Online automotive business Carsales.com posted a messy first half result, leaving brokers questioning whether earnings momentum is losing traction.

-Long-term potential in international market but domestic performance key to short term
-Global technology players becoming more active in the company's market segments
-Stratton not out of the woods yet, although not expected to deteriorate further

By Eva Brocklehurst

Is earnings growth becoming harder for Carsales.com ((CAR))? The company's first half results were underpinned by growth in the dealer segment, resilience in display advertising and rapid growth for Tyresales and Redbook Inspect. Yet higher costs appear to have put a brake on growth.

Carsales may be a very good digital company but Morgan Stanley believes incremental growth in earnings per share is becoming harder, and the first half growth of 5% will not be sustained by the current price/earnings ratio of 22x.

The broker suggests the growth rate and contraction in the first half EBITDA margin indicate a maturing business and increasing competition. A maturing business reflects the migration from print to online. This signals the key to growth will be bolt-on acquisitions, such as Tyresales, Stratton & international assets. High growth but lower quality earnings in the broker's view.

As well, Morgan Stanley believes global technology players are becoming more active. This includes eBay and Gumtree, which have already negatively affected the company's traditional price increases in its private seller division. Facebook and Google/YouTube have also crimped the broker's growth expectations for Carsales.com's display advertising.

The risk is, if growth cannot return to double digits, a price/earnings de-rating is likely. Morgan Stanley maintains a Overweight rating at this point, noting the recent weakness in the share price reflects some of its concerns.

UBS concludes that the shape and risk profile of forward growth appears to be less attractive versus history yet the stock remains inexpensive relative to the past. The upside risks to the broker's forecasts relate to whether the company can sustain around 10% annual revenue growth in the dealer business through a combination of price and depth measures, and obtain growth in non-core domestic streams.

On the other hand, downside risk looms with heightened competition and a limited dealer profitability pool. All up, the broker considers the stock to be fairly valued after its rebound and maintains a Neutral rating.

Citi expects an acceleration in revenue growth in the core business and growth rates to be maintained in the longer term, driven by both volume and yield in the dealer business. In the international market the broker acknowledges long-term potential but does not believe this will make a meaningful contribution in the near term. Hence, Citi's Buy rating is based on the performance of the core domestic business.

Stratton Subdued

Macquarie was encouraged by the revenue trends, including the dealer category, where contributions were made from depth revenue, price increases and volumes. As expected, Stratton revenues were negatively affected by supplier issues. The broker expects a gradual re-basing as this business adjusts its operations and cost base to account for recent disruptions.

Stratton will probably face additional challenges, should the industry need to adjust its practices regarding insurance add-ons and/or flex commissions. Nevertheless, the broker envisages scope for better earnings momentum in the second half.

The first half reflected higher marketing spending which, partly a timing issue, is expected to taper off in the second half. Macquarie notes this is the last result that will be delivered by co-founder and CEO Greg Roebuck following his retirement. The broker does not expect any shift in strategy with the new CEO, Cameron McIntyre, who is the current chief operating officer.

Management remains positive on the differentiation that the Redbook Inspect service can provide. Margins will be inferior to the core business but the broker still expects the contribution to be positive and improve as the business scale increases.

Morgans maintains a Hold rating and notes, but for the problems at Stratton, underlying earnings would have increased almost 14%. Assuming Stratton does not get any worse in the second half, although unlikely to improve, there are reasonable prospects for high single digit growth in earnings per share from FY18 onwards, in the broker's opinion. Stratton Finance was affected severely by one of its main suppliers of loans falling foul of the corporate regulator, ASIC, and management has signalled that the second half will not be that much better.

Competition Increasing

This is one of the weakest half-years to date Morgans observes, as the core business chugged along nicely, albeit with elevated costs, while more recent add-ons such as automobile finance and Asian classifieds cut around $10m out of the headline result. The broker has a long-term positive view on the stock, as the company dominates online automotive advertising and is unlikely to be toppled by a new entrant, albeit major competitor Carsguide is being re-launched under a new owner, Cox, which has deep pockets.

History does not favour weak number two players in online classifieds, Morgans asserts, yet Cox is a huge company with a successful business in the US. Hence, caution prevails regarding the impact of competition on Carsales in FY18 and FY19.

Is The Business Riskier?

Ord Minnett expects the increase in the dealer lead fee and the strength in data & research will offset the ongoing challenges in Stratton in the second half and once again deliver a quality result, while the company invests the growth in emerging businesses and highly prospective international options.

The broker notes the acquisition of DeMotores rounds out the company's Latin American exposure and, combined with the Asian investments, calculates $1.10 in value embedded in the share price. Stripping this out this reveals a core FY18 price/earnings ratio of 18.6x. With the businesses at an early stage and with some development costs borne by the core business, the broker believes there is considerable potential for growth.

Despite the solid performance, Deutsche Bank is more cautious and lowers its forecasts to reflect lower earnings at Stratton and the macro conditions that are affecting Webmotors in Brazil. Webmotors moved to a lead-based model from July 2016 and, while first half dealer leads were up 41%, this failed to translate to a meaningful revenue uplift. Weak macro conditions in Brazil are having an impact, the broker observes.

Elsewhere, Shaw and Partners notes the company's investments in infant markets have attractive earnings potential. This includes Argentina, Mexico and Chile. Nevertheless, these are medium-term propositions, which the broker believes makes the stock a much riskier investment than it was. Lower margin businesses are taking a greater portion of earnings growth and this is a key risk for the future.

The broker has a target of $11.50, which incorporates a demanding multiple with increased earnings risk and lower earnings growth relative to the company of old. Shaw, not one of the eight stockbrokers monitored daily on the FNArena database, has a Hold rating.

Credit Suisse was particularly encouraged by the 10% growth in dealer revenue and expects the core domestic revenue growth to continue strongly. The broker does not believe the stock is expensive as it trades at the low end of its peer group range, retaining an Outperform rating.

The database shows five Buy ratings and three Hold. The consensus target is $12.05, suggesting 10.7% upside to the last share price. Targets range from $10.50 (UBS) to $13.20 (Macquarie).
 

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REA Group will divorce its European portals, selling them to Oakley Capital Private Equity. Brokers welcome the tighter focus on key businesses.

-Europe envisaged taking too long to generate an acceptable return
-Increase in free cash flow should allow for higher dividends
-Online partnership in home loans with National Australia Bank
 

By Eva Brocklehurst

REA Group ((REA)) has divorced its real estate portals in Europe, with the sale to Oakley Capital Private Equity of athome.lu in France and Luxembourg and Casa.it in Italy for $189.7m. As the company has accumulated European tax losses from its venture into Britain, no tax is expected on the sale.

Morgans observes the sale will remove the long-term option values inherent in the company's ability to merge its European portals with another, thus creating synergies. Nevertheless, it would have taken another 3-5 years of investment to achieve an acceptable return. The divestments are strongly accretive to free cash flow as well as the broker's valuation.

Morgans' valuation increases by approximately $0.94 per share as a result of the divestments. As the company has good prospects for continued earnings growth in its real estate marketplaces in Australia, Asia and North America, the broker retains a Add rating. Growth prospects outside of Australia are yet to contribute to earnings per share but are expected to be mildly accretive from FY19 onwards.

The loss of the European option may disappoint some shareholders, Morgans suspects, but the increase in free cash flow will allow for higher dividend pay-outs. Earnings estimates are slightly reduced as the loss of pre-tax earnings from Europe is slightly larger than the returns the company will get in the short term through holding cash on deposit. Overall, the tighter focus should be welcomed, in the broker's opinion.

Limited Benefits From International Network

Macquarie is also positive about the divestments. The broker believes global scale does not guarantee growth and has previously argued that there is limited benefit in terms of real estate classifieds. The European assets failed to generate the returns witnessed in Australia because of different competitive positions, market structures and economic cycles. The broker observes markets evolved independently and real estate markets are more dependent on local network effects than technology.

Macquarie expects the company will enjoy an acceleration in earnings heading into 2017 because of softer comparables for listing volumes and from cost controls that were put in place in the first half. Strong longer term prospects are also expected for the domestic assets through improvements in yield and the development of adjacent businesses.

UBS observes the loss of the euro earnings will only be partly offset by interest earned at the cash rate and therefore expects the sale to be slightly dilutive to earnings per share in FY17-18 although broadly neutral for valuation.

Home Loan Partnership With National Australia Bank

Separately, the company has announced a partnership with National Australia Bank ((NAB)), to offer integrated online home loans through the realestate.com.au portal. National Australia Bank will provide funding for development as well as commissions for home settlements facilitated through the product, which is expected to be launched in 2017.

UBS expects the upfront commission rate would be lower than for other mortgage brokers, given National Australia Bank is also funding development costs. The broker expects the mortgage business, in isolation, will be slightly accretive to earnings per share in FY18, with the potential to become a more meaningful contributor from FY19.

UBS now factors in both the sale of the European assets and the new mortgage business, resulting in a slight reduction to earnings per share in FY17-18 from the loss of European earnings, and given the mortgage business will still be ramping up.

There are six Buy ratings on FNArena's database, with one Hold (Deutsche Bank, yet to report on the divestments). The consensus target is $59.34, suggesting 9.6% upside to the last share price. Not all brokers have made the effort to update their views and projections post these latest announcements.

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APN Outdoor ((APO)) and oOh!media ((OML)) have proposed a merger which, if successful, would produce a substantial, diversified outdoor media grouping.

-Key issue centres on competition concerns and ACCC definition of market
-Exposes APO to retail renewal risk and advertising brought in-house
-Highly profitable contracts could face margin pressure
 

By Eva Brocklehurst

A merger is being proposed between Australia's two major proponents in outdoor media, oOh!media ((OML)) and APN Outdoor ((APO)) in an all-scrip transaction. The newly formed group would be a leading, diversified outdoor and online media business, with considerable leverage to the growing out-of-home segment and audience awareness generated from such advertising channels.

Under the terms of the deal, OML shareholders will receive 0.83 APO shares for every OML share held. This, based on the prior closing price for APO, values OML at $4.48 a share. The companies are signalling synergy targets of at least $20m to be achieved within two years of the merger implementation. APO shareholders are forecast to hold 55% of the merged entity.

The merged group is expected to generate 2016 pro forma earnings of $171m. Assets are spread across both regional and metro locations, and would include 8,985 digital screens and 63,200 static screens.

oOh!media has upgraded 2016 guidance to $72-74m from $68-72m, which includes partial contributions from the ECN, Junkee and Cactus acquisitions. A final dividend of up to $0.10 per share has been guided for 2016, slightly above the stated 40-60% pay-out ratio, based on company estimates. Morgan Stanley notes the deal exposes APO to retail renewal risk, with Scentre Group ((SCG)) being an example where retail advertising has been brought in-house.

OML also has lower growth/margin business within its portfolio, such as offices and InLink. Moreover, the broker points out that this merger is an incremental negative for APO's AdShel as it creates a stronger competitor in contract negotiations. Still, the broker is generally positive about the deal, as it provides a stronger market position for APO, which has reiterated earnings guidance at the top end of it $84-86m range.

Credit Suisse has no complaint about the logic of the merger, as both companies have leading market positions in key outdoor verticals and are well managed. Yet, while APO is the clear winner from a diversification standpoint, the subsequent rally in its share price captures the bulk of the earnings accretion. The broker also believes it underplays any possibility of issues from the competition regulator, the Australian Competition and Consumer Commission (ACCC).

While the sector continues to enjoy tail winds, Credit Suisse suspects issues around the proposed merger will dominate sentiment in the near term and, therefore, downgrades both to Neutral from Outperform.

The benefits of the merger capture obvious cost synergies, revenue cross selling opportunities and create a more rational bidding environment for lease space. The latter is most significant, Credit Suisse believes, given market concerns around the sustainability of longer-term margins against heightened activity in contract renewals.

The broker is aware that the combined group would have an estimated 60% of Australian market share and over 70% share of roadside billboards and acknowledges both companies have undertaken extensive due diligence on the prospects of regulatory approval. Still, regulatory approval cannot be taken for granted and this will ultimately come down to the regulators definition of "market", and the role of landlords add an extra layer of complexity in the broker's opinion.

UBS agrees key considerations for the ACCC will be its definition of market and its application of the "competition" test. The decision may also have implications for future traditional media consolidation. If the ACCC were to take a more narrow view and define market as national out-of-home advertising, analysis of market concentration both pre-and post a merger could be more negative, given the broker estimates the pair's combined share of the Australian outdoor media market is 50-60%.

Valuation upside for APO now hinges on delivering revenue/operating expenditure synergies above the $20m guidance, offset by a discount to the probability of the deal completing. The broker also remains wary of the impact of higher rents, it landlords push for a greater share of revenue from digitally upgraded assets. Ord Minnett does not consider the regulator will be a major hurdle to the transaction but acknowledges a risk that some of the more highly profitable contracts could face margin pressure if change-of-control provisions are enacted.

The overlap between the businesses is minimal, in the broker's opinion, and then only in airports and outdoor billboards, while the transaction will likely improve market structure and create the only competitor in the out-of-home advertising market with substantial share in all sub-segments of the industry. The broker downgrades oOh!media to Accumulate from Buy on valuation grounds following the share price movement.

Morgans believes investors that are prepared to wear the regulatory risk should buy APO prior to the decision by the ACCC. Pending the outcome, the broker maintains a Hold rating but expects the share price to gravitate upwards in the event of ACCC approval.

FNArena's database shows a $6.18 consensus target for APO, suggesting 2.6% upside to the last share price. Targets range from $5.66 (Morgans) to $7.00 (Morgan Stanley). There are three Buy ratings and two Hold. There are one Buy (Ord Minnett) and one Hold (Credit Suisse) for OML on the database.
 

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REA Group highlights continued softness in Australian online real estate listings but unconcerned brokers are upgrading their ratings.

-Near-term performance contingent on listings volumes
-Revenue growth expected to outpace cost growth
-Several years of double-digit revenue and earnings growth envisaged
 

By Eva Brocklehurst

REA Group ((REA)) has highlighted continued softness in Australian online real estate listings, offset by growth in its premium product uptake. Listings volumes appear to have improved slightly from the 11% decline previously reported by the company back in July.

Total listings volumes were reported as down 8% for the July to September period, with the largest decline seen in Sydney and Melbourne markets. The update was low on detail but assuming both commercial and developer revenue growth remains robust, UBS expects Australian revenue growth, in aggregate, in the range of 12-14%.

The broker does not expect the growth trajectories of the three main Australian revenue drivers (volumes, headline price, and depth penetration) will change materially in the second quarter. UBS upgrades to Neutral from Sell because of the recent underperformance of the share price.

Valuation appears fair versus the longer-term growth opportunity, in the broker's view, while the near-term performance now appears highly contingent on listing volumes.

Morgan Stanley remains positive on the long-term opportunity in Australia for online real estate advertising, noting that while management expects listings to remain negative in the second quarter, it has not explicitly guided for earnings for the full year to be weaker.

Although cost growth was high in the quarter, stemming from the incorporation of iPproperty and the timing of marketing spending, the company still expects full year revenue growth to exceed cost growth.

Shaw & Partners upgrades to Buy from Hold on valuation and raises the target to $64. The broker, not one of the eight monitored daily on the FNArena database, believes the company's ability to increase its Australian residential revenues by 14% in a declining market is testament to its strong business model.

Moreover. investment has continued throughout the recent period. The broker believes this is another indication that management is willing to concentrate on driving further growth and not reacting to short-term headwinds.

Shaw & Partners also notes the company has a relatively more dominant position in Western Australia and this is likely to be an offsetting measure in terms of listing volumes, as these were strong on the west coast in the quarter. On the downside, the increase in investment in iProperty, as well as the interest repayments on new debt, have negatively affected free cash flow and this is expected to continue in FY17.

Despite the headwinds to listings, Credit Suisse finds growth is solid enough. The broker assumes headwinds will ease in the second half and revenue growth accelerate. The broker believes the risk to forecasts is on the upside if volumes recover more quickly than assumed.

The company operates in a large market and Credit Suisse observes plenty of opportunity to increase its share of the expenditure on property. When revenue growth was slow previously because of short-term concerns this signalled a buying opportunity. Hence, the broker retains a Outperform rating.

Morgans observes the company is tightening its belt in anticipation of a listings drought that will continue through FY17, although it is confident of further margin expansion. A 10-15% price rise in July, coupled with a shift in mix towards more expensive ads, has allowed the company to grow its core residential revenues despite a drop in overall listings volumes.

Morgans asserts, with the benefit of hindsight, the launch last year of the Premiere All subscription package was "genius". The broker believes the stock offers good exposure to growth in online real estate advertising in Australia, Asia, Europe and Latin America and still has several years of double-digit revenue and earnings growth ahead.

Deutsche Bank upgrades to Hold from Sell as the stock is trading close to valuation and there are no near-term negative catalysts. The broker does not expect the current rate of decline in listings to continue into 2017 and views the first half as effectively a trough in the listings cycle.

Management has alluded to new products being launched in the second half and, depending on the timing, these may provide catalysts heading into FY18.

The database has four Buy and three Hold ratings. The consensus target is $55.18, suggesting 4.3% upside to the last share price. Targets range from $49.50 (Deutsche Bank) to $65.00 (Morgan Stanley).
 

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Seven West Media reported a surprisingly weak outlook for FY17 due to rising sports costs and falling TV advertising share.

-Olympics broadcast benefit won't recoup costs
-Inflation in TV sports broadcasting costs
-Digital revenue expected to surge in FY17

By Eva Brocklehurst

Seven West Media ((SWM)) is looking subdued in FY17 and the market has marked the stock down heavily to incorporate weaker guidance, on the back of rising costs and falling TV advertising revenue.

Guidance for FY17 is for earnings to be down 15-20% year on year and the TV ad market to be flat or weaker. Earnings fell 10.7% in FY16. Costs fell 4.2% in the first half but these reversed to be up 2.1% in the second half, or up 3.8% if the benefit of the lower TV licence fee is stripped out.

Overall guidance was not inconsistent with forecasts but the main surprise for Deutsche Bank was costs. Management signalled operating costs could be up as much as 9% in FY17, including the Olympics cost of around $80m. Deutsche Bank expects a revenue share improvement of 150 basis points in FY17 for the Seven TV network, given the benefit from broadcasting the Olympics, but notes that on a standalone basis, this uplift of around $40-45m does not recoup the costs incurred.

Seven West also confirmed it is in the early stages of discussions with Verizon, which has proposed purchasing Yahoo! Inc. Limited detail was provided on the options under the Yahoo!7 joint venture agreement in the event of a change of control. Given Yahoo!7 is currently generating earnings of $26m Deutsche Bank views the buying out of its 50% partner as manageable for Seven West, but not insignificant.

Meanwhile, Presto subscriber growth was up 193% in FY16, although Deutsche Bank notes industry feedback continues to suggest it is lagging Netflix and Stan in terms of subscribers. Whilst the broker agrees that streamed video on demand (SVOD) presents an opportunity, intense competition is expected to hinder near-term earnings growth potential.

Macquarie notes the deterioration in the second half in terms of operations, which reflects the slowing in the TV ad market. The broker believes the main driver of rising costs is the new AFL rights deal, which is estimated to add $25m to incremental costs in both FY17 and FY18. Cash conversion was also weak, which the broker attributes to a large pre-payment on the Olympics as well as the impact of onerous contracts being written off and restructuring and redundancy charges.

The broker notes earnings at The West Australian declined 24.3% in FY16 as the paper remains challenged by structural factors and a softer WA economy. Seven West is awaiting approval to acquire Perth Now and The Sunday Times from News Corp ((NWS)), with the company noting scope for operational synergies from combining these two businesses.

Macquarie downgraded the stock to Underperform ahead of the results on the basis headwinds were increasing and would pressure the outlook. Given the significant share price correction, subsequently, the investment case is considered more balanced now and the broker reinstates a Neutral rating.

Credit Suisse moves to a Neutral rating from Outperform as the broker's valuation falls on lower earnings because of higher costs and higher net debt. TV ratings are considered solid and there will be a boost from the Olympics, but the broker expects negative momentum and ongoing TV ad market weakness will present a major barrier to earnings growth going forward. Credit Suisse assumes a 1% decline in TV advertising in FY17 and a TV market share for Seven of 41.5%.

The weak outlook is consistent with Morgan Stanley’s view on the structural changes confronting the business. These including losing revenue share in the TV market and inflation in TV sports costs. Moreover, the broker does not confine its view to Seven, believing TV and radio peers will also deliver a weaker outlook.

There were no new comments on acquisitions or capital allocation at the results nor on changes to media ownership rules, the broker notes, outside of the comment that options are still being considered regarding Verizon’s bid for Yahoo! Inc.

Morgan Stanley notes upside risks for Seven West include a potential de-merger or spin-off of the print assets, which could result in a re-rating, and the possibility of Seven Group ((SVN)) lifting its stake. Seven Media has stated it may look at M&A in the media industry and the broker expects the market would greet this news positively, if the terms were accretive. On the downside there is the risk that the economy softens and TV ad spending falls further with an equity re-capitalisation subsequently possible.

Macquarie notes Seven West is actively pursuing digital revenue opportunities and may have the opportunity to integrate is own advertising partners into digital media content. The company has reported early-stage investment losses of $23.9m in FY16 as part of its new ventures, with entities making up these losses including Presto, SocietyOne, HealthEngine, Newzulu and Starts at 60.

Macquarie makes the point that the decline in TV ad market revenues is against a backdrop of strengthening trends in digital advertising revenue, reflected in companies such as Facebook and Google. Seven West's digital revenue is expected to be up more than 150% in FY17.

FNArena’s database has one Buy rating for Seven West (UBS, yet to update on results), three Hold and two Sell. The consensus target is 86c, suggesting 8.0% in upside to the last share price. This compares with a target of 95c ahead of the results. The dividend yield on FY17 and FY18 forecasts is 8.2% and 8.3% respectively.
 

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-Can SXL match or beat WIN share?
-SXL envisaged the main winner
-Also gaining from regulatory changes
 

By Eva Brocklehurst

The play in regional TV has moved to the next game, with a major deal being struck between Nine Entertainment ((NEC)) and Southern Cross Media ((SXL)). The pair announced a new affiliate agreement which will begin on July 1.

This means Southern Cross Media will broadcast Nine's metro content into regional Queensland and Victoria and into southern NSW. In return Southern Cross will pay a fee of 50% to Nine. Nine will help Southern Cross to expand its regional news services while in return, a national sales service will be provided for Nine across northern NSW and Darwin. Effectively, the deal replaces existing arrangements between Nine and WIN Group and Southern Cross and Ten Network ((TEN)) in those markets.

This covers the bulk of regional media but there are some outstanding areas, UBS observes. Nine still needs to negotiate an affiliate for Tasmania and Western Australia and will, presumably, deal with WIN Corp in these regions. For Southern Cross, as Nine already owns regional stations in Newcastle and northern NSW, an affiliate deal will need to be re-negotiated with Ten.

So, the broker's next question is: what will WIN do? WIN appears to be the loser in this game, as it needs to switch its affiliate feed from Nine to a weaker partner in Ten. For Southern Cross there is the potential to lift its existing 21% regional revenue share to the mid 30% range and a step up in the affiliate fee is only a partial offset, UBS notes.

The other question is whether Southern Cross can match or beat WIN's regional share. The broker suspects there may be some “stickiness” in regional viewing behaviour, although acknowledges Nine's ownership of key programs such as rugby and cricket may instigate a switch. UBS also believes upside exists if Southern Cross can beat WIN's mid 30% regional share, given WIN has arguably under-invested in local content.

Macquarie agrees the arrangement creates value for Southern Cross and Nine at the expense of WIN as there is the scope for further collaboration over time in terms of their national radio and TV platforms. This could include sales integration, content and cross promotion. In essence, such collaboration could unlock many of the benefits Macquarie has contemplated via a merger of the two.

The broker expects Southern Cross to reach an affiliate deal with Ten in northern NSW, albeit at a higher rate than it currently pays. Adding another player to the field, Macquarie notes Seven West Media's ((SWM)) regional network, Prime, could benefit in the near term from any advertiser uncertainty in the initial stages of the change over.

Ord Minnett estimates the switch in affiliation for Southern Cross will result in a revenue uplift of around $55m in FY17, because of the higher ratings and market share from Nine's content. Countering this, the broker estimates incremental expenses under the new deal will be around $50m in FY17 because of the higher affiliation fee in percentage terms, an increase in variable costs such as advertising agency commissions, and an increase in employee expenses given a larger sales force.

Still, Southern Cross is expected to be the main winner in this deal and the broker also expects this network will gain from potential regulatory changes over the next 12-18 months. Despite the benefits of the new deal, Ord Minnett retains a Sell rating for Nine, believing 2016 is the beginning of a structural decline in Free-To-Air TV advertising dollars, driven by audience declines.

FNArena's database has three Buy ratings, one Hold and two Sell for Nine Entertainment with a consensus target of $1.37, suggesting 17.8% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 10.5% and 11.8% respectively.

For Southern Cross there are five Hold ratings and one Sell. The consensus target is $1.09, suggesting 2.1% in downside to the last share price. The dividend yield on FY16 and FY17 forecasts is 6.0% and 6.1% respectively.

Ten Network has a consensus target of $1.30 on the database, suggesting 35.8% in upside to the last share price. There are one Buy and four Hold ratings. Seven West Media has three Buy, two Hold and one Sell rating. Its consensus target is 91c, suggesting 13.6% downside to the last share price. The dividend yield on FY16 and FY17 forecasts is 7.2% and 6.1% respectively.
 

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-Structural decline in TV audience
-Olympics to shift focus to SWM
-Catalysts in media reform, election
 

By Eva Brocklehurst

Nine Entertainment ((NEC)) is facing mounting challenges as Free-To-Air TV audiences wither. The company acknowledges third quarter revenue weakness has accelerated on the back of a 5.0% decline in the first half, with comparables affected by the early timing of Easter and the absence of last year's Cricket World Cup.

Nine Entertainment now expects the metro FTA TV market to record a low single digit decline in FY16. Revenue share is expected to be 37%, versus 38% previously.

Macquarie suspects the network will struggle to regain momentum and the Olympics later in the year will be a headwind, as Seven West Media ((SWM)) scoops the benefits. The broker notes advertising softness in TV is underscored by a structural decline in audience. Spending has been shifting to the out-of-home segment, radio and digital outlets.

Meanwhile, regional TV has been weaker than the metro areas in recent times. Nine Entertainment has a direct and indirect exposure to the trends via its ownership of NBN TV and affiliate arrangements with WIN Corp. The broker also believes a weaker revenue share outlook reduces the implied arbitrage synergies from any possible tie up with Southern Cross ((SXL)).

Yet Macquarie finds valuation support in the stock and potential positive catalysts from media reforms, licence fee reductions and election-related advertising expenditure. The FY16 audience decline is expected to be 1.2% and Macquarie estimates a share of 37% for Nine Entertainment.

Morgan Stanley suggests the company was hoping for a better start to the ratings year in February but this does not appear to have happened. Several of the new shows were disappointing and six weeks into the new season the audience share is actually lower than in in the same period last year.

The broker believes risks are skewed to the downside and whilst a lower FY16 forecasts is appropriate the broker encourages investors to look beyond this, when a further loss of share and higher costs are expected to weigh. As a result, Morgan Stanley retains an Underweight rating.

After updating its analysis, Ord Minnett cuts its recommendation on Nine Entertainment to Sell from Hold. More broadly, the broker considers FTA audiences as the canary in the coal mine, with a 3.8% decline in 2016 following a 6.0% decline in 2015. The broker believes this is the start of a structural decline in FTA TV advertising dollars.

There are three events in 2016 which may contribute $80-100m in revenue which could offset audience pressures, including the federal election, the Olympics and the census. Olympic packages revenue should start to make its mark towards the end of the half, but then this flow is directed to Seven West Media.

The revenue weakness reflects company-specific factors, Deutsche Bank contends. Industry data suggests the network's ratings share for 2016 year to date is 35%, down from 37% in the preceding corresponding year, with key shows such as Australia's Got Talent and Renovation Rumble failing to deliver.

Deutsche Bank retains a Buy rating but concedes this is based on improving revenue share in FY17, with the company expected to gain some momentum in the fourth quarter from the start of the NRL season and a new season of The Voice. Costs remain in focus and some discipline on this front may provide a minor offset. The broker adjusts cost reductions in its model to 4.0%.

UBS expects fourth quarter revenues will decline at a slower rate relative to the third quarter as the impact of Easter reverses, welcoming the news that TV costs will be at least 4.0% lower than the previous corresponding period.

The broker downgrades market growth forecasts and market share forecasts to be in line with the new guidance. Slightly higher digital contributions and lower operating expenditure for TV are only partial offsets. While the guidance has negative implications for the broader sector UBS suspects Seven West Media and Ten Network ((TEN)) have taken share at Nine's expense.

UBS maintains a Buy rating on valuation grounds and the dividend yield. The broker expects catalysts can be sourced from affiliate fee re-negotiations, potential licence fee cuts and changes in media ownership laws.

Election spending may aid growth in the short term for the sector and the broker considers it is unlikely the company's market growth forecasts factor in any uplift from an election. However, Seven West's broadcast of the Olympics will probably hurt Nine's first half market share.

FNArena's database shows four Buy ratings and two Sell. The consensus target is $1.47, suggesting 30.7% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 11.1% and 12.3% respectively.
 

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