The Wrap: TV Sport, Advice, AMP & Reece

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Weekly Broker Wrap: TV sport; hospitals; super advice; AMP; and Reece.

-TV sports rights hotly contested as one of the remaining “must watch” live TV offerings
-Brownfield expansion plans for hospital sector seen playing to Ramsay Health Care's strengths
-Shift to independence amongst wealth advisers considered negative for AMP, IOOF
-Shake up likely at AMP after Royal Commission
-Reece extracting operating synergies with greater scale
 

By Eva Brocklehurst

TV Sport

Falling ratings and declining advertising returns have caused free-to-air (FTA) TV networks to adjust business models. The networks are now intent on obtaining live sports broadcasts to stem falling revenue.

IbisWorld analysis shows that sporting events remain one of the last “must-watch” live TV offerings. These broadcasts bring in significant returns from advertising revenue and sponsorship.

In 2017 the highest rating programs included the AFL grand final, the State of Origin series and the Australian Open final. IbisWorld suggests, as sports broadcasts are generally exclusive, they win ratings while cross-promoting other programs is also a large drawcard for the networks.

The cost of acquiring sports broadcasts has increased significantly over the past five years. IbisWorld observes the AFL deal is currently the most lucrative in Australia, bringing in $418m annually over 2017-22 to the AFL. This is a 66.8% increase versus the 2012-16 rights.

New media players entering the sports broadcast market may induce a rights bidding war and further affect margins for the FTA broadcasters, the analysts suggest. For example, Ten Network is now backed by its foreign parent CBS, which has a significant presence in the US sports broadcasting market.

Seven West Media ((SWM)) and Foxtel have acquired the cricket broadcasting rights for 2018-24 seasons. The digital rights ownership is unclear at this stage, although likely to be with Foxtel. The total cost is reported to be $1.18bn, or $197m annually over the next six years.

This is a significant step-up in value, Citi suggests, representing an increase of 67% on the previous deal that was split between Nine Entertainment ((NEC)) and Ten Network, as advertising revenues were insufficient to cover total costs. Nine and Seven generally use summer sports to drive audiences into their new shows throughout the year.

Now that the deals are signed, Nine Entertainment's losses are expected to be lower, given they have moved to a -$20-30m per annum loss on the tennis versus a -$50m per annum loss on the cricket. Still, cricket will need to be replaced with other content given tennis offers fewer broadcast hours.

Macquarie points out that as the tennis deal starts in 2020, Nine Entertainment will have one summer without a major sport. As sports rights are largely loss-leading the broker suggests this could be a positive for FY19 earnings. However, one alternative could be for Nine to buy the tennis rights from Seven a year earlier.

Citi adds that while FTA broadcasters have repeatedly indicated they would not continue to overpay for sports rights, as long as one of them, or Pay-TV, is willing to pay more, inflation in sports rights will continue.

Hospitals

Both Ramsay Health Care ((RHC)) and Healthscope ((HSO)) will undertake expansion programs over the rest of FY18 and into FY19. In evaluating the projects, Macquarie suggests Ramsay Health Care is playing to its strengths. Brownfield projects include some of its largest metropolitan hospitals such as North Shore Private, St George Private and Hollywood.

In addition, the company is considering a number of sites for expansion in regional locations such as Queensland's Sunshine Coast, which have exposure to older age groups and lower levels of competition.

Based on Macquarie's assessment criteria, Healthscope's Northern Beaches Hospital scores the highest in quality terms, reflecting a number of favourable attributes relating to location, demographics and competition.

However this is a new development servicing both public and private patients versus a traditional brownfield expansion and, therefore, has more uncertainty attached. The broker envisages both companies will deploy capital at some of the largest locations.

Macquarie retains a positive investment view on Ramsay Health Care with an Outperform rating and $74.50 target, noting there is also balance-sheet capacity for acquisitions.

Meanwhile, Macquarie is cautious on Healthscope, retaining a Neutral rating and $1.95 target. Underperformance of some sites is expected to improve in the second half but the broker envisages further negative operating leverage in the event that a more favourable case mix and increased volumes do not materialise.

Super Adviser Trends

Bell Potter observes an unprecedented shift in adviser numbers in the wealth advice industry. During the March quarter a further 240 advisers left the large fully-integrated operators such as AMP ((AMP)), IOOF ((IFL)) and the major banks. The broker believes the changes are being driven by the negative press surrounding the larger players and the rigidity of the models they offer.

These larger operators are also looking to reduce wealth exposure, as many are fronting the Royal Commission inquiry into banking and financial services. Four stocks that are most affected by the trends include AMP, which has just fronted the commission and where Bell Potter believes the appropriate strategy is not in place to combat the trends.

IOOF, following the acquisition of ANZ ((ANZ)) Wealth, is also now in the group of mature, less agile players from which advisers are moving away. On the other hand, Onevue Holdings ((OVH)) is considered a beneficiary of the shift to independence through its investment platform as is Praemium ((PPS)).

AMP

Bell Potter suggests the risks are mounting for AMP as it faces the Royal Commission. The broker anticipates the entire board, including chairman Catherine Brenner, will step down in the near term and a new board is likely to cull many senior executives and undertake an audit.

There is also the likelihood of class actions, possibly from shareholders or AMP advisers. Following the hearing so far, the broker downgrades underlying earnings per share by -1.1% for FY18 and -1.4% for FY19. Bell Potter also downgrades its target to $3.76 from $3.97 and retains a Sell rating.

The broker further suggests the fully-integrated advisor model is under risk and it is unlikely the buyer-of last-resort policy will survive the scrutiny of the Royal Commission. This is a closed loop which exists in AMP Financial Planning, whereby advisers are required to sell their client books to AMP with no option to take them when they leave.

Furthermore, higher ongoing compliance costs and acceleration of adviser losses is anticipated. AMP is also likely to endure fee cuts and a worsening of net flows amid the probability of further refunds being payable to clients.

The broker suggests there is significant risk around the company's existing reporting methodology. Back in February at the FY17 result, Bell Potter pointed out that underlying earnings excluded too many costs that should have been included in the numbers.

The broker now values AMP as an ex-growth company and uses a 68% weighting to a discounted cash flow methodology is this better captures the deteriorating value of the business.

Reece

Citi reiterates a Buy rating, raising its target to $12.12 from $11.10 for Reece ((REH)). The broker believes the stock will trade at a 30% premium to its long-term PE and a 25% premium to the market multiple, reflecting the operating synergies that may be extracted from greater scale. This is a result of two recent acquisitions, but primarily ViaDux.

The company's first half sales were ahead of forecasts although net profit was softer because of lower margins. The company continues to pursue a growth strategy and the ViaDux acquisition expands its civil products offering. Citi forecasts around $95m in sales in the nine months contribution to FY18 since ownership.

Operations have also gained scale from the expansion of the Heatcraft NZ footprint to 18 locations from 11. The company has enhanced its online offering for both trade and retail customers. No quantitative guidance was provided at the first half but Reece signalled the new products have gained traction.

Citi suggests, while there was no signs of the slowdown in building activity in the first half, new products, enhanced customer experience and store openings should mitigate any negative impacts from a contraction in the housing cycle.

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