ANALYSIS - The market may have overreacted to SCA’s affiliate loss of Nine

Chris Pash
By Chris Pash | 19 March 2021

The share price of regional broadcaster SCA fell as much as 20% when news broke of its loss of television affiliate status with Nine Entertainment.

The shares last traded at $1.98, after a 10% fall on Friday last week.

Nine’s affiliate switch to WIN, whose owner billionaire Bruce Gordon is Nine’s biggest shareholder, is logical if only for the close ownership interests between the two companies.

Nine gets better regional distribution and keeps a big shareholder close. Gordon is currently pushing for a seat on the board of Nine.  

For SCA, the loss of program supply from the number-one free-to-air network is disappointing but the economic loss need not be great.

Analysts at Macquarie raise the possibility of SCA doing slightly better under an affiliate agreement with Ten.

SCA was paying 50% of revenue back to Nine. Under a previous deal with Ten, SCA paid an affiliate fee of just 34%.

If SCA can get a deal close to that, the Macquarie analysts expect SCA will be slightly better off.

UBS analysts are also positive: “In terms of actual economic impacts, we think an earnings neutral outcome is still possible.”

Again, much depends on SCA’s talks with TEN for a new affiliate agreement.

The UBS analysts also think that the Ten commission could be below the 50% paid to Nine.

“If the new affiliate fee is between 30%-40%, we think a neutral EBITDA (earnings before interest, taxes, depreciation, and amortisation) outcome is possible,” write the UBS analysts in a note to clients.

At Morningstar, senior equities analyst Brian Han describes the next step as a “(re)marriage of mutual necessity” with Ten.

“We do not believe the loss is fatal to Southern Cross' investment case,” writes Han in a note to clients.

“The no-moat-rated group's journey to become a more resilient, radio-centric company has been ongoing.”

Radio generates 80% of group earnings, up from 67% five years ago. Han says that will lift to 85% from the 2022 financial year, further limiting the impact of regional TV structural decline.

About 80% of forecast TV revenue in the next financial year, about $149 million, was expected from the Nine affiliation.

Morningstar, assuming an affiliation deal with Ten, estimates 2022 financial year revenue of $86 million.

“This is substantially lower than what we believe Southern Cross would have gotten under the Nine affiliation,” says Han.

Morningstar has cut its fair value estimate on SCA by 8% to $3.50 a share, reflecting net impact of the Nine regional TV affiliation loss.

That is still way ahead of the current share price.

But radio remains the company’s key. “Notwithstanding the damage, the key to Southern Cross' recovery lies in the core radio division,” writes Han.

“While the radio medium's current advertising recovery lags TV (and outdoor too), that is likely due to the ‘catch-up’ branding efforts by national advertisers who drive 90% of spending on TV.

“We believe radio's exposure to national advertisers is less than 80% in metropolitan markets and less than 50% in regional markets.

“As advertising demand spills over from TV and local advertiser confidence rebuilds, we see Southern Cross' radio-centric operations benefiting, especially as we move into fiscal 2022.”

Analysts at Morgan Stanley see lower earnings and higher risk for SCA as it starts talks for a new cornerstone TV program supply deal with Ten.

The analysts say SCA’s present and future both appear to be more in radio and not regional TV.

“Critically, we view regional FTA TV, without any attaching catch-up rights or streaming rights, as a business in structural decline,” they say.

Last month SCA launched LiSTNR, a curated and personalised free app offering radio, podcasts, music and news.

LiSTNR, three years in development and with extensive research into consumers’ evolving audio habits and needs, consolidates SCA’s existing digital audio plus a huge range of new premium content.

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