With SXL trading well below our valuation, we move to a Buy up to a trigger point of $1.80.
But, the share price is unlikely to outperform until after the entitlement offer is priced and bedded down.
SXL is an Australian regional Radio and Television broadcaster. Regional television and radio markets have historically shown themselves to be relatively stable, moderate growth markets under normal macro-economic conditions, but not totally immune to a slowing economy.
We adjust our model to reflect the proposed acquisition of Austereo (ASX: AEO). While the offer remains subject to AEO shareholder acceptances it has a high chance of success given Village Roadshow (ASX: VRL) indicates it will accept for its 52.5% stake in the absence of a higher offer and the AEO directors unanimously recommend it. The offer remains subject to ACCC and Australian Communications and Media Authority approval.
The AEO acquisition makes strategic sense for SXL. It diversifies earnings with a presence in the mainland capital cities, and given a national audience reach of 95% this should increase earnings stability.
Following the acquisition, around 38% of revenue will be derived from metro radio, which has typically been less volatile than other forms of advertising. AEO has a very strong franchise and is the leading Australian radio operator via ownership of the FM radio brands, the Today and Triple M networks.
We value SXL at $2.20 on a discounted cash flow basis post the AEO acquisition.
Our forecasts assume a solid recovery in advertising markets in 2011 with forecast organic revenue growth of around 4.5%.
For more information on Southern Cross Media (SXL) please contact us on 07 4771 4577.