Macquarie rates this troubled stock as Neutral (but not Sell)

Macquarie Research rated Southern Cross Austereo (ASX: SXL) stocks as NEUTRAL in a research note on Friday, despite caution from a softening advertisement market. 

However, the bank described the company’s valuation as “[still] appealing.” 

To anybody who follows the somewhat unique radio broadcaster’s stock, this could be seen as an interesting statement, and not the least because the bank also expects further consensus downgrades.

One big thing to note about SXL - it still hasn’t recovered its COVID-19 losses. 

There are a number of companies which fit that bill, but SXL is a standout for the wrong reasons. 

Consider the below. 

No COVID recovery for SXL shares 

• On the 21st of February in 2020, shares were worth $8.40 

• One day later, COVID-19 took a jackhammer to world markets

• One month later, on the 20th of March, they were worth $2.45 

• By the 24th of April 2020, they were worth $1.30

• As at close on Friday 17 February 2023, they are worth $1.01

• But the ASX300 has moved on above and beyond its pre-COVID high

The company issued a trading halt, then called voluntary suspension for a month. By the time it reinstated, the damage was already done (see chart below).

SXL’s 5y chart vs. the ASX300 (XKO) 

Earnings downgrade

EBITDA and NPAT for SXL were both down -6% compared to Macquarie’s respective estimates, the bank highlighted on Friday.

In turn, the bank downgraded SXL’s price target by -6% to $1.13.

What’s more, as far as Macquarie sees it, Southern Cross Austereo is in for a rough couple of years yet (but not so rough that the bank rated the stock a SELL). 

In short, full FY EBITDA is projected to be down: 

• -2% for FY23 

• -2$ for FY24 

• -9% for FY25 

TV revenue a drag 

Despite the fact both EBITDA and NPAT came in -6% lower than Macquarie’s expectations in Southern Cross’s first-half yearly report, the bank’s research division is still watching SXL closely. 

This is because it appears between the lines that SXL could benefit from selling off its TV assets. “Radio is preferred over TV operators,” the bank wrote on Friday. 

Summarising the stock’s first-half report, analysts also wrote:

“SXL are not actively looking to sell TV [assets], but are open to the idea. Focus now is to run assets as efficiently as possible.” 

The bank expected soft TV revenue performance, however, SXL’s results were weaker than it was anticipating. 

This surprised the analysts towards the downside, even though Macquarie’s research highlighted TV markets declined between -5% to -10% in the second half of CY22. 

“SXL expects Q3 broadcast revenue to be flat to low-single-digit growth YoY which we think is a positive outcome,” analysts wrote. 

Why Macquarie still rates SXL as a HOLD and not a SELL

There are some green shoots among the char. 

Firstly, SXL recently acquired an asset, LiSTNR, which is basically a competitor to Spotify. Users download the app and they can access music, radio stations, and podcasts. 

“LiSTNR is tracking at revenue growth of >65% for Jan & Feb 2023 YoY, highlighting its strong take-up given new partnerships agreements with Wondery and Stitcher,” analysts wrote on Friday. 

Wondery and Stitcher are both well known US-based podcast production powerhouses. 

Second green shoot: share buybacks and new talent

Perhaps the main reason Macquarie is retaining NEUTRAL on SXL is because of the company’s upcoming share buyback. 

“SXL has bought back 83% of shares permitted under on-market buyback,” analysts noted, adding that the “board intends to resume buy-back after results until expiry on April 7.” 

An ex-Disney CFO has also been added to the team (Tim Young).