We recently reviewed HT&E (ASX:HT1) in order to assess whether the re-rating in the share price since the release of interim results in August is sustainable. To this end, we consider two factors that are likely to be the key drivers for the share price: The outlook for the domestic radio market and the potential for capital management.
HT&E Ltd (Here There & Everywhere) was previously APN News & Media, after a change in the Company name in May 2017. Following the divestment of the Adshel outdoor advertising business in September 2018 to ASX-listed Company oOh!media, HT&E’s main asset is the Australian Radio Network (ARN). It is a leading broadcaster across Australia. ARN’s stations broadcast across three core brands: The KIIS Network, The Pure Gold Network, and The Edge. KIIS is the major brand, with the KIIS network comprising KIIS 1065 Sydney, KIIS 101.1 Melbourne, 97.3 Brisbane, Mix102.3 Adelaide and 96FM in Perth.
ARN accounts for over 85% of group revenue. The other major asset is an outdoor advertising business in Hong Kong (Cody), which undertakes billboard, transit and other outdoor advertising.
Can HT&E overcome challenging conditions in the radio market?
Financial results for the six months to 31 December 2018 (1H19) highlighted revenue pressure. This was underpinned by ARN revenue falling 3.8% and underperforming the 2.2% decline in the overall radio market.
In its 1H19 results release, the Company commented that the deterioration in the Australian radio market continued into 3Q19 and that short bookings suggest the metropolitan radio market could be down mid-single percent in 3Q19. However, recent improvement in briefing activity with clients is being observed for possible 4Q19 bookings, which provides ARN potential to outperform the 3Q19 trend.
It is worth noting comments from the Company’s ASX-listed competitor Southern Cross Media Group at their full-year results release that it expects the metropolitan radio market to stabilise in September, and return to growth in October. However, it is uncertain to what extent increased briefing activity will translate to bookings.
Aside from the potential for increased briefing activity to convert into bookings, we discuss two avenues available to HT&E in order to overcome/mitigate the currently-challenging market conditions:
1. Maintaining Recent Radio Ratings Trends
As an offsetting factor to continued weakness in the metropolitan radio market, ARN could benefit from the recent stability in its ratings, with the Company hopeful it can outperform the market. ARN achieved its best ever radio ratings in FY18 after launching a number of new breakfast shows and a national drive show, and achieved revenue growth in line with market.
These trends are improving, with recent ratings survey results showing consistent growth across all markets. ARN holds the No.1 and No. 2 FM breakfast shows in Sydney, while the KIIS network in Melbourne recently recorded its highest audience share since 2014.
However, the most recent radio survey released last week (Survey 6) showed mixed results. While the KIIS network in Sydney continues to gain share, results for the KIIS network in Melbourne reported a decline after previously reporting ratings share gains over the previous four consecutive surveys (although overall share remains higher than at the start of the year).
The key question is the extent to which improved ratings allow ARN to recover lost market share in 1H19, given that ARN’s revenue growth in 1H19 (-3.8%) was below that for SXL’s radio operations (the latter reported +1% growth for the same period).
2. Potential to Generate Additional Cost Savings
While revenue growth in 1H19 declined by 4%, the modest increase in EBITDA was driven underpinned by higher cost savings across the business (most notably ARN). The Company has made good progress reducing corporate costs and simplifying the management and operational structures between HT&E and ARN.
Further savings are expected in 2H19 and into FY20, in line with the Company’s aim of reducing corporate costs and simplifying the management and operational structures between HT&E and ARN. In its interim results commentary, HT&E noted that in 1H19, the changing shape of cost of sales as digital revenue grows, contracted talent and other cost increases, and other possible non-repeat savings from FY18, means that cost growth in 2H19 is likely to exceed revenue growth. Accordingly, the Company is proceeding with its cost and efficiency review. This could result in further cost reduction initiatives in the event that poor trading conditions continue.
While the shares are currently trading on 1-year forward P/E multiple of ~12x, we do not consider the current level to be an appealing entry point. In particular, there is a possibility that the consensus profit forecast for FY19 is unlikely to be met due to:
i. Uncertain trends for both revenue and costs in the ARN business and
ii. Potential revenue loss in the Hong Kong outdoor business from withdrawn contracts in light of recent protests in Hong Kong.
Overall, we consider yield/capital management potential to be the main factors supporting an investment case for HT&E at present, given that the Company has a significant net cash balance of $107.7m and is considering non-core assets sales. To this end, the shares are currently trading on an attractive fully franked yield of ~5%, which is likely to be supported by the Board’s decision to increase the dividend payout ratio from 40-60% to 60-80% and ii) The potential for further capital management into FY20 and beyond.
On a weekly chart we can see that there appears to be good support near $1.70 and some resistance up near $1.95. At the moment the shares are in the top of the range so buyers would ideally want to see it get back to the bottom of the range. Otherwise, if we see an upside break, traders may wish to follow that for a short term trade back up towards $2.30.
Michael Gable is managing director of Fairmont Equities.
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