Adjusting the View
Broadcaster Prime Media (ASX:PRT) released its full year numbers last week which continued to show that the company faces ongoing headwinds in the broadcasting market with ad revenues flowing elsewhere and declining audiences. Despite that, management is working on strengthening its balance sheet and we take a closer look at those results. We also update our views on the latest developments in the media sector.
What’s New and our View
In our last coverage of the media company back in February (FAT-AUS-861), we looked at its First Half 2018 (1H18) results which showed that the company is facing structural headwinds in its sector and squeezed by declining audiences, which are shifting towards subscription streaming services such as Netflix and declining ad revenues which have been moving towards Tech giants like Facebook and Google. This in turn has led to the broadcaster expecting a lower result in its FY18 outlook.
Today we’re focussing our review on company’s financials but prior to that we want to note our revised view on the company. Our initial thesis on the company back in 2014 (FAT-AUS-664) was predicated on the (i) TV ad market showing signs of a recovery while the company has a (ii) dominance in the regional markets of northern NSW, Gold Coast, Southern NSW, Victoria, Mildura and Western Australia. The company also (iii) doesn’t have to take risks on content considering its long-term relationship with Seven Network and (iv) a 8% dividend (since suspended).
However, with Netflix’s entry into Australia in 2015 disrupting the sector as well as attracting others (CBS planning entry by end of the year) not to mention the steady migration of ad revenue towards digital platforms has pressured broadcasters’ and other media toplines.
As a result of the headwinds, we are seeing a consolidation in the media space with a clear case coming from Nine Entertainment (ASX.NEC) and Fairfax Media (ASX.FXJ) setting a possible precedent.
We believe that Prime Media (ASX:PRT) remains a potential acquisition target although we stress that we are not holding the stock purely on this ‘hope.’ Our decision to maintain a hold on the stock is also not based on blind faith, or the aversion to ‘cutting a loser.’ Prime is continuing to make steady progress in strengthening its financial position as well as keeping expenses under control amidst declining revenues. We therefore retain a Hold on Prime Media.
FY18 Interim Results (ended 30 June 2018)
Moving on to results, and starting from the headline numbers for the FY18 Prime Media reported revenues of $219.16 million which was lower by 8.7% year-on-year. Management noted that this was a due to a tough comparator (2016 had Olympics) while the Gold Coast Commonwealth Games broadcast improved audiences and revenue in the second half, advertiser spend in the Commonwealth Games was materially less than the Rio Olympic Games due to fewer days of competition.
On the plus side though, was that the company still maintained the lead in terms of market share reporting a 41.9% result though the figure was lower than last year’s 43.8% but that was due to a boost from the Rio Olympic Games. Looking at the year prior to the Olympics and this is in fact a 20 basis point upgrade.
Source: 29 August 2018 Company Presentation
Moving on, with rising content costs and declining audiences and ad revenues, Gross Profit Margins contracted year-on-year and now down 177 basis points to 45.8% at $100.31 million.
Going forward, as we’ve noted above, it seems that the operational conditions for the media sector are likely to remain difficult, with the aforementioned margin squeeze while operating expenses are expected to tick up due to the inclusion of the new spectrum licence tax that was waived in prior years.
As such we already see impact of this in operating expenses which increased 7.6% year-on-year to $64.6 million. All of the increase came from higher broadcasting and transmission costs which went up 14.7% year-on-year to $42.24 million but were partially offset by lower administrative and marketing expenses of $12.74 million which fell 3.7% year-on-year.
On the other hand the difficulties in the sector has also lead to management reporting a one-off non-cash impairment of television broadcast licences of $51.69 million
to reflect the ongoing decline of regional free-to-air television advertising markets and increasing programming costs. Combined, this led to an operating loss of $15.97 million compared to last year’s $54.13 million profit.
However, adjusting of this one-off (and subsequent deferred tax liabilities), “core” earnings should amount to $25.3 million as reflected in the graphic below. Admittedly, this this is still lower (-28.9%) compared to last year’s adjusted core earnings of $35.6 million though it was a beneficiary of the Rio Olympics and a waiver of spectrum licence tax.
Source: 29 August 2018 Company Presentation
Going forward, while headwinds are still present, management notes that they will suspend dividend payments to focus any surplus funds to reduce interest bearing debt and strengthen the company’s financial position.
In fact, net interest-bearing debt this time around has been reduced by $22.16 million compared to June 2017, to $14.79 million. This reduction in debt led to finance costs improving (lower) by 37.6% year-on-year to $1.58 million. The prudent levels of gearing, and high interest cover give us a strong degree of confidence about Prime’s financial stability, and ability to weather current headwinds.
Source: 29 August 2018 Company Presentation
Moving on back to operational results, the one-off impairment charge led to a tax benefit of $5.33 million for the year as it released a deferred tax liability of $15.9 million arising from the impairment charge. Factoring all of the above, Prime Media (ASX:PRT) reported a consolidated loss after tax attributable to the members of $12.28 million which represents a decrease of circa $48.52 million.
Outlook 2019
Going forward though, with costs under control and one-off impairments out of the way, management is targeting a FY19 core NPAT of between $12 and $15 million. Although smaller year-on-year (40% to 50% decline) this includes a focus on strengthening the balance sheet further.
These estimates are quite conservative as it doesn’t reflect this summer’s cricket games coverage while also factoring in a more downbeat regional advertising sentiment. Going forward, we will provide coverage on the company’s upcoming trading update this 18 October.
Turning to the charts, and on the daily, the bearish moving average crossover present since November 2017 is suggestive of momentum to favour the downside (where the 50-day moving average red line crosses below the 200-day moving average green line). A breach of support at 25.5 cents is also bearish. In order for upward momentum to step up a notch, a sustained break above the 200-day moving average (green line) of 30 cents as dynamic resistance is required. Should this favourable scenario unfold, then this would improve the short-term technical landscape.
With reference to the monthly chart, the long-term downtrend remains largely at play. Support at the 2016 low of 24.5 cents has also ceded. In order for the broader technical outlook to strengthen, a decisive break above overhead resistance located at the 2009 low of 44 cents (as shown by the horizontal red line) is required. Should this occur, then momentum would be confirmed to have rotated upwards. For the moment the technical outlook remains challenged to say the least.
Summary
On a valuation front, Prime Media (ASX:PRT) shares are trading at a Forecasted FY18 Price/Earnings ratio of 3.8 times. This would imply a high level of market fear over Prime’s financial position and operating outlook. Given a high degree of interest cover, and falling debt, we do not believe that such a low valuation is completely warranted.
There is also potential for a merger in the works in light of Nine Entertainment and Fairfax Media likely setting a precedent.
We will continue to monitor developments going forward with an expected trading update to be provided in October 2018.
In the meantime, Prime Media (ASX:PRT) will remain held in the Fat Prophets portfolio.
