Digital Audio Shift And Rising Content Costs Will Pressure Margins Over Time

Catalysts

About Southern Cross Media Group

Southern Cross Media Group operates a nationwide Australian audio network spanning broadcast radio and the LiSTNR digital audio platform.

What are the underlying business or industry changes driving this perspective?

• The rapid shift in listening from traditional broadcast to digital streaming could stall if larger global platforms accelerate investment in Australian audio, compressing LiSTNR pricing power and capping digital revenue growth and group EBITDA.
• Advertising budgets are increasingly directed to performance and walled garden platforms. This may limit the ability of a brand-led audio network to keep closing the gap between audience share and revenue share, constraining top line growth and operating leverage.
• Having removed more than $60 million from OpEx and CapEx over recent years, further meaningful efficiency gains may be hard to achieve. Any slowdown in revenue would therefore quickly pressure net margins and earnings despite the current low cost base.
• Content and talent costs for premium shows, sport rights and podcasts could rise faster than revenue as competition for marquee audio brands intensifies. This could erode the current 90 percent conversion of incremental revenue to earnings and weaken free cash flow.
• Reliance on partnerships and third party regional networks to extend digital reach may expose the company to renegotiation risk and revenue sharing pressure. This could dilute the economics of LiSTNR expansion and limit future NPAT growth.

Assumptions

This narrative explores a more pessimistic perspective on Southern Cross Media Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Southern Cross Media Group's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.5% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach A$19.5 million (and earnings per share of A$0.08) by about December 2028, up from A$6.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$35.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 31.1x today. This future PE is lower than the current PE for the AU Media industry at 17.2x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The successful transformation into a digitally focused audio company, with LiSTNR now EBITDA and cash flow positive and growing revenue at close to 30% per year, could support sustained top line expansion and structurally higher earnings.
• Dominance in the core 25 to 54 money demographic, where SCA holds a 9 point audience share lead and is progressively closing the gap between audience share and revenue share, may underpin continued revenue growth and margin expansion.
• Demonstrated cost and capital discipline, including more than $60 million of sustainable savings, flat non revenue related costs since FY 23 and maintenance CapEx around $10 million per year, could protect and grow net margins and free cash flow even in a soft advertising market.
• Low leverage with net debt reduced to $67.6 million and a leverage ratio near 1 times, combined with strong free cash flow conversion above 100 percent, gives flexibility to invest in growth and return higher fully franked dividends, supporting earnings resilience and shareholder returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Southern Cross Media Group is A$0.65, which represents up to two standard deviations below the consensus price target of A$0.88. This valuation is based on what can be assumed as the expectations of Southern Cross Media Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.08, and the most bearish reporting a price target of just A$0.65.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$433.5 million, earnings will come to A$19.5 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$0.83, the analyst price target of A$0.65 is 27.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.