Australia | Apr 18 2008
By Chris Shaw
As concerns mount over a likely slowdown in the Australian economy those companies exposed to the advertising market are increasingly at risk of declining earnings, though both Deutsche Bank and Merrill Lynch take the view the radio advertising market is the most resilient market in any downturn.
This has implications for radio group Austereo ((AEO)) as the shares have been sold off by 44% since last November, a price fall both brokers consider is an over-reaction given the more solid nature of radio advertising. As a result both brokers have upgraded their rating on the stock to Buy over the past 48 hours, Deutsche from Hold previously and Merrill Lynch from its previous Sell recommendation.
Value is the primary reason as while both brokers have made minor adjustments to earnings estimates for the company to factor in any downturn the stock now looks cheap, particularly as it is trading well below their respective valuations of $1.85 and $1.93.
These are based on earnings per share (EPS) estimates of 14c this year and in FY09 for Deutsche and 13.5c and 12.9c respectively for Merrills, the broker noting its estimates are slightly below market consensus. While Deutsche now expects radio advertising growth of 1.6% in FY09 Merrills estimates the current market price for Austereo implies a 7% downturn, which it regards as excessive.
Deutsche agrees, pointing out there is still some upside potential from any increase in ratings where the group has enjoyed a strong start to the 2008 survey period with a modest increase in market share so far for the year. As well it suggests there is upside potential from a shift to a digital platform as this will present the group with opportunities to develop new advertising and program segments.
Risks remain and include an increase in costs or a stronger than expected downturn in advertising but both brokers take the view these are more than priced in at current levels. Their price targets suggest this as well, Deutsche putting an objective of $1.85 on the shares and Merrills slightly more aggressive at $1.95. The FNArena database shows an average price target on the stock of $2.08 and Thomson One Analytics shows a median target of $2.10, which suggests neither broker is being too aggressive with its forecasts.
(It may also indicate others still have to catch up with Deutsche and Merrills).
Shares in Austereo today are weaker in line with the broader market and as at 11.20am the stock was down 6c or 3.8% at $1.51.