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Morningstar | So What There Is Radio Silence on Southern Cross Media?

There are fears Southern Cross Media may be left out of media sector consolidation, especially with the proposed Nine-Fairfax combination potentially cooling interest for the no-moat-rated TV and radio broadcaster.

If the concern is this will lead to a reversal of the 26% stock price rally since early April 2018, then we view this as misplaced. The recent performance merely brings Southern Cross shares to our AUD 1.30 fair value estimate on a stand-alone basis. Shares are trading at just 12.3 times our fiscal 2019 EPS estimate and still forecast to yield 6.0% fully franked on current prices.

This is before factoring cost-out potentials from management's recent decision to fully integrate Southern Cross' metropolitan and regional media assets. Improved operating efficiencies from such an initiative could coincide with monetisation from fiscal 2019 of recent radio ratings gains. For instance, 2Day FM in Sydney has increased its ratings share in 2018 to-date by 1.3 percentage points. Continuation of this momentum would render conservative our five-year EBITDA CAGR forecast of 1.8% for the metropolitan radio unit (a third of group earnings before corporate costs). Management commentary on these issues will be of utmost of interest come Aug. 23 when the group reports its fiscal 2018 results.

As for its position in a consolidating landscape, our intrinsic assessment has never been based on Southern Cross being an acquisition target. However, extensive radio assets spanning metropolitan and regional areas are likely to feature in the thoughts of traditional media entities looking to diversify, or for private equity looking to pursue a regional media roll-up strategy. Radio is a medium whose share of the Australian advertising pie has held at around the 8% mark for the past two decades. This is remarkably resilient in the face of digital disruption which has pummelled advertising share of newspapers (down from 42% to 7%) and TV (from 36% to 21%).