Morningstar | Value in Radio-Centric Southern Cross Despite Fuzzy Cyclical Signals
Shares in Southern Cross Media are trading at an attractive 29% discount to our AUD 1.40 fair value estimate per share.The recent stock underperformance may be attributed to cyclical concerns, especially the potential impact on advertising markets from weakening property prices. However, we believe our 2.9% revenue growth rate for the group (more than two thirds of group revenue in radio where Southern Cross is gaining ratings share) adequately accounts for the risk, and we maintain our 4.3% EBITDA growth for fiscal 2019. In any case, we are prepared to look through the near-term cyclical headwinds, especially given the solid balance sheet (leverage of 1.8 versus 3.5 covenant limit) which underpins the current 7.8% full franked yield.
Operationally, solid progress is being made with radio assets gaining ratings/revenue shares. For instance, in the all-important Sydney market, what used to be the struggling 2Day FM station has improved its overall ratings share to 5.9%, up from 3.9% at the end of 2017, with the critical breakfast slot now commanding 4.6% share versus 2.8% at the end of 2017. Management is also investing in the future via premium local-content podcasting, while admitting early defeat in challenging ventures such as regional outdoor advertising.
Structurally, Southern Cross is more resiliently placed than other traditional media, as radio is likely to maintain its 8% share of the advertising pie—a level it has achieved for the past two decades, despite digital disruption which has pummelled advertising share of newspapers (down to 7% from 42%) and TV (to 21% from 36%). Our confidence is supported by the medium's innovations to follow its ever-mobile listeners, via new products such as digital radio, podcasting and app-based services. Southern Cross' market-leading scale in the industry is such that it is better-positioned to monetise radio's resilience by investing in local content and selling the group's enviable national reach to advertisers.
According to CoreLogic data, Australian national dwelling values are down 4.1% on an annual basis to November 2018. The weakness is more pronounced in Sydney (minus 8.1%) and Melbourne (minus 5.8%). A prolonged weakness in the housing market could sap consumer confidence and impact advertising expenditures, including the radio and the regional TV markets where Southern Cross operates. This cyclical risk could be exacerbated by the likely absence in 2019 of one-off spending which boosted advertising markets this year, for example, financial services advertising (in response to the Royal Commission) and special event-related expenditures (Winter Olympics, Commonwealth Games, World Cup football). However, we remain comfortable with our 2.9% revenue growth forecast for Southern Cross in fiscal 2019, broken down into 2.0% for the metropolitan radio division and 3.5% for the regional radio/TV division. It is also worth highlighting that the group made a solid start to fiscal 2019, with September-quarter revenue up 3.5% year on year, tracking ahead of our full-year forecast.
As for the progress in radio ratings, Southern Cross' other radio properties are also enjoying higher ratings shares in 2018 to-date, compared with how they ended in 2017. For instance, in the afternoon drive-slot of Sydney market, 2Day FM increased its ratings share from 5.5% at the end of 2017 to 6.0% in the latest survey of this year, proving that "Hughesy and Kate" (poached from KiiS FM last year) are indeed funny after all. Continuing monetisation of these ratings gains may provide some buffer against overall radio advertising market weakness in the near term.
Finally, management's concerted efforts to be the leader in premium, local-content podcasting space could be worthwhile, if industry forecasts are to be believed. Podcasting currently only accounts for a 10% share of audio streaming audience in Australia, according to Infinite Dial Australia. However, its popularity is increasing at such a rate that PwC is forecasting the market to reach AUD 47 million by 2020, up from around AUD 17 million currently. While that is not material now, continued growth at such a trajectory, coupled with Southern Cross' investment to become the pre-eminent house of premium local content in the space, could make podcasting a valuable additional revenue stream longer term for the group.
Southern Cross Media Group is engaged in the creation and broadcasting of content on free-to-air commercial radio (AM, FM and digital), television and online media platforms across Australia.
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