Right now it appears virtually certain the archaic “Reach Rule” is about to fade into business history.
The Reach Rule is meant to limit control of commercial broadcasting licenses issued to a single entity to no more than 75% of the population of Australia. With heavy presence in metropolitan areas, the Reach Rule severely restricts the ability of broadcasters to increase their presence in regional and rural areas. The financial press is telling us that rule could go away in a matter of weeks, perhaps even days.
Another but less impactful regulation that could fall is the “two out of three” rule, which limits a single entity to control more than two of the three major media platforms – newspapers, free-to air tv, and free-to-air radio – in a single market.
The end result if both of these regulations are eliminated is likely to be a flurry of activity as commercial broadcasters scramble to expand to meet the growing threat posed by the internet and the rise of streaming content.
There has already been speculation in the financial media about a potential $2 billion merger between Nine Entertainment (NEC) and rival Southern Cross Media (SXL) that would somehow not violate existing regulations. The two companies admit they have been in talks but deny a major merger is in the works.
Although analysts at both Citi and CBA had earlier expressed doubts the removal of the Reach Rule would produce a round of M & A activity in the sector. The following one month chart shows the reaction.
Long term investors are well aware of the wisdom of finding stocks of companies in sectors benefiting from positive and growing economic trends, such as healthcare. Traditional media has been suffering from the digital revolution for some time and as yet none have found a way to withstand the headwinds. Over five years NEC is down 15% and SXL is down 20% while the ASX 200 is slightly positive at about 2%. Other major traditional media players have fared worse, with TEN and Seven West Media down over 80%, APN 65% lower and Fairfax 40% softer in the past five years.
While there may be some benefit to joining two traditional media providers like Nine and Southern Cross, we think potential investors looking to catch the wave would do well to look long and hard at the historical performance of our biggest media outlets. The following table includes six ASX media providers, listed by market cap. Note that Nine Entertainment is relatively new to the ASX, having gone public in December of 2013. The company’s first day closing price was $1.82.
(52 Wk % Change)
5 Year Earnings Growth Rate
10 Year Earnings Growth Rate
5 Year Total Shareholder Return
10 Year Total Shareholder Return
3Year Total Shareholder Return
Seven West Media
Southern Cross Media
Prime Media Group
With the exception of Ten Network (TEN) all these stocks pay fully franked dividends. We will begin with the smallest of the group, Prime Media Group (PRT) with a market cap of $202 million. The largest of the group by a wide margin is Fairfax Media (FXJ) with a market cap of $2.08 billion, almost twice that of second largest, Nine Entertainment at $1.16 billion.
Prime recently reported Full Year 2015 results which were solid, despite the challenges facing the industry. Revenue dropped slightly – down 0.2% – but net profit after tax (NPAT) rose 14.2%. The company also reduced its debt by 26.2% but management expressed “moderate” expectations for the first half of 2016, at best.
Prime is a regional free-to-air broadcaster serving the Capital Territory, Victoria, the Queensland Gold Coast, parts of New South Wales and all of regional Western Australia. The company also operates online websites delivering local content.
Investors may be enticed by the company’s current yield of about 12.3%, but there is another reason to like this company. Prime has ties to other major media players, including a joint venture agreement with privately held Win Television in Western Australia, broadcasting content from Ten Networks. Prime also collaborates with Seven West Media (SWM) on local news and current affairs programming in NSW.
Prime is one of very few media stocks to show a healthy profit in FY 2015. What about future growth?
The next table includes dividend yield, and growth forecasts for both dividends and earnings along with some valuation measures for all six stocks.
2 Year Dividend Growth Forecast
2 Year Earnings Growth Forecast
Seven West Media
Southern Cross Media
Prime Media Group
The current P/E for the Media Sector is 12.86 with an average P/B (Price to Book Ratio) of 1.52. Fairfax is the only stock with a higher P/E, although the Forward P/E is through FY 2016. The fact the Forward P/E covers only one year explains the apparent discrepancies with the negative earnings forecasts, which cover two years.
All the stocks are below the Sector P/B and Seven West and Southern Cross are trading below book value. The outsized 2 year earnings growth forecast for TEN is due to coming off a negative base. The reported earnings per share (EPS) for 2015 was a negative 1.9 cents per share, which is estimated to improve to a negative 0.1 cents per share in FY 2016 before going positive to 0.4 cents in 2017.
TEN owns three free-to-air television channels operating in Sydney, Melbourne, Brisbane, Adelaide and Perth, as well as a digital platform called Tenplay. The company’s Full Year results were disappointing and management cited the key challenge facing the entire sector – increasing competition for advertising revenue.
For FY 2015 TEN’s revenues rose 4.5% but profits showed the $164 million loss posted in FY 2014 almost doubling to this year’s loss of $312 million. The company had planned its second capital raise of the year to deal with its debt of approximately $158 million, with only about $14 million in total cash. On 22 October the ACCC (Australian Competition and Consumer Commission) federal regulators approved a 15% stake sought by Foxtel, the cable operation of News Corp. The $77 million raised will go towards debt reduction.
Fairfax Media (FXJ) is largely a publisher of news and entertainment in print and digital formats. The company’s iconic newspapers include The Sydney Morning Herald, The Age and The Australian Financial Review. Fairfax also holds a majority interest in the Macquarie Radio Network, listed on the ASX with the code MRN. In addition, Fairfax operates in regional community media, with print newspapers and digital outlets in about 160 communities across Australia.
On 5 November the Fairfax CEO issued a trading update during the company’s Annual General Meeting (AGM). In short, the company sees advertising revenues as problematic due to “ongoing structural challenges”, as well as weak consumer confidence.
Fairfax has the lowest gearing of any stock in the table at 14% and has more total cash on hand as of the most recent quarter – $342 million – than total debt – $293.2 million.
Nine Entertainment (NEC) operates in two segments – Television and Digital. The Nine Network broadcasts in Sydney, Melbourne, Brisbane, Perth, Darwin, and Adelaide as well as in regional areas in New South Wales. The Digital operations include premium content websites. In January of this year Nine and Fairfax launched a joint venture subscription video on demand service called STAN.
On 5 June the company issued a trading update, advising it was lowering its earnings guidance due to “softer than anticipated Free-To-Air advertising.” Full Year 2015 Results released on 27 August showed a 2.9% decline in NPAT but a 2.6% rise in revenue. Earlier this year Nine Entertainment won the rights to broadcast the National Rugby League, a move management describes as being “transformational.”
Seven West Media (SWM) has four operating divisions – Television, Newspapers, Magazines, and Other Businesses and Ventures. Like every one of the stocks in the table, Seven West advertising revenue is at risk as more and more people are moving to the Internet for news and general interest information. Although the company has a variety of digital offerings, including Yahoo7 Finance, its major sources of revenue remain in Television, Magazines and Newspapers. However, the company has launched its own subscription based streaming service, Presto Entertainment, in conjunction with Foxtel.
In the 25 August release of Full Year 2015 results, profit declined 11.5% and revenues dropped in all three major operating areas. In addition, management expects earnings before interest and taxes (EBIT) to drop between 5 and 10% in FY 2016.
Southern Cross Media (SXL) is yet another media stock struggling to find a place in the digital world while still relying on Television and Radio broadcasting for its major sources of revenue. The company operates radio and television broadcasting outlets in regional and metropolitan areas throughout Australia. Full Year 2015 results followed the pattern of the other media stocks in the table. Revenues fell 4.2%; earnings before interest, taxes, depreciation, and amortisation (EBITDA) fell 9.2% and NPAT rose 3.5% -from a FY2014 loss of $292 million to a smaller loss of $284 million. The company took some one-offs in 2015, dragging NPAT to an 18.6% decline.
Regulatory changes may provide a temporary reprieve from the onslaught of the massive movement of consumers away from traditional media. Right now experts tell us older viewers are still watching commercial television, but younger viewers are going elsewhere, to the likes of YouTube, Netflix, and Facebook.
With newly launched subscription streaming services to compete with Netflix, Nine Entertainment’s Stan and Seven West’s Presto make these companies worth watching.