IOOF has revenue pressures, including platform margin pressure, but cost control is a mitigating factor for Citi, even if IOOF is unsuccessful in its bid for Trust Co ((TRU)). Counter bidder Perpetual is relatively expensive, but Trust is seen as a worthwhile accretive acquisition. Meanwhile, ASX is considered relatively safe but unexciting. There is little sign of IPO or secondary capital raisings picking up materially, and new initiatives such as collateral management and OTC clearing are not expected to make a substantial difference for some time. Derivatives volumes did rise in FY13 but, in Citi's opinion, if interest rates are more stable then these too may subside.

Soft economic conditions and slowing resources activity meant a challenging end to FY13 for the transport industry. CIMB notes growth was below that recorded in the first half for all stocks except Toll Holdings ((TOL)) and Qantas ((QAN)). Toll was cycling a weak result in the second half of 2012, while Qantas benefited from an accounting estimates change. Overall, the airlines were hit the hardest as a combination of excess capacity in the domestic market and weak demand affected yields. Logistics operators, such as Toll, Brambles ((BXB)) and Qube Logistics ((QUB)) faced sluggish consumer demand, while Asciano ((AIO)) and Aurizon ((AZJ)) faced a softening coal market. All this is expected to persist in FY14, making earnings growth a challenge in the year ahead.

Qantas and Virgin Australia ((VAH)) have the most risk going forward because of excess capacity in the market and soft demand, according to CIMB. Toll and Qube also have risks, given the continued weakness in the broader economy and their exposure to the resources industry. Less risky are Asciano, Aurizon and Brambles. Brambles was re-rated Outperform at the FY13 result as CIMB thinks valuation multiples are now more reasonable. The broker's other key picks are Asciano, for its double-digit earnings growth profile combined with attractive valuation multiples, and Qantas, where there's an opportunity to add some cyclical risk to the portfolio with limited downside. CIMB finds downside risks continue for Virgin Australia while Toll and Qube are starting to trade above fair fundamental valuation.
 

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article 3 months old

Online Winning Election Ad-Spend

-Political ads up strongly
-Online focus for politicians
-Digital continues to grow ad share
 

By Eva Brocklehurst

Advertising momentum appears to be subdued but did grow in June, driven by increased political spending. Agency advertising spending grew 1.8% year on year in the quarter which compares with a 2% decline in May and 1% growth in April. The mainstay was political advertising, which has more than doubled year on year. Wonder why. Outside of election-related spending, soft advertising is expected to persist, probably through to September, or until after the federal election. Then, a pick-up is expected to compensate for the reduction in political campaigning. By some, but not all brokers.

JP Morgan has drawn on industry feedback to suggest the election will offer an advertising blip, as always, but thereafter subdued conditions will reign again through the rest of FY14. The broker has cut its ad-spend growth forecast for the period to 1.3% from 2.7%.

Meanwhile, what stands out for analysts is that print has failed to be a beneficiary of the increased political advertising. Politicians, it seems, are increasingly paying attention to courting voters either online or on TV and radio. Online advertising spending grew robustly, by 24%, and continues to offset large declines in print media as newspapers and magazines fell 22% and 25% respectively in June.

The digital share of political advertising spending reached a record high of 28%. While the largest share of advertising went to TV, 35.6%, digital procured the largest increase in terms of government dollars spent. Goldman Sachs thinks this is indicative of a trend of fragmentation in advertising, even on the political front. It remains to be seen whether fragmentation will lead to lower election ad spending this year against previous election years, given that digital advertising tends to be less expensive than other media, particularly TV. This notwithstanding, the trend has not stifled overall government advertising spending in the June quarter.

Free-To-Air TV advertising was the stand-out because there was a strong slate of sport and reality programming in June. Both FTA and pay TV also benefitted from the increased political ad spending. Total TV advertising spending grew 5.7% in the year to June. Pay TV ad share has doubled to 12% over the past six years but remains below its 20% share of commercial viewing. Radio advertising grew 8% in June while the outdoor sector was down 7%.

Retail, the largest advertising category, fell slightly (2.7%) in the June half. Entertainment also fell 6.6%. Automotive advertising has overtaken finance as the second largest category and grew 4.5%. Other categories which rose included travel, up 2.7%, pharmaceuticals, up 18.7% and media up 5.0%. Goldman Sachs has observed that gambling advertising growth was solid. Spending on gambling advertising on TV grew sharply over the last 12-18 months but the trend has now slowed. Goldman expects advertising market growth in 2013 of 0.7% and stronger but relatively subdued growth in 2014.

What does this industry statistical data indicate for certain stocks? UBS has cut regional newspaper growth estimates to down 10.2% for FY13, reflecting commentary emanating from Fairfax Media ((FXJ)) and APN News & Media ((APN)). Fairfax remains the only Buy recommendation the broker has in the media sector. The stock stands out given the strength of the balance sheet and potential for upside earnings surprise. UBS thinks Fairfax is suffering as the market underestimates its ability to meet cost cutting targets. In the online space the broker prefers REA Group ((REA)) and SEEK ((SEK)). Seek is underpinned by a continued migration to online business from print. REA is considered to have the best earnings growth in the sector despite trading on a relatively high FY14 price earnings multiple of 28 times.

 In this environment Credit Suisse likes Seven West Media ((SWM)) as a strong micro story in the traditional media sector and Ten Network ((TEN)) for its leverage to a recovery in ratings and FTA TV advertising. Carsales.com ((CRZ)) is also favoured as it has strong exposure to digital advertising which is maintaining strong momentum throughout the current cyclical downturn.

Goldman  has a preference for Carsales.com as well as SEEK. The broker's least preferred stocks are Fairfax, APN News & Media and Ten Network.

JP Morgan, who is expecting weak post-election spending, is Overweight Seven West and Prime Media ((PRT)) and Underweight Fairfax and Seek.
 

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article 3 months old

Bears Seek Out SEEK

-Bear case for employment classifieds
-Citi sees shares priced for recovery
-Upside potential from other avenues
 

By Eva Brocklehurst

Seek and you shall find it's bearish. A deteriorating jobs market spells difficult times for SEEK ((SEK)). Online employment advertising volumes are depleting as economic activity flattens in Australia.

SEEK's core business is online employment classifieds in Australia and New Zealand and it is the leader in Australian online recruitment. A key measure of the health of the job market, the ANZ job ads series, has been in decline since September 2012. ANZ internet job ads were down 18% in June and down around 17% in the first half of 2013. Moreover, SEEK's own new job ads data highlights weakness in the key resource states of Western Australia (down 25%) and Queensland (down 27%) in the first five months of 2013. JP Morgan forecasts a 15% volume decline for Seek in the second half of 2013. Citi has also found the downtrend in employment ad volumes has accelerated. Citi believes ad volumes will stabilise at current levels but this implies a fall of 5% in FY14. The broker expects employment to recover in FY15, forecasting 10% ad volume growth. 

The volume of employment advertising has been highly correlated with changes in the unemployment rate. Following the trends of employment in previous cycles, Citi believes the bottom in online employment volumes is around 90,000 ads per week and this correlates to an unemployment rate of 6.5%. This could be more bearish than is the case, as Citi's economics team forecasts the unemployment rate to peak at 5.9% in mid 2014. Last month, BA-Merrill Lynch focused on unemployment expectations, with a base case for an unemployment rate of 6.75% by early 2016 and a bear case of 7.5% by mid 2016. This broker has pushed out expectations for economic recovery domestically by two years and believes the market is expecting a recovery way too soon. Merrills' earnings forecasts for SEEK are therefore some 9-15% below consensus and the broker has an Underperform rating.

SEEK advised that the second half earnings should be moderately higher than the first half. This implies FY13 net profit of $140-142m. JP Morgan's forecasts are lower, at $135m. The broker maintains an Underweight view because the outlook is challenging for online employment while the decline in employment print classifieds has accelerated and is likely to reduce the remaining market. Citi has made the greatest downgrade to FY14 earnings forecasts and expects net profit around $149m for that year. The broker has downgraded SEEK to Sell from Neutral as, while there is modest earnings growth in coming years, the shares already appear priced for a recovery and are trading above fair value.

SEEK also operates online training courses and has acquired stakes in learnings businesses IDP and Think. It has majority stakes in a number of international online employment businesses including China, Brazil, Mexico and South East Asia. From these other sources is likely to come any upside risk to the overall bearish view, in JP Morgan's opinion. Last month UBS noted the company's acquisition of a 25% stake in One Africa Media, the largest online classifieds in the continent with a presence in Nigeria, Kenya and South Africa. The deal was not expected to affect current earnings estimates but UBS believes it is a solid strategic move with longer-term importance.

There is a glimmer of hope in all this weakness. Last month CIMB reviewed the stock and chose to retain the Outperform rating. The reason for this was that about one third of the company's earnings are now seen coming from offshore and the stock is increasingly exposed to movements in the exchange rate. CIMB expects the benefit of the decline in the Australian dollar will help to offset the downside risk from job advertising weakness. As a result, the stock is the  broker's top pick in the online classified sector on its multiples and longer-term growth profile.

Taking a look at ratings on the FNArena database there are quite mixed views totalling four Sell, two Hold and one Buy (CIMB). The consensus target price is $8.97, suggesting just 0.9% downside to the last share price. Over the past week the target has eased from $9.04. The range on targets is $7.56 to $11.20. 
 

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article 3 months old

Treasure Chest: New REA Model Offers Enhanced Upside

- REA dominant in real estate
- Superior growth to peers
- Business model change in the offing
- UBS upgrades earnings forecasts


By Greg Peel

Late in May, BA-Merrill Lynch downgraded REA Group ((REA)) to Neutral from Buy. Merrills problem was that REA’s FY14 PE multiple had reached 30x and its share price had reached a level representing a 30% premium to REA’s online classified peers. A premium is certainly deserved given REA’s superior earnings growth profile, suggested Merrills, but at close to $30 the shares had reached fair value in the analysts’ view.

REA Group, formerly Realestate.com, has had a stellar run, outperforming the market by 73% over the past twelve months. The stock price has more than doubled in that time. REA has established itself in a relatively short space of time to be Australia’s dominant online real estate classified advertiser, and one of a group of three who have managed to divert the “rivers of gold” once enjoyed by the likes of Fairfax Media and rival newspaper publishers, which, like many old world businesses, failed to pay heed to the online revolution occurring right in front of their eyes. REA has piped off real estate, Carsales.com auto, and Seek employment.

REA’s share of total of all real estate classified advertising came from nowhere to reach 26% in FY12. Merrills noted in May the company’s domestic price structure encourages advertisers to shift up to higher value listings which is likely to see growth sustained even without substantial price increases. The broker community simply does not have a bad word to say about REA, its revenue and earnings momentum, and its market share growth. Broker ratings simply reflect the perceived capture of value, and with Merrills downgrading in May, Macquarie earlier in May, and Credit Suisse back in February, REA now shows a full set of seven Hold (or equivalent) ratings from seven covering brokers in the FNArena database.

One of those is UBS (Neutral), but in a report today the UBS analysts have announced an adjustment to their valuation model to accommodate a change in business model REA Group is looking to implement. This sees UBS’ target price on REA jump to $29.30 from $19.75, although this brings the target to in line with the current trading price, hence no rating upgrade. Importantly, nevertheless, UBS has upgraded its earnings forecast substantially on the back of the new business model, which sees the analysts’ numbers rise to 7% above consensus for FY14 and 16% for FY15.

REA’s new plan is to lower real estate agent subscription fees as a sacrifice to drive a price per listing model with greater depth penetration across the residential and commercial segments, UBS explains. The analysts also expect REA will look to cross-sell real estate leads to “adjacent verticals”, such as telcos, pay-tv, banks, insurance companies and utilities. If the change is successful, UBS expects REA’s revenues and earnings will accelerate over the next three years.

Which is no small feat. UBS suggests REA’s lofty PE can be supported by a compound average growth rate in earnings per share of 21% per annum in FY14-17. The analysts’ rebuilt valuation model focuses on the company’s potential to leverage its dominant position, increasing its online real estate market share from 26% in FY12 to 65% in FY22. In that period, UBS expects online advertising as a share of all real estate advertising to grow from 40% to 90%. The 21% earnings growth rate will be supported by a 15% growth rate in revenues and an increase in margins from 53% now to 62% in FY17.

The result is forecast earnings increases of 7%, 18% and 27% from UBS for the period FY13-15, which feed the rise in target price. Notwithstanding such forecasts, the analysts note that further upside exists if REA can execute in Italy on its leads-based model.

The company is also sitting on $210m in cash, leaving room for M&A, which might be interesting when one considers that while REA controls 26% of the online real estate market at this point in time, that only represents around 3% of all online classified advertising spend.

 

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article 3 months old

Weekly Broker Wrap: Australian Banks And Other Bubbles

-Impact from Ford closure
-Aust dollar to go lower
-Bank yield rally could be ending
-Where are the asset bubbles?
-Election boosting ad spending
 

By Eva Brocklehurst

Whenever major employers close up shop there's repercussions for other businesses and sectors, which may not be obvious at first glance. Ford Australia's decision to de-camp from manufacturing in Australia by 2016 is a case in point. Ford will shut down its Victorian car building plants at Geelong and Broadmeadows. These facilities employ 1200 people. The decision has thrown the spotlight on the durability of the other car manufacturers in Australia - Toyota, with its factory at Altona, Victoria, and General Motors Holden with a plant at Elizabeth, South Australia.

The Australian real estate investment vehicle, CFS Retail Property ((CFX)), is the most exposed to the shopping centres that are near these plants. UBS estimates CFS has 10% of net operating income from centres exposed to these locations while Westfield Retail ((WRT)) has 1% of assets that are exposed, at Westfield Geelong. UBS is Underweight on domestic discretionary anchored malls, which includes CFS, Westfield Retail and GPT Group ((GPT)). The March quarter updates from retailers underlines the deteriorating operating metrics for shopping centres as a whole and increased unemployment in the above locations will make that worse. Westfield Group ((WDC)) is more immune, given exposure to improving US markets and an appreciating US dollar.

The economics team at UBS has reduced Australian dollar forecasts, revising the currency to US95c, from US$1.00, for end of 2013 and US90c, from US95c, by mid 2014. Westfield has increased exposure to US dollar earnings, to 30-40% in 2014 from 15% in 2011. UBS estimates a 10% movement in the AUD/USD exchange rate alters earnings by 3-4%. Admittedly, some of this growth may be offset by dilutive asset sales.

UBS notes the Australian dollar has suffered more than most during the US dollar's recent advance, which has occurred along with expectations the US Federal Reserve may reduce quantitative easing (QE). This has coupled with the Reserve Bank's recent lowering of the cash rate, eroding the Australian currency's yield advantage. Commodity price weakness is a factor. The risk of another seasonal drop in the iron ore price could be just the catalyst for the Australian dollar to go lower. This time capital inflows are not enough to balance this out and there is a likelihood the Australian dollar will "re-discover" its commodity currency roots.

One final cut to the cash rate is expected over the next few months. UBS suspects, even if the RBA does not move, the easing bias will be maintained until 2014. If the rate cut eventuates then this could further undermine the Australian dollar's yield advantage and lower the cost of carry for fresh short positions in the currency. Moreover, the bond market is already heavily bought by foreign investors and UBS suspects that, after three years of accumulation, FX reserve managers have hit their benchmark exposure levels to the Australian dollar. As the mining boom peaks, investment flows will be smaller on that front.

This doesn't mean there will be a complete exit. Reserve managers have a very long term investment horizon and the country's AAA status and strong fiscal position are still major attractions. There are also structural factors at play, with the shift into Australian dollar denominated assets part of a long-term transition to a multiple reserve currency system, in the analysts' view. Nevertheless, UBS notes with interest the sudden absence of bids from private wealth managers since the downside break with parity  to the US dollar. Support for the Australian dollar will come from improved GDP growth both locally and globally. Moreover, commodity prices are still expected to remain around double their historical averages, not consistent with a sharp correction in the currency below US90c.

Lower interest rates, the increasing rarity of Australia's AAA rating and favourable economic conditions have supported investment in Australian banks. Conditions should stay supportive but Citi suspects the yield rally could be at an end. The broker still has a Buy call on Westpac ((WBC)), ANZ Bank ((ANZ)) and Commonwealth Bank ((CBA)). It's just there's some risks to the rally looming. Rising interest rates are not an issue at present but any whiff of inflation would change that. Offshore, Citi expects interest rates/liquidity would tighten more so because of improved economic conditions and in this case monitoring the situation is paramount. All else being equal, a depreciation in the Australian dollar could result in higher interest rates and the sharp reversal in rates would pressure bank valuations.

Usually the market is sold off on global shocks. Beyond the direct influence on bank earnings, these shocks can lead to higher interest rates regardless of the level of the Reserve Bank's cash rate and a falling Australian dollar. Things to look out for on this score are further EU instability, sovereign debt problems, pandemics and adverse political or economic developments in  key trading partners. Shifting asset allocations are also a risk. To that end Citi flags the risk of infrastructure bonds in Australia, which may be seen as a substitute for bank shares and cash, particularly by retail/self-managed superannuation investors.

Macquarie thinks there may be an old fashioned "mortgage war" afoot. In a low growth environment competition returns to businesses that are generating higher than the group average return on equity. Of the majors, CBA and Westpac have stated they intend to target growth at system rates to stem market share loss. Here Macquarie thinks Westpac will have to do the most work, either dropping its standard variable rate, adjusting broker commissions and/or discounting more. A combination of these could cost 2-5% of earnings in FY14. The motgage broker channel may be the place to start. It is currently growing strongly in Macquarie's analysis and ANZ writes the most business this way.

Some advice on how NOT to invest from UBS. The broker defines an asset bubble as a valuation beyond the reasonable bounds of the fundamentals which could correct rapidly. On this basis there are five markets that fit this criteria. The main driver of bubbles is ultra-loose monetary policy. By pushing risk free rates to an unprecedented low level, central banks run the risk of creating a disorderly return to normal. The danger zone is when the central banks start to try and normalise policy. There are five candidates in the current circumstances for the bubble territory. These are: risk free rates - US treasuries, German bunds, UK gilts and Japanese bonds; credit; Asian real estate; emerging stock markets such as Indonesia, Philippines and Thailand; and Australian banks.

UBS finds Australian bank valuations are very stretched and the favouring of yield and good fundamentals should support them in the future. The trigger to a correction lies, as it does with most of the other four candidates, with any clumsy exit from the US Fed's QE policy. UBS' economics team in the US believes a scaling down of QE will happen in the first quarter of 2014. Despite this, other than a sell-off in risk-free rates after any QE exit, UBS does not think the Australian bank bubble will burst any time soon. Other potential risks are a downgrade to the sovereign rating, a housing market correction, trading book or funding issues, but these are unlikely.

US treasury yields are too low, as are German bunds. In UBS' opinion they should be closer to nominal GDP growth. Will the bubble burst there? Depends how well the Fed controls the long end of the curve. UK gilts are not as far from fair value and so may not be as problematic. In Japan, any sharp policy change after the elections in July may wield the big correction stick. For credit growth in both Europe and the US the analysts have been concerned for long time about the fact that liquidity vanishes in volatile periods. Therefore, here too the QE exit strategy is important. Asian real estate will suffer repercussions when QE is reduced as this will limit asset purchases and raise the cost of funding, notably Hong Kong real estate. UBS suspects the bubble may not burst with a QE exit in regards to emerging stock markets but many are expensive and relatively illiquid so there could be problems.

The federal election is on September 14. This will boost advertising spending in 2013, particularly on TV. Goldman Sachs estimate an extra $70 million boost to ad market spending in the second half of 2013. In fact, the longer lead up to this election has already produced more politically related advertising. The government has been increasing spending in digital areas at the expense of other media types. As digital spending tends to be less expensive this may mean lower political advertising spending overall. Goldman Sachs notes the key area of downside risk is mainly in print media. Ad market advertising is currently tracking 2-3% below the first half of 2012.

There are some differences this time. The early announcement of the election may mean some spending falls into the first half of 2013. More time to plan spending may produce cost effective campaigns too, as fewer ad spots are booked at high rates. Thus far, Goldman finds government advertising spending grew considerably in April and looks like lifting in May and June. Should total political advertising spending end up being weaker against previous years, it probably would be the result of more cost effective campaigning. Elections don't stop others advertising. Conventional wisdom has it that electioneering - elections usually happen in the third quarter - pushes other advertisers out to the fourth quarter, or pulls them forward to the second quarter. Goldman has found no basis for this and expects the extended election campaign will have no discernible effect on advertiser spending.
 

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article 3 months old

Ten Runs Hard But Comes In Third

-Soft first half TV earnings
-Cost cutting discipline welcomed
-Turnaround will be hard and take time
 

By Eva Brocklehurst

Ten Network Holdings ((TEN)), the unfortunate third sibling in commercial TV's free-to-air family, produced another weak earnings report, showing TV earnings down 38.5% in the first half. Brokers welcomed the discipline surrounding cost control but were less keen on the substantial risks ahead, as Ten seeks to turn fortunes around. Ten's TV revenue share was just 21% in the first half. Citi remarked that this is the lowest commercial share of any TV broadcaster in recent times. The previous low was set by Ten back in 2002.

In terms of the strategy, Macquarie found it a bit hard to fathom. Pursuing an older demographic - 18-49 year-olds - may make sense given the traditional 16-39 year-old demographic could erode because of a shifting use of technology, but it won't be easy. Macquarie said the previous management tried to do this by improving news and live sports and found it too hard. Moreover, Seven West Media's ((SWM)) Seven Network and the Nine Network are already entrenched in this space and have much more stable schedules. CIMB suspects the strength of competitor networks and the lack of a strong audience on which to build will make it hard to grab a sustainable share.

Even the potential gains in advertising from the election spending leading up to the September 14 poll are unclear, according to UBS. UBS views Ten as the biggest loser in a fragmented TV market, noting a turnaround will require content investment and time. Sports rights are not up for grabs, except for cricket, and local content is a multi-year strategy. Regarding the company's good cost cutting discipline, CIMB also makes the point that costs could start to rise again if the network is successful in bidding for a major sporting event, such as cricket. On this score JP Morgan believes it would be a good way to get a slightly older audience but is not hopeful. Nine has the first right of refusal and will be hard to budge. The broker also flags the fact that Ten's regional affiliation agreement with Southern Cross Media ((SXL)) expires mid 2013. Management did say they were negotiating "in good faith" with SXL and that was all they were prepared to divulge.

Citi thinks the worst may be behind Ten as the first half sustained a capital raising, an asset disposal, redundancies, loss of revenue share and change in management. A new, simpler structure should provide a clean slate going forward. The broker expects FY13 will be the peak in cash outflow. Citi had previously upgraded Ten to a Buy, reflecting better advertising, improved operational performance and cash profile. Execution risks are there but the broker believes Ten is set to do better. Citi expects TV advertising to improve in the second half and audience ratings to stabilise.

The beginning of Ten's second half (last month) coincides with the start of the official ratings season and launch of a number of key franchises such as MasterChef and Ten is confident costs (ex selling) for FY13 will show a 6% decline. Despite this, for BA-Merrill Lynch the company requires a sustained improvement in ratings trends before advertisers will provide more support and revenue share will lag ratings share in the medium term.

The only other Buy rating on the FNArena database is Credit Suisse. This broker thinks the company is heading in the right direction and the financial position looks better. Moreover, a cyclical uplift in TV advertising spending is not factored into the share price, in Credit Suisse's view. The Hold ratings number two as well - JP Morgan and Deutsche Bank. The remaining four are lined up to Sell. One of these, CIMB, thinks the stock will slip into loss in the second half as ratings and market share remain weak. Whatever the outlook, most brokers believe Ten has its work well and truly cut out to turn around in the medium term.

In sum, there are two Buy, two Hold and four Sell recommendations. The consensus target is 30c, which suggests 4.8% downside to the last traded share price. The range of targets on the database is 18c (Merrills) to 40c (Citi).
 

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