AUSTRALIA SXL AU Price (at 05:10, 27 Mar 2017 GMT) Neutral A$1.37 Valuation A$ - DCF (WACC 8.0%, beta 1.2, ERP 5.0%, RFR 3.3%) 1.39 12-month target A$ 1.30 12-month TSR % +0.8 Volatility Index Medium GICS sector Media Market cap A$m 1,054 30-day avg turnover A$m 4.9 Number shares on issue m 769.0 Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m 642.3 710.9 689.7 703.6 EBIT m 138.9 146.5 143.0 142.8 Reported profit m 77.2 92.2 90.2 91.2 Adjusted profit m 77.2 92.2 90.2 91.2 Gross cashflow m 106.1 123.2 118.8 119.8 CFPS 13.8 16.0 15.4 15.6 CFPS growth % 9.7 16.0-3.6 0.8 PGCFPS x 9.9 8.6 8.9 8.8 PGCFPS rel x 0.80 0.77 0.87 0.96 EPS adj 10.1 12.0 11.7 11.8 EPS adj growth % 15.0 19.2-2.1 1.0 PER adj x 13.6 11.4 11.7 11.6 PER rel x 0.61 0.60 0.71 0.83 Total DPS 6.8 7.7 8.2 8.3 Total div yield % 4.9 5.6 6.0 6.1 Franking % 100 100 100 100 ROA % 8.1 8.7 8.7 8.9 ROE % 8.1 9.2 8.7 8.6 EV/EBITDA x 8.6 8.1 8.4 8.4 Net debt/equity % 38.3 33.7 25.5 21.5 P/BV x 1.1 1.0 1.0 1.0 SXL AU vs Small Ordinaries, & rec Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 2017 (all figures in AUD unless noted) 28 March 2017 Macquarie Securities (Australia) Limited Streamlining ahead of reform? Event Southern Cross and WIN have reached an agreement for the sale of Southern Cross Northern NSW (NNSW) TV assets and operations for $55m ($45m payable on completion and $10m payable one year after completion). Impact Sale price of 5.5x-6.9x EBITDA: We estimate that the NNSW TV asset generates $8-10m of EBITDA for Southern Cross, equating to a sale price of 5.5x-6.9x, which we think is a good outcome for a regional TV asset. Our EBITDA estimate includes minor dis-synergies from the continued costs of selling Nine s NBN and Southern Cross wider radio content into NNSW. Southern Cross currently broadcasts Ten s content in the NNSW licence area on a five-year agreement to 30 June 2021. Improves positioning if reform proceeds: The sale of NNSW would give Southern Cross a highly complementary footprint to Nine. Without the sale, there would be duplication in the NNSW licence area. As a result, in the context of potential media reforms, the complementary footprint would make any M&A between Southern Cross and Nine easier to execute (eg, the sale of Southern Cross TV assets to Nine, or a broader combination of the two businesses). A complementary footprint would also exist for Ten/WIN, and has existed for some time for Seven/Prime. Still looking to expand regional radio: The potential sale of WIN s i98fm Wollongong radio station to Southern Cross was excluded from the revised deal. Southern Cross nonetheless remains interested in regional radio assets, which provide a stable earnings stream, and will continue to look to expand its network. Applying the 5.5x-6.9x sale multiple to the remaining regional TV business, we estimate Southern Cross radio assets to be trading on 7.9x-8.5x EV/EBITDA (FY18), which is broadly consistent with our view that radio assets should trade on 8-9x EV/EBITDA. Further improves balance sheet: In the event that the deal is completed and the proceeds of the transaction are used to pay down debt, we estimate that the $55m payment would reduce Southern Cross net debt/ebitda radio (pro forma 31 December 2016) by 0.22x to 1.68x. We estimate net debt/ebitda falls to 1.40x by 31 June 2018 (based on the assumption that the initial $45m payment occurs on 1 July). Deal conditions: Completion of the transaction is subject to the execution of definitive agreements, FIRB approval for WIN s acquisition, and consent from Network Ten for the transfer of its NNSW affiliate agreement to WIN. The company did not indicate when it expects the transaction to complete. Earnings and target price revision EPS changes: FY17: no change; FY18: -3.3%; FY19: -2.7%, reflecting the removal of NNSW earnings and reduction in debt (note we have assumed the transaction completes on 1 July 2017). TP unchanged at $1.30/sh. Price catalyst 12-month price target: A$1.30 based on a DCF methodology. Catalyst: Radio survey #2 (27 April); potential licence fee cuts (May budget). Action and recommendation While the deal represents a good sale price for Southern Cross and would strategically be a positive step for both parties involved, the ad market remains challenging and Southern Cross radio assets are trading in line with our expectations for a radio business (at 8-9x EV/EBITDA). Retain Neutral. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Group (SXL) $1.37 Interim 1H17 2H17E 1H18E 2H18E Full year FY16 FY17E FY18E FY19E Revenue $m 351.8 359.1 348.5 341.2 Revenue $m 642.3 710.9 689.7 703.6 Opex $m 259.5 274.1 264.6 253.7 Opex $m 474.9 533.6 518.4 532.5 EBITDA (inc Associates) $m 92.3 85.0 83.9 87.4 EBITDA (inc Associates) $m 167.4 177.3 171.3 171.1 Depreciation $m 15.5 15.6 14.5 14.1 Depreciation $m 28.9 31.0 28.6 28.6 Amortisation $m 0.0 0.0 0.0 0.0 Amortisation $m 0.0 0.0 0.0 0.0 D&A $m 15.5 15.6 14.5 14.1 D&A $m 28.9 31.0 28.6 28.6 EBIT $m 76.8 69.4 69.3 73.3 EBIT $m 138.6 146.3 142.7 142.5 Associates $m 0.3 0.0 0.1 0.1 Associates $m 0.3 0.3 0.3 0.3 EBIT incl. assoc $m 77.1 69.4 69.5 73.5 EBIT incl. assoc $m 138.9 146.5 143.0 142.8 Net Interest Expense $m 9.6 8.3 6.7 6.6 Net Interest Expense $m 24.7 18.0 13.3 11.7 Pre-Tax Profit $m 67.5 61.1 62.8 66.9 Pre-Tax Profit $m 114.2 128.6 129.7 131.1 Tax Expense $m 19.0 17.4 19.1 20.4 Tax Expense $m 36.9 36.4 39.5 39.9 Net Profit $m 48.5 43.7 43.7 46.5 Net Profit $m 77.2 92.2 90.2 91.2 Minority Interests $m 0.0 0.0 0.0 0.0 Minority Interests $m 0.0 0.0 0.0 0.0 Adjusted Earnings $m 48.5 43.7 43.7 46.5 Adjusted Earnings $m 77.2 92.2 90.2 91.2 NRIs (net of tax) $m 0.0 0.0 0.0 0.0 NRIs (net of tax) $m 0.0 0.0 0.0 0.0 Reported Earnings $m 48.5 43.7 43.7 46.5 Reported Earnings $m 77.2 92.2 90.2 91.2 EPS (Adj/dil) cps 6.3 5.7 5.7 6.0 EPS (Adj/dil) cps 10.1 12.0 11.7 11.8 EPS Grow th % 11.7% 28.9% (9.9%) 6.5% EPS Grow th % 15.0% 19.2% (2.1%) 1.0% DPS cps 3.8 4.0 4.0 4.2 DPS cps 6.8 7.7 8.2 8.3 Dividend yield % 2.7% 2.9% 2.9% 3.1% Dividend yield % 4.9% 5.6% 6.0% 6.1% Payout ratio (adj) % 59.5% 70.0% 70.0% 70.0% Payout ratio (adj) % 67.2% 64.5% 70.0% 70.0% FCF/sh cps 3.5 6.9 5.8 6.4 FCF/sh cps 22.1 10.4 12.2 11.7 FCFE yield (annualised) % 5.1% 10.1% 8.4% 9.3% FCFE yield (annualised) % 16.1% 7.6% 8.9% 8.6% EBITDA margin % 26.2% 23.7% 24.1% 25.6% EBITDA margin % 26.1% 24.9% 24.8% 24.3% EBIT margin % 21.8% 19.3% 19.9% 21.5% EBIT margin % 21.6% 20.6% 20.7% 20.2% EBITDA grow th % 1.1% 11.7% (9.1%) 2.8% EBITDA grow th % 2.7% 5.9% (3.4%) (0.1%) EBIT grow th % (0.1%) 12.6% (9.7%) 5.6% EBIT grow th % 3.0% 5.5% (2.4%) (0.1%) Key assumptions 1H17 2H17E 1H18E 2H18E Key assumptions FY16 FY17E FY18E FY19E Metro radio ad market grow th % 1.5% 3.0% 3.0% 3.0% Metro radio ad market grow th % 5.9% 2.2% 3.0% 2.5% SXL implied metro radio share % 31.6% 32.5% 31.5% 31.5% SXL implied metro radio share % 31.2% 31.5% 31.5% 31.5% Regional TV ad market grow th % (1.4%) (2.0%) -% -% Regional TV ad market grow th % (6.2%) (1.7%) -% -% Profit and Loss Ratios FY16 FY17E FY18E FY19E Cashflow Analysis FY16 FY17E FY18E FY19E Revenue grow th % 5.1% 10.7% (3.0%) 2.0% EBITDA $m 167.4 177.3 171.3 171.1 % of EBITDA in 1H % 54.5% 52.1% 49.0% 48.9% Ch in Working Capital $m 22.3 3.4 (3.0) 1.3 Effective Tax Rate % 32.4% 28.4% 30.5% 30.5% Net Interest Paid $m 29.2 19.2 13.3 11.7 PER (adj) x 13.6 11.4 11.7 11.6 Tax Paid $m 32.8 41.9 39.5 39.9 EV/EBIT x 10.3 9.6 9.3 9.0 Other $m 109.8 (3.3) (3.3) (3.3) EV/EBITDA x 8.5 7.9 7.7 7.5 Operating Cashflow $m 193.0 109.5 118.2 114.9 EV/Sales x 2.2 2.0 1.9 1.8 Acquisitions $m - - - - Capex $m 23.3 30.0 25.0 25.0 Balance Sheet Ratios FY16 FY17E FY18E FY19E Asset Sales $m 16.1 12.6 45.0 10.0 Other $m (0.1) (7.1) - - ROE % 8.1% 9.2% 8.7% 8.6% Investing Cashflow $m (7.2) (24.5) 20.0 (15.0) ROFE % 20.5% 21.3% 21.6% 21.8% Dividends Paid $m 33.7 55.8 61.2 63.6 ROA % 9.7% 11.5% 11.4% 11.7% Equity movements $m - - - - Net debt $m 340.2 335.2 257.8 221.2 Debt movements $m (215.0) (76.8) (77.4) (36.6) Adj Net Debt/Equity x 0.3 0.3 0.2 0.2 Other $m 14.3 (0.1) - - Adj Net Debt/EBITDA x 1.9 1.7 1.4 1.2 Financing Cashflow $m (234.3) (132.6) (138.5) (100.2) Interest Cover (EBIT) x 5.6 8.1 10.7 12.2 EFPOWA m 768.6 769.0 769.3 769.6 Net Cashflow $m (48.6) (47.6) (0.3) (0.3) Divisional estimates FY16 FY17E FY18E FY19E Balance Sheet FY16 FY17E FY18E FY19E Metro radio $m 242.3 254.0 257.2 263.6 Cash $m 94.8 47.4 47.4 47.4 Regional radio $m 169.0 176.1 179.8 183.6 Receivables $m 144.7 159.6 151.7 155.2 Regional TV $m 213.3 263.1 234.9 238.6 Inventories $m - - - - Corporate $m 17.8 17.8 17.8 17.8 Investments $m 3.7 4.0 4.0 4.0 Total revenue $m 642.3 710.9 689.7 703.6 PP&E $m 145.2 144.7 131.1 125.5 Metro radio $m 51.4 56.4 53.7 54.0 Intangibles $m 1,289.5 1,298.4 1,263.4 1,255.4 Regional TV & radio $m 131.2 130.9 127.6 127.1 Other Assets $m 9.9 8.6 8.6 8.6 Corporate $m (14.9) (10.0) (10.0) (10.0) Total Assets $m 1,687.8 1,662.7 1,606.2 1,596.1 Total EBITDA $m 167.7 177.3 171.3 171.1 Payables $m 86.4 98.5 93.6 95.7 Short Term Debt $m 36.0 36.0 36.0 36.0 Long Term Debt $m 433.9 357.5 280.1 243.5 Snapshot Current Provisions $m 31.2 29.9 29.9 29.9 Current price $ 1.37 Other Liabilities $m 120.3 113.1 113.1 113.1 EFPOWA # 769 Total Liabilities $m 707.6 635.0 552.7 518.3 Market cap $m 1,054 Shareholders Funds $m 979.9 1,027.5 1,053.3 1,077.6 Net debt $m 348 Minority Interests $m 0.3 0.3 0.3 0.3 EV $m 1,401 Shaereholder Equity $m 980.1 1,027.8 1,053.6 1,077.9 Source: Company data, Macquarie Research, March 2017 28 March 2017 2
Macquarie Quant View The quant model currently holds a neutral view on Group. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 162/347 Global rank in Media % of BUY recommendations 14% (1/7) Number of Price Target downgrades 1 Number of Price Target upgrades 0 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Media) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.3 0.1 Grou 0.0 Grou -0.2-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. -0.4 Grou -0.6 0.2 Grou -0.7-3.0-2.0-1.0 0.0 1.0 2.0 3.0-40% -30% -20% -10% 0% 10% 20% 30% 40% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. CFROI CPS Growth FY1 Price to Sales FY0 Price to Cash LTM Net Income Margin FY0 Dividend Cover Capex Growth Earnings Stability -35% -24% -27% -29% Negatives Positives -40% -20% 0% 20% 40% 36% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 0.05 0.47 0.27 0.02-0.43-0.46-0.41 0.23-1.09-0.19-0.98 Percentile relative to sector(/347) Percentile relative to market(/421) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 28 March 2017 3
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) SXL AU vs Small Ordinaries, & rec TEN AU vs Small Ordinaries, & rec SWM AU vs Small Ordinaries, & rec NEC AU vs Small Ordinaries, & rec Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 2017 12-month target price methodology SXL AU: A$1.30 based on a DCF methodology TEN AU: A$1.00 based on a DCF methodology SWM AU: A$0.80 based on a DCF methodology NEC AU: A$1.25 based on a DCF methodology Company-specific disclosures: SXL AU: The Macquarie Group together with its affiliates, beneficially owns 1% or more of a class of common equity securities of Group (SXL.AX) Macquarie Capital (USA) Inc. or one of its affiliates, expects to receive or intends to seek compensation for investment banking services from Group Ltd in the next three months. TEN AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Ten Network Holdings Limited's equity securities. SWM AU: Macquarie Capital (Australia) Limited acted as Financial Adviser to the Independent Board Committee of Limited, in the last 24 months, in relation to the capital raising and resolution of the convertible preference shares held by majority shareholder Seven Group Holdings Limited, for which it received compensation. NEC AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Nine Entertainment Co Holdings Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. 28 March 2017 4
This publication was disseminated on 28 March 2017 at 08:25 UTC. Macquarie Wealth Management Date Stock Code (BBG code) Recommendation Target Price 26-Aug-2016 SXL AU Neutral A$1.30 04-May-2016 SXL AU Neutral A$1.20 29-Apr-2016 SXL AU Neutral A$1.15 10-Feb-2016 SXL AU Neutral A$1.10 27-Aug-2015 SXL AU Neutral A$1.15 25-Feb-2015 SXL AU Neutral A$1.10 21-Oct-2014 SXL AU Neutral A$1.00 21-Aug-2014 SXL AU Neutral A$1.20 23-May-2014 SXL AU Outperform A$1.25 Target price risk disclosures: SXL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include TEN AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include SWM AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include NEC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. 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