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Southern Cross Media tunes into dividends

Lex Hall  |  01 Nov 2019Text size  Decrease  Increase  |  
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Investors seeking a company with stable earnings, healthy dividends and a sound balance sheet may consider tuning in to Southern Cross Media Group, says Morningstar’s Brian Han.

Southern Cross Media Group (ASX: SXL), the market leader in radio coverage, faces challenges but it is nevertheless trading at just 8.1 times to Han’s forecast fiscal EPS and is yielding a sustainable 7.4 per cent fully franked dividend.

Formerly Macquarie Group, the company is a four-star stock, trading at a 35 discount to Han’s fair value estimate of $1.30.

“In a widespread advertising downturn, all one can ask for is that Southern Cross maintains its share,” says Han. “We believe it is doing so.”

Han’s five-year forecast points to a “tepid” annual revenue growth rate of 1.2 per cent but he stresses that Southern Cross Media has managed to maintain a 30 per cent share of the radio advertising market despite unprecedented industry disruption.

“Southern Cross is not a "growth" company, but a stable earnings generator capable of producing reliable cash flow and returning it via dividends to shareholders,” Han says.

The company’s flagship media asset is Southern Cross Austereo, which claims to reach more than 95 per cent of the Australian population through its radio, television and digital assets.

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Led by the Triple M and Hit Networks, SCA owns 78 radio stations plus eight digital radio stations across metropolitan and regional Australia and represents an additional 34 regional radio stations.

It broadcasts 86 free-to-air TV signals across regional Australia with Nine Network, Seven Network and Network Ten’s programming.

Han says Southern Cross’s stability is anchored by the resilient radio advertising medium, which has achieved 4 per cent compound annual growth rate since 1997 and maintained an 8 per cent share of the advertising pie throughout that time.

“This is a remarkable feat in the face of unprecedented industry disruption. And Southern Cross commands a steady and market-leading 30 per cent share of that radio advertising market in the metropolitan space, and likely 40 per cent-plus share in regional areas.”

The radio business accounts for more than 80 per cent of Southern Cross's earnings, up from less than 70 per cent three years ago, boosted by divestment of the northern NSW regional TV asset in May 2017, Han says.

“This conscious effort to be more radio-centric is management's response to the structural threats posed by digital technology whose decimation of the TV and print media industries have been well-documented.”

The company’s other plus is its strong balance sheet. Its annualised net debt/EBITDA ratio stands at 1.8 times, comfortably below the 3.50 times covenant limit, Han says.

Bulls say

  • Southern Cross Media commands a solid position in the Australian regional television and radio space, and upside operating leverage may be significant when ratings recover.
  • The regional radio broadcasting business is especially resilient, generating about 60pc of its revenue from sticky local small and midsize businesses.
  • The metropolitan radio operation is one of only two national FM networks in Australian capital cities and boasts a significant audience base.

Bears say

  • The regional television operation has historically suffered from weak ratings of main content supplier Ten Network. The new Nine affiliation, struck in 2016, reduces reliance on Ten but comes with lower earnings margin.
  • The free-to-air television and radio industries are structurally challenged with proliferating alternative entertainment choices for consumers. Consequently, audiences are declining, and advertisers will increasingly follow eyeballs and eardrums elsewhere.
  • The company's margin could decline more than expected as costs for marquee content and on-air talent continue to escalate, putting further pressure on the balance sheet.



is senior editor for Morningstar Australia

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