EUR 850.00 For Business Accounts Only

Morningstar | Solid Fundamentals Under the Southern Cross

Southern Cross Media's fiscal 2019 first-half performance showed solid underlying fundamentals. Underlying EBITDA grew 6% year on year to AUD 83 million, driving an 11% lift in underlying net profit after tax, or NPAT, to AUD 42 million. Almost all the operating earnings were converted to cash, with free cash flow amounting to AUD 66 million for the half, up 15%. This led to a further deleveraging of the balance sheet and net debt/EBITDA now stands at 1.7, down from 1.8 six months ago and at the low end of the company's 1.5 to 2.0 target range.

These figures appear at odds with the market pricing of shares in the no-moat-rated group, with the stock trading at fiscal 2019 price/earnings ratio of just 11 times while yielding fully franked yield of 6.9%.

Granted, there are areas to fret over. First-half underlying TV EBITDA slumped 9% to AUD 16 million, hurt by the loss of cricket coverage as a Nine affiliate in key regional markets and the generally weaker TV advertising market. However, this was more than offset by the 9% rise in EBITDA to AUD 78 million for the radio unit which now accounts for over 80% of group earnings before corporate costs. While the AUD 227 million impairment charge on the carrying value of TV licences is ugly, it has no cash flow impact and further highlights the appeal of being increasingly radio-centric. That focus on the relatively resilient radio industry is also opening potential growth avenues in the form of digital radio and podcasting audience monetisation.

As such, we remain positive on Southern Cross shares which are trading at a 20% discount to our unchanged AUD 1.40 fair value estimate. We see this as enough margin of safety for the risk of management acting on "balance sheet flexibility" in a big way. After all, the 68% dividend payout in the first half is low relative the 65% to 85% board policy and especially considering the underleveraged balance sheet.

In the radio segment, the 9% rise in EBITDA was driven by 4% revenue growth. The top line performance was aided by revenue market share gains and monetisation of growing digital radio audience in the metropolitan markets, as well as resilient performances in the regional operations. This, combined with flat staff costs and operating leverage, led to a 60-basis point increase in EBITDA margin to 34.4%.

In the regional TV segment, headline EBITDA fell 18% to AUD 15 million. However, adjusted for one-off adjustments, the figure was down 9% to AUD 16 million, partly hit by the loss of cricket coverage (AUD 4 million impact). The result could have been worse had Southern Cross not grown share in an otherwise weak overall regional TV advertising market.

There was nothing in management's outlook statement for us to change our forecast estimates. Fretting over month-to-month volatility in the revenue market is not a practice we embrace. Fundamentally, we see Southern Cross as a mid-single-digit operating earnings growth company over the long term, with exposure mostly to the radio medium--one that has weathered the structural headwinds better than most other traditional media.