Assessing the Earnings Potential Yr Avg
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28 January 2015 Asia Pacific/Australia Equity Research Media (Media - SMID (AU)) APN News & Media (APN.AX / APN AU) Rating OUTPERFORM* INCREASE TARGET PRICE Price (28 Jan 15, A$) 0.80 Target price (A$) (from 1.00) 1.10¹ Market cap. (A$mn) 823.23 Assessing the earnings potential Yr avg. mthly trading (A$mn) 28 Last month's trading (A$mn) 16 ■ We have undertaken a detailed review of each of APN's business units. Projected return: As a result we expect group EBITDA to remain reasonably stable in FY14 Capital gain (%) 37.5 and deliver 14% growth in FY15. We forecast Adshel EBITDA growth of 28% Dividend yield (net %) 7.6 Total return (%) 45.1 in FY15 which is not included in group EBITDA (in associate income). 52-week price range 0.84 - 0.36 ■ Australian Radio Network to drive the majority of growth. We forecast * Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. 16% and 35% EBITDA growth in FY14 and FY15 for ARN, driven by gains in [V] = Stock considered volatile (see Disclosure Appendix). audience share. The launch of KIIS in Sydney will be the primary driver of FY14 earnings whilst the launch of KIIS in Melbourne coupled with the 96FM Research Analysts acquisition from FXJ (subject to approvals) is likely to drive FY15 earnings. Samantha Carleton ■ Adshel digital opportunity is material. Whilst FY14 was a year of 61 2 8205 4148 investment, we expect material earnings growth in FY15 from the Sydney [email protected] Trains contract and digital conversion. Analysis of global outdoor companies Michael O'Meara suggests that digital conversion generates a 2-5x revenue uplift. This 61 2 8205 4071 [email protected] provides material upside for Adshel over an extended period of time. ■ Australian Regional Media earnings decline to decelerate. We expect This report is distributed in Australia by Credit APN to focus on reducing ARM's cost base over the next couple of years. Suisse Equities (Australia) Limited. Please see legal This may include outsourcing admin functions, converting publications to disclaimer and disclosure annex for further terms digital, closing printing presses (Ballina closed in 2013 and Toowoomba to and information. close in 2015) or partnering with another publisher on back end production. Prepared by Credit Suisse Emerging Companies (Australia) Pty Limited, a joint venture entered ■ NZME investment to provide a short-term headwind however right into between Credit Suisse and First NZ Capital. strategy for long-term growth. APN has provided guidance for NZME which signals increased investment in FY14 and FY15 as the business is transformed. We expect increased integration will ultimately result in NZME gaining a greater share of wallet (currently 14% of NZ ad spend) over time. ■ We value APN at $1.10 on a 12mth horizon, with a stretch valuation of $1.53. Total return forecast in perspective Financial and valuation metrics 70% CSEC tgt^ Year 12/13A 12/14E 12/15E 12/16E 50% Revenue (A$mn) 823.5 864.5 924.6 925.3 30% EBITDA (A$mn) 152.2 156.4 178.3 186.6 10% EBIT (A$mn) 119.2 122.4 141.4 149.6 Sh Prc -10% Mean^ Net income (A$mn) 72.2 70.5 91.8 99.8 -30% EPS (CSEC adj.) (Ac) 10.92 7.40 8.92 9.69 -50% Change from previous EPS (%) n.a. -2.5 1.3 1.2 -70% Consensus EPS (Ac) n.a. 7.90 7.80 8.20 12mth Volatility* 52wk Hi-Lo IBES Consensus EPS growth (%) 30.0 -32.2 20.5 8.7 target return^ P/E (x) 7.3 10.8 9.0 8.3 Dividend (Ac) — — 6.00 7.00 Performance over 1M 3M 12M Dividend yield (%) — — 7.5 8.8 Absolute (%) -4.8 5.3 84.0 P/B (x) 1.5 1.5 1.4 1.3 Relative (%) -6.2 3.9 76.7 Net debt/equity (%) 70.8 74.6 62.7 47.8 Relative performance versus S&P ASX 200.See Reference Source: Company data, ASX, CSEC estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against Appendix for a description of the chart. Source: CSEC ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency. estimates, * Consensus, mean range from Thomson Reuters DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: CSEC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 28 January 2015 Figure 1: Financial summary APN News & Media (APN)2012 2013 2014 Year2015 ending 302016 Dec 2012 2013 In AUDmn,2014 unless otherwise2015 stated2016 Share Price: A$0.80 1/28/2015 12:45 Earnings 12/12A 12/13A 12/14E 12/15E 12/16E Rating OUTPERFORM c_EPS_SHARESEquiv. FPO (period avg.) mn 647.7 661.5 952.5 1,029.0 1,029.0 Target Price A$ 1.10 c_EPS*100EPS (Normalised) c 8.4 10.9 7.4 8.9 9.7 vs Share price % 37.50 EPS_GROWTH*100EPS Growth % 30.0 -32.2 20.5 8.7 DCF A$ 1.10 c_EBITDA_MARGIN*100EBITDA Margin % 17.0 18.5 18.1 19.3 20.2 APN News and Media Limited is involved in publishing, radio broadcasting, online, transit & c_DPS*100DPS c 1.5 0.0 0.0 6.0 7.0 outdoor advertising in Australia and New Zealand. c_PAYOUT*100Payout % 17.9 0.0 0.0 67.3 72.2 FRANKING*100Franking % 33.3 33.3 33.3 33.3 33.3 c_FCF_PS*100Free CFPS c 2.3 0.3 -0.4 -0.2 -0.3 Profit & Loss 12/12A 12/13A 12/14E 12/15E 12/16E c_TAX_RATE*100Effective tax rate % 13.2 -75.2 63.1 25.5 27.5 Sales revenue 863.4 823.5 864.5 924.6 925.3 Valuation EBITDA 146.9 152.2 156.4 178.3 186.6 c_PE P/E x 9.5 7.3 10.8 9.0 8.3 Depr. & Amort. (33.5) (33.0) (34.0) (37.0) (37.0) PEG PEG x -0.3 0.2 -0.3 0.4 0.9 EBIT 113.4 119.2 122.4 141.4 149.6 c_EBIT_MULTIPLE_CURREV/EBIT x 11.3 10.5 10.1 8.7 7.8 Associates 9.2 10.6 10.9 13.5 14.9 c_EBITDA_MULTIPLE_CUEV/EBITDA x 8.7 8.2 7.9 6.9 6.2 Net interest Exp. (40.5) (37.9) (38.3) (33.1) (28.6) c_DIV_YIELD*100Dividend Yield % 1.9 0.0 0.0 7.5 8.8 Other (9.2) (10.6) (10.9) (13.5) (14.9) c_FCF_YIELD*100FCF Yield % 2.9 0.3 -0.5 -0.3 -0.3 Profit before tax 72.9 81.3 84.1 108.3 121.0 c_PB Price to Book x 1.5 1.5 1.5 1.4 1.3 Income tax (3.8) 6.0 (19.0) (27.7) (33.3) Returns Profit after tax 69.1 87.3 65.1 80.6 87.7 c_ROE*100Return on Equity % 15.5 20.0 13.6 15.3 15.2 Minorities (23.8) (25.7) (5.6) (2.3) (2.9) c_I_NPAT/c_I_SALES*100Profit Margin % 6.3 8.8 8.2 9.9 10.8 Preferred dividends 0.0 0.0 0.0 0.0 0.0 c_I_SALES/c_B_TOT_ASSAsset Turnover x 0.7 0.7 0.7 0.8 0.8 Associates & Other 9.2 10.6 10.9 13.5 14.9 c_ASSETS/c_EQ_COMMONEquity Multiplier x 3.7 3.5 2.3 2.0 1.9 Normalised NPAT 54.4 72.2 70.5 91.8 99.8 c_ROA*100Return on Assets % 4.2 5.8 6.0 7.5 8.2 Unusual item after tax (510.2) (57.6) (55.2) 0.0 0.0 c_ROIC*100Return on Invested Cap. % 10.3 12.3 9.7 10.1 10.4 Reported NPAT (455.8) 14.6 15.3 91.8 99.8 Gearing (SUM Net( c_BORROW, Debt to Net -c_B_CASHdebt + Equity , -c_B_CASH_OPER,% 43.9 -c_B_RESTR_CASH,41.5 42.7 c_NET_DEBT_ADJ)38.5 / SUM32.4 (c_EQ_SUM, c_BORROW, -c_B_CASH , -c_B_CASH_OPER, -c_B_RESTR_CASH, c_NET_DEBT_ADJ))*100 Balance Sheet 12/12A 12/13A 12/14E 12/15E 12/16E SUM (Net c_BORROW, Debt to EBITDA -c_B_CASH , -c_B_CASH_OPER,x 3.1 -c_B_RESTR_CASH,2.8 c_NET_DEBT_ADJ)/c_I_EBITDA2.7 2.3 1.8 Cash & equivalents 20.3 20.0 46.0 12.1 17.6 c_I_EBITDA/Int Cover c_I_NET_INTEREST (EBITDA/Net Int.) x 3.6 4.0 4.1 5.4 6.5 Inventories 10.4 7.6 8.3 8.9 8.9 c_I_EBIT/Int Cover c_I_NET_INTEREST (EBIT/Net Int.) x 2.8 3.1 3.2 4.3 5.2 Receivables 127.8 121.0 133.0 136.4 136.2 (c_C_CAPEX/c_I_SALES)*-100Capex to Sales % 1.6 1.7 1.8 1.7 1.7 Other current assets 50.7 130.1 8.8 8.8 8.8 (c_C_CAPEX/c_I_DEPR)*-100Capex to Depreciation % 50.1 54.2 57.3 52.7 52.7 Current assets 209.2 278.6 196.1 166.2 171.4 MSCI IVA (ESG) Rating BBB CSEC View Property, plant & equip. 171.5 149.4 138.8 124.5 110.1 TP ESG Risk (%): -1 Intangibles 723.3 714.9 721.2 716.9 713.1 TP Risk Comment: APN's Governance has improved however key shareholder INM remains a large influence on the Other non-current assets 189.8 112.1 118.8 210.3 225.2 9.6 company Non-current assets 1,084.6 976.3 978.8 1,051.6 1,048.4 8.6 Total assets 1,293.8 1,254.9 1,174.9 1,217.8 1,219.8 7.6 Payables 160.2 113.4 124.8 136.4 136.2 Interest bearing debt 479.1 452.4 464.6 414.6 354.6 6.6 Other liabilities 69.0 78.5 24.5 24.5 24.5 5.6 MSCI IVA Risk: Neutral Total liabilities 708.3 644.4 613.8 575.5 515.2 4.6 MSCI IVA Risk Comment: MSCI has recently downgraded its Net assets 585.5 610.5 561.0 642.3 704.6 rating for APN based on the apparent lack of talent retention 3.6 programs and undisclosed source of pulp for its newspapers.