Prime Media Group (PRT)

Fat Prophets

Thursday 13th March 2014

What’s new
Prime Media is a free-to-air TV broadcaster servicing the regional markets of northern NSW, Gold Coast, Southern NSW, Victoria, Mildura and Western Australia.

The company sources almost all its TV programming from the Seven Network pursuant to a long term affiliation agreement. In addition, the company itself produces a total of six separate major local news bulletins each weekday in order to provide much sought-after local content relevant to the interests of the regional viewers.

In the recent December-half of 2013, Prime Media’s revenues edged up 1 percent to $136 million. While net profit from continuing operations fell 2 percent to $18 million, it comfortably exceeded consensus expectations. The core TV division reported first-half Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) of $40 million, up a solid 5 percent from a year ago.

Outlook
Prime Media is leveraged to the programming strength of Seven Network, the number-one rated TV network in Australia. It is a relationship which allows the company to snare over 40 percent of the TV advertising dollars in the regional markets that it operates. This, combined with management’s proven track record of cost discipline, means the company offers an ideal pure-play exposure to the TV advertising market which is showing tentative signs of recovery.

Furthermore, in the event that the recovery does not eventuate in the near term, shareholders are likely to be rewarded with a highly attractive 8 percent fully franked yield for their patience. We are of the view that the juicy yield can be sustained, given Prime Media’s solid financial position, with net debt-to-EBITDA of just 1.8 times and an interest cover of 10.8 times.

Over the longer term, we also see potential for the company to be taken over when the current audience-reach restriction is eventually abolished. In our view, Seven Network is the most likely suitor, given their existing affiliation agreement and the fact that Seven Network already boasts an 11.4 percent shareholding in Prime Media.
Price

Shares in the regional broadcaster have struggled in recent times, and are down 12 percent and 22 percent over the past 6 and 12 months, respectively. However, with the recent divestiture of the underperforming radio assets and the renewal of the key affiliation agreement with Seven Network, we see brighter prospects ahead for the stock.

Worth Buying?
We are attracted to Prime Media’s simple business model and solid fundamentals. We see upside in the form of the company’s leverage to a recovering TV advertising market and potential corporate activity when the current audience-reach rule is abolished. In the meantime, patient shareholders will be rewarded with a juicy 8 percent yield.

Given these reasons, and the fact that the stock is currently trading at less than 10 times consensus earnings estimates, we believe the stock is worth buying at current levels.

Greg Smith is the Head of Research at Fat Prophets.

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