Australia | Jun 16 2008
By Chris Shaw
Last year was almost a perfect one for TV networks in Australia as the
economy was still growing strongly and the Federal election meant there
was plenty of advertising to go around. But six months on and things
have clearly changed as Ten Network ((TEN)) last Friday surprised the
market by lowering earnings guidance, with management citing a tougher advertising market as the principal reason for the shortfall.
While the group delivered a 3Q EBITDA (earnings before interest, tax,
depreciation and amortisation) result of $38.2m, which Macquarie notes
was in line with expectations and Credit Suisse suggests showed some
good results in terms of cost control, it was the downgrade to full
year guidance that saw the share price sold-off.
Management has indicated full year EBITDA from the group’s television
division is likely to come in around 10% below last year’s $237 million
and this implies a final quarter result of around $16 million, down
from a little over $53 million for the same period last year.
As Deutsche Bank points out, the problem for Ten is a combination of
lower ratings as flagship programs such as Big Brother struggle and
reduced advertising spending generally, with last year’s advertising
spending during the election also creating tougher comparables for this
year. The other problem Macquarie notes is the company simply doesn’t
have enough growth drivers in its business to lift earnings in periods
when advertising falls or slows, which implies the impact of such a
slowdown is felt more by Ten Network than some of its rivals.
Credit Suise makes a similar point as by factoring in a tougher
advertising market into its estimates for other networks such as Seven
Network ((SEV)), which is the only one likely to benefit from the
upcoming Beijing Olympics, and Consolidated Media Holdings ((CMJ)) the
earnings impact for both stocks is only minor and means no changes to the broker’s respective valuation or price target.
But for Ten the broker has slashed its earnings estimates by 15.7% this
year to 11.7c and in FY09 by 16.7% to 11.3c, while Macquarie has cut
its numbers by 13.7% and 24.2% respectively to 11.2c and 9.5c,
highlighting just how much more vulnerable Ten is in the current
environment. Consensus earnings forecasts for the company according to
the FNArena database now stand at 12c and 12.3c.
The other issue for Ten according to ABN Amro is the tougher
advertising market puts a recovery in earnings from the group’s Eye Corp outdoor advertising division at risk, as an expected reduction in start-up losses from the UK and US parts of the business is now less likely.
As a result the broker has also cut its estimates significantly, with
both FY08 and FY09 forecasts lowered by 17% to 10.9c and 10.5c. For the
broker the issue is even after the share price declines last week the
stock is still not cheap, as on its numbers the shares closed at a P/E
(price to earnings) multiple of around 16.9x FY09 earnings last week.
With few obvious options to lift growth the broker retains its Sell
rating.
BN Amro is not alone with such a view as the FNArena database shows seven
Sell ratings compared to just two Holds, with an average price target
of $1.89, down from $2.27 prior to the update and a median price target
from last week according to Thomson One Analytics of $2.17.
Shares in Ten Network today are weaker again in a mixed overall market
and as at 12.20pm the stock was 9c lower at $1.675. The stock has had a
trading range over the past 12 months of $1.57 to $3.02.