APN coasts the radio waves

A smaller outdoor format and the healthy performance of APN Media's radio business backdrop the market's love affair with the company.

In case you’ve missed it, APN News and Media’s share price has increased by a staggering 80 per cent over the last three months.

Sitting at 27 cents towards the end of July, yesterday the share price was at 48.5 cents – a mark the company hasn’t traded at for over a year.

In the same period, comparable media stocks have not performed anywhere near as well. Seven West Media is up 12.9 per cent over the past 3 months, Fairfax up 8.4 per cent and Southern Cross Austereo up 27.5 per cent. Only Macquarie Radio Network has seen a greater increase, up 127 per cent over the same period buoyed by speculation that it will establish a merged AM radio operation with Fairfax’s radio assets.

So what’s driving the increased market confidence in the prospects of APN?

It’s difficult to pinpoint the exact reason.

The first sign of increased confidence was back on August 16, when APN released its half-yearly financials. A half-yearly profit of $12.8 million was announced, a bounce from the previous year’s first-half result of a $319 million dollar loss. However, once impairment charges were removed the profit result year-on-year were effectively the same. Aside a commitment to reduce debt moving forward to the tune of $25 million due to cost containment, there didn’t appear to be much in the topline numbers to suggest much aside it was business as usual.

In terms of divisional results, performance was mixed. The regional media business is experiencing significant headwinds. Half-yearly revenue was down 14 per cent year-on-year and earnings before interest, taxes, depreciation and amortisation down 40 per cent. Its New Zealand media revenue was down 8 per cent, with EBITDA up 1 per cent.

APN Outdoor revenue was down 1 per cent with EBITDA down 20 per cent. The acquired Inc Media digital catalogue business was down 28 per cent in terms of revenue and EBITDA down 71 per cent, and the Brands Exclusive online sales business saw revenue increase 30 per cent but EBITDA drop 38 per cent, causing a $2.6 million loss for the 6 month period.

The heroes of the half were the Australian Radio Network radio business.  Revenue was up 7 per cent (in a market up only 3 per cent) and EBITDA up 14 per cent; the NZ radio business – revenue up 8 per cent, EBITDA up 27 per cent; and the AdShel outdoor advertising business – revenue up 5 per cent and EBITDA up 18 per cent. The company also announced they were exploring divestment options for the Brands Exclusive business (which the company had paid a reported $42 million for an 82 per cent stake just 12 months earlier) and were on track to slowly chip away at debt to the tune of $40-50 million (of a total net debt of $459 million) before the end of the year.

A mixed set of numbers, but one the market liked. Shares jumped 20 per cent in one day and held steady until the tail end of September, when APN announced it had formerly commenced the process to explore the sale of Brands Exclusive, where it climbed another 20 per cent over the following two weeks. While the acquisition of Brands Exclusive was met positively by the market, its performance had been lousy for APN.

The more revenue it generated, the more money it lost, and its $2.6 million dollar loss in the first half demonstrated that the reported $42 million total price tag paid was well over its realistic market value. On Tuesday, APN announced it had entered into exclusive discussions to sell the remaining 50 per cent of its APN Outdoor business to private equity group Quadrant for $69 million. This sent shares climbing another 20 per cent over the following 24 hours.

With the removal of APN Outdoor, it means the three best performing assets of the group are joint ventures with US media giant Clear Channel. Between the ARN radio business, the NZ radio business and Adshel, these three companies contribute only 32 per cent of total group revenue but a substantial 54 per cent of group EBITDA before corporate costs – more than the declining newspaper businesses.

APN must see some future in the newspaper business. It hired Michael Miller to run the company, an experienced newspaper man with significant experience at Nationwide News. However, given the seemingly irreversible downsizing of the newspaper industry, it increasingly looks like a future APN is one driven primarily by radio – be broadcast or digital – and smaller format outdoor.

The performance demonstrated by ARN over the past two years has been impressive, with share increases converting to very handy revenue and profit increases. With Adshel, they have managed to buck a very sluggish out of home industry trend and grow profit. Both businesses appear to have more upside in the future that will generate investor confidence. Surely APN would love to own both of these businesses – key strategic pillars of the organisation – outright.

It raises the question of whether Clear Channel may have plans to exit the Australian market via an exit of the joint ventures it is involved in, and whether APN is looking at ways it can reduce its liabilities to take complete ownership of Adshel and ARN if that was to happen. The reason? Clear Channel presently has $20.3 billion in long term debt, and the interest on the debt owing in the first half of 2013 exceeded operating income by a staggering $392 million. In addition, cash flows for the first six months of 2013 decreased by $520.8 million. Clear Channel have bought some breathing room in terms of when these facilities are due, but the interest liability is proving increasingly troublesome.

Ben Shepherd is a media and technology consultant. He can be found on LinkedIn and on Twitter.

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