huntley recommendation Softening Ad market conditions! The...

huntley recommendation
Softening Ad market conditions!


The television advertising market experienced a drop in 1H06 expenditure of 1.8% to $1.48bn compared to the pcp. We anticipate a continuation of these soft conditions due to weak consumer spending. The emergence of innovative technologies, new digital platforms and decrease in audience numbers further support this trend.


Momentum is building in online and digital media as advertisers shift funds from traditional media. The increase in broadband penetration enables advertisers to rollout more sophisticated content. Use of the internet and users time spent continues to grow, and advertisers are moving away from mass marketing to niche marketing, a trend that is slowly starting to hurt traditional media channels. More information about the consumer is available via the internet so advertising can be more targeted through this medium.




Diversification maintains profits


SBC business is diversified within the media sector, with 60% of revenues derived from TV operations in FY05, compared to 78% and 88% for SEV and TEN respectively. This reduced reliance on the cyclical TV ad market assists in maintaining revenues and profits.


SBC TV operations are affiliated with all three Free to Air (FTA) operators, which provide a natural hedge against rating performance. Yet, SBC is mostly leveraged to TEN's performance with a potential broadcasting exposure of up to 5.8m eyeballs spanning regional NSW, QLD & VIC. TEN has enjoyed strong ratings in recent years due to the success of reality TV programs as Big Brother and Idol. Recently, its viewer numbers are in decline due to a lack of repeat hits to replace existing programming.


This decline in TEN's ratings performance is only a moderate threat to SBC profits because of the diversity of geographic and advertising market segments. In terms of advertising revenues, workflow from ad agencies is expected to decline in line with metropolitan trends and TEN rating performance, whereas local advertising revenue is expected to remain at similar levels. Bargaining power still remains with SBC due to Channel 10's leading position in the 16-39 age group.


SBC's operating cost base will increase due to the rollout of digital TV and higher affiliation fees. The fierce rating competition and the decline in viewer numbers will force the networks to generate premium content. Nine Adelaide will be most affected because affiliation fees are linked to programming costs. Affiliation fees with TEN are not expected to change.


SBC's other operations include radio broadcasting (20% of revenue) and the production and sales arm, Southern Star (20%). SBC's radio operations have a strong presence in the 40+ demographics with Radio 3AW in Melbourne continuing to rate number one. Additionally, its hourly news service is delivered daily to 178 radio stations in every state, and it has secured the exclusive radio rights to 2006 Melbourne Commonwealth Games. These features represent an opportunity to grow exposure and gain market share. Management expects the radio advertising market will grow by 4% in FY06.




Recommendation


SBC share price has fallen more than 20% in the last four months. The recent drop in the share price reflects negative market sentiment towards TV ad expenditure and uncertainty surrounding the deregulation of the media sector. The value of any takeover premium previously factored in SBC's share price seems to be diminishing.


We expect TV revenue to be flat for the year with moderate growth from radio operations. SBC's current share price at around $12.00 implies an FY06 P/E of 13.5x, which is 15% discount to the sector. We remain cautious due to continued softening ad market conditions and a beginning of a structural shift towards digital advertising. We expect management to maintain a dividend payout ratio of between 70-75%, implying a FY06 yield of 5.5%. Accumulate for yield.