Southern Cross Media (ASX: SXL): We expect to hear good news in the 1HY report

Marc Kennis Marc Kennis, February 9, 2022

Demand for advertisement to increase soon

Southern Cross Media Group (ASX: SXL), together with its subsidiaries, engages in the creation and broadcasting of content on free-to-air commercial radio, television (TV) and online media platforms. It operates through two segments, Regional and Metro. The company owns 78 regular radio stations and 8 digital radio stations across metropolitan and regional Australia. It broadcasts 86 free-to-air TV signals in regional Australia as well.

The company also provides audio and visual services, including social media, live events, video, online and mobile assets that deliver national and local entertainment and news content. Southern Cross Media Group Limited was incorporated in 2005 and is based in Melbourne, Australia.

We believe with the easing COVID situation and international borders opening, business activities are likely to increase. Additionally, the Federal election is expected in May 2022. All that means higher demand for advertisement, in our view. This leads us to believe we can expect positive earnings guidance for FY22 in the upcoming 1HY22 report on 24 February 2022.


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COVID-19 hit the share price badly

Let’s go all the way back to August 2019 and see what brought down the share price from $10 (adjusted for the share consolidation in November 2020) to the current $2 level.


Southern Cross Media

Southern Cross Media, Weekly Chart in Semi-log Scale (Source: Metastock)


❶ SXL outsourced its television and radio broadcast transmission services to Broadcast Australia, resulting in a $9.2m non-cash loss.

❷ A trading update by SXL warns of weak Media markets and lower earnings guidance.

❸ Corona crash takes down the share price to $1. The company estimates a 30% reduction in revenues and also raises capital to improve its balance sheet.

❹ Spread of the Omicron variant and its impact on small businesses lowers the earnings expectations by the market.

❺ The easing COVID situation improves the outlook for small businesses.


As can be seen in the chart, the share price has spent most of its time after the Corona crash trading in a range between $1.75 to $2.70 (the two blue lines). The share price moved closer to the top of the range when the outlook for small businesses improved and reversed to the bottom of the range with a worsening COVID situation.


Southern Cross Media has a solid business

The stock is trading at a price-to-book multiple of only 0.8x. A large portion of the assets on SXL’s balance sheet is, however, intangible. On the earnings side, the shares are currently trading at EV/EBITDA multiples of 6x and 5.9x for FY23 and FY24 respectively. The company pays a 5-cent dividend, which yields 2.5% at the current share price. These numbers are not very attractive, in our view. So, the market will need to see a more positive future ahead of SXL if its share price is going to move higher.


There are signs of hope for SXL

Australia is quickly putting the COVID-19 pandemic behind it as the restrictions on small business activities are easing and international borders are opening to travellers as early as 21 February 2022. Australia also has the Federal election coming up in May this year. All that means higher demand for advertisement and therefore higher revenue for SXL. Results of FY21 already showed improvements over the FY20 results and we expect to see an even better business outlook for the rest of FY22 in the coming 1HY22 report.


The risks

We believe the main risk to SXL’s profitability is the ongoing pandemic. The impact of COVID-19 has already been reflected in the share price. But any further disappointing news regarding the spread of the virus or potential new variants could hit the share price, in our view.


Our suggested action plan

As the business outlook is improving, we expect to see a gradual increase in SXL’s share price towards the top of the range at $2.70. This implies a potential upside of about 35% from the current share price at $2.00.

The 1HY22 results are to be announced on 24 February 2022. As we get closer to the announcement date, we expect speculation to push the price higher, because the market is expecting to hear good news based on the improving business environment. This increased market demand for the stock can also be seen on the chart as the share price broke its downtrend (the red trendline) and has picked up some momentum.

The bottom of the range at $1.75 (the lower blue line) has proven itself to be a very valid support level as it has reversed the share price several times in the past year. Breaking below this level is a sign of severe bearish sentiment on the stock and can be used as a stop-loss level.


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