Small Caps | Aug 16 2019
Radio advertising markets are now pivotal for HT&E and the environment remains tough in the second half of 2019, although the third quarter could be a nadir.
-Comparables for the Australian Radio Network become easier from September
-Significant buyback capacity retained
-Potential takeover target in consolidating media environment
By Eva Brocklehurst
HT&E ((HT1)) acknowledges conditions in its Australian Radio Network are weak and suspects advertising market revenue will be down by mid single digits in the third quarter. Nevertheless, the company is holding its market share in a tough environment, viewed by brokers now as a play on the radio advertising market, after the sale of its outdoor assets in 2018.
The company has flagged first half operating earnings (EBITDA) of $38m but, as Canaccord Genuity points out, this reflects the impact of accounting changes and, adjusting for this, puts the figure at $30.3m. Australia Radio Network revenue declined by -3.8%.
Media industry trading conditions have been weak since the federal election, although comparables will become significantly easier from September and UBS suspects the third quarter could be a nadir. However, costs growth will be above trend in the second half and the broker reduces estimates by -2-3% for 2019-20.
The company has also increased its dividend policy to 60-80% of net profit, from 40-60%, amid the resignation of the Chief Financial Officer and General Counsel as part of the initiatives to reduce corporate costs. The former CFO of Adshel has been appointed CFO.
HT&E retains a focus on its audio investments, with other parts of the business under review, excluding the Hong Kong outdoor segment. The second half outlook for the Hong Kong business is considered uncertain, given the impact of civil unrest.
No revenue has been affected to this point but Macquarie suggests there is a risk to second half numbers, as forward bookings are not that strong. Hong Kong outdoor operating earnings on a like-for-like basis were up 203% in the first half. The company will also close down Gfinity Esports, in which it has a 35% stake, unwilling to commit the necessary capital to develop the business.
Soprano Design is a provider of mobile messaging technology for mobile network carriers that has demonstrated impressive revenue growth. HT&E provided more visibility regarding the financials for Soprano Design and UBS suspects the $15m carrying amount understates the true value of the business.
Soprano Design is already profitable, recording 22% growth in revenue and 13% growth in operating earnings over the past 12 months. UBS now includes $50m for the company's 25% stake in the business. Macquarie suggests HT&E could look at unlocking value for its stake, given this is not a core operation.
Given the increased disclosure provided for Soprano Design, in particular, Credit Suisse also wonders if an IPO (initial public offer) of this business may again be on the cards, as it was back in 2016.
Canaccord Genuity suspects a further buyback could be used to buttress the stock against significant downward pressure. Attractive valuation metrics and the buyback capacity – the balance sheet is extremely healthy – persuade the broker to retain a Buy rating and a $2.20 target.
Canaccord Genuity, not one of the seven monitored daily on the FNArena database, lowers 2019 operating earnings forecasts by -5% based on the commentary regarding soft radio market conditions and the prospect of higher costs.
Macquarie agrees there is potential for further capital management in 2020. Cost growth in the second half is likely to exceed revenue growth, the company has acknowledged, given an inability to repeat the savings of 2018. If poor market conditions continue Macquarie, too, expects another wave of cost cutting initiatives.
In terms of the dispute with the Australian Taxation Office there was no update regarding a change in interest or penalties. The company has previously paid a $50.7m deposit in relation to claims being pursued. A final resolution could take several years, Macquarie points out, and this is costing the company $2m per annum. The broker believes HT&E is a potential takeover target in a consolidating media environment.
FNArena's database shows one Buy rating (Credit Suisse), two Hold and one Sell (Morgan Stanley). The consensus target is $1.78, signalling 3.2% upside to the last share price the dividend yield on 2019 and 2020 forecasts is 5.6% and 5.3% respectively.
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