Executive summary
The stock price of Southern Cross Media Group Limited did not show any reaction to the announcement of the 2015 financial results. The stock price increased days before the announcement and the day after the event but declined two days after the announcement. Financial analysis of firm indicates that it has a strong liquidity, and this has improved over the last five years. Its debt to equity ratio has increased due to the capital reduction in accordance with the relevant statute. The year 2015 saw a decline in the profitability of the company although this did not affect the dividend per share. The company’s earnings declined due to the weaker performance of the television advertising market. It also forced the company to impair intangibles and investments due to lower growth forecasts. Based on the analysis of the company and the industry, I believe it would not be a good idea to buy its stock unless it undertakes measures to diversify its revenue sources.
Objectives of the report
The report analyses the impact of an announcement on the stock market. It further analyses the financial condition of Southern Cross Media Group Limited including the stocks that advises the potential investors on whether it is a good buy or not.
Overview of the industry, competitors and company
Southern Cross Media Group Limited is a company that creates and broadcasts content on online media platforms, radio and TV in Australia. It owns 19 television licenses and ten radio stations. The company also provides online advertising and serves about 8.34 million subscribers, both radio and TV. The company operates in the entertainment-diversified industry. The performance of the free-to-air television and commercial radio industry depends on the company’s coverage, technological advancement demand for advertising, among other factors. Over the last few years, the free-to-air TV industry has been adversely affected since the number of Australians watching free-to-air TV programs has gone down. Online advertising market platforms have become more lucrative than TV networks. Competitors of the company include Fairfax Media Limited, Nine Entertainment Co. Holding Limited, among other competitors.
Overview of the announcement and the expected impact
On Thursday 27th August 2015, the company released its full year financial results for the year ended 30th June 2015. It reported a net loss of $284.9 million after tax. The loss was mainly due to the impairment of its Metro and Regional assets. It also reported a net profit after tax excluding significant items of $64.8 million. Southern Cross Media Group maintained its dividend of 3 cents per share, equalling a 67% payout ratio. Among the key highlights of the release included the 3.5% increase in regional radio advertising revenue, a reduction in net debt to $506.9 million representing a decrease by $81 million. Leverage ratio also reduced by 2.84 times from the same period in the previous financial year. As the CEO pointed out in the release, the performance of the television advertising market was weaker although the company’s market share in the radio market improved.
I expected the announcement to affect the company's stock market price adversely. As pointed out, the company reported a net loss after including significant items. Although it reported a net operating profit after tax excluding significant items, investors would be worried by the weaker performance in the television advertising market. A decline in the performance of the company adversely affects the company’s stock price. Companies with improving financial performance have growth potential and positive prospects. The demand for their stocks is usually high since investors expect to gain in future as their stock prices continue to rise. Shareholders of companies showing weaker financial performances may decide to sell their stocks to avoid further losses if the stock prices fall.
The above expected adverse impact of the media release by Southern Cross Media Group would not have a substantial impact on the hare price. Despite the company reporting a loss after including significant items, it still managed to maintain the dividends at 3.0 cents per share. Investors with a short-term orientation would still hold on or purchase more of the stock due to the dividends paid. However, I expected that the payment of dividends would not have a substantial impact on the share price. Investors not only focus on the dividends but also capital gains. Furthermore, investors would be more interested in the company’s ability to sustain dividend payments (Hillier, 2010). Without positive prospects of growth in future earnings, the payment of dividends has a mild effect on the stock price of the company.
Actual stock market reaction
The stock price Southern Cross Media Group Limited showed random movements towards and after the announcement of the company’s full years on August 27th, 2015. As shown in the graph below, the stock recorded the lowest price in the period under consideration three days before the announcement of the results. The price increased slightly on 25th, 26th as well as on the day the announcement was made. However, the company’s stock price rose significantly the day after the release of the financial results. The following day saw a decline in the stock’s price.
The residual plot shown below shows that the announcement had no major impact on the stock market prices. The pattern exhibited by the stock price movements is not consistent. From the above analysis, it shows that the reaction of the stock market was not the same as what I would have expected as explained in the previous section. The stock price for the company increased slightly in the two days to the announcement of the results. On the day of the announcement of the results, there was a small increase in the market price. As explained in the previous section, I would have expected the stock price to fall since the company had reported a net loss after including significant items. The company maintained the dividend per share, and this could have led to the increase in stock prices after the release of the financial results. However, the challenges of declining TV advertising market could have caused the decline of the stock two days later.
Directors’ report
The director’s report highlights the major events, internal, external, financial and nonfinancial, that affected the company’s performance as well as those with a potential to affect the company’s earnings. Among the highlights included the reduction in the television market. In the year 2015, the television market fell by 4.5%, and this is expected to continue as it the sector faces competition from other means such as the internet. Television industry forecast growth rates were reduced significantly. This not only affects current but also the future performance of the company. It caused the impairment of assets of the Metro and Regional CGUs.
Besides, the directors highlighted the increasing competition in the radio market. This forced the company to reassess its revenue growth forecasts as well as the long-term market share. Intense competition is likely to affect the company’s earnings. Another important highlight was the group’s capital management strategy of reducing leverage. Reducing leverage is important since it reduces the financial risk involved in investing in the company’s securities.
Analysis of the income statement
A horizontal analysis of the income statement of Southern Cross Media Group shows that the company experienced a reduction in revenues from continuing operations in 2015. The reduction in revenue was due to the weaker performance of the television advertising market. The company also reported a net loss in both 2014 and 2015. The large net loss after tax was due to the impairment loss of its intangibles and investments. The reduction of the television market growth caused the impairment of its assets. A vertical analysis further shows that the percentage loss was about 45% in 2015 and that impairment of intangibles and investments was the largest contributor to this loss.
Analysis of the balance sheet
The balance sheets for 2014 and 2015 indicate that the firm’s total assets declined in 2015. The assets that declined the most were intangibles and investments due to the impairment Metro and Regional CGUs that resulted from weaker television advertising market performance. Total current assets increased significantly in 2015 while current liabilities only had a slight increase. Total shareholders’ equity declined in 2015 due to the capital reduction done as required by section 258F of the Corporations Act.
Analysis of the statement of cash flows
The statement of cash flow for the two years shows an increase in cash assets at the end of the year 2015. This was largely caused by a reduction in net cash used in both investing and financing activities. The company also received significant amount from the sale of property, plant and equipment. The statement also indicates that the year 2015 saw a reduction in cash generated from operating activities. This was caused by a reduction in total revenue as a result of the reduction of the television advertising market. The analysis indicate a stable cash flow situation and no signs of cash flow problems (Weil, Schipper, & Francis, 2014).
Financial Ratio analysis of SXL Southern Cross Media
Current ratio
Southern Cross Media Group Limited’s current ratio has increased over the last financial periods. In the year 2015, the current ratio was 1.920 up from 1.29 in the previous year. The current ratios were 1.12, 1.08 and 1.19 in 2011, 2012 and 2013 respectively. In all the financial years, the company’s current ratios were more than one indicating that Southern Cross Media Group Limited had adequate current assets to pay off its short-term obligations (Horngren & Harrison, 2012). The trend shows an improvement in the liquidity of the company in each of the years under consideration.
Debt to equity
The company has had an increase in debt to equity in the last three financial years. The ratio increased in 2012 but declined in 2013. It then increased from 0.659 in 2014 to 0.8556 in 2015. The decline can be attributed to the fall in shareholders’ equity. This was occasioned by the reduction of equity capital as required by Section 258F of the Corporations Act. The increase in this ratio implies a reduction in Southern Cross Media Group Limited’s solvency (Stice & Stice, 2012). However, the company has plans to reduce its leverage and the net borrowing cost.
Return on assets
The company’s return on assets improved between 2010 and 2013. However, both 2014 and 2015 have seen a decline in Southern Cross Media Group Limited’s return on assets. This indicates a fall in the firm’s profitability. This has been occasioned by the decline of the television advertising market.
Profit ratio
Southern Cross Media Group Limited’s profit ratio also declined in 2014 and 2015 indicating a decline in the firm’s profitability (Gibson, 2009). This was majorly due to the large impairment loss included due to the weaker performance of the TV market and lower revenue growth prospects.
P/E ratio
The company has seen a reduction in its P/E ratio due to the fall in the stock prices. In 2015, the ratio increased since the stock price declined while the EPS increased during the year.
SWOT analysis
Strengths
The company has a stable financial position despite the weak performance in 2015.
Skilled workforce that enhances creativity and innovation
Well-developed distribution and sales network
Weaknesses
• Over-reliance on TV and radio markets
• Limited investment in research and development
Threats
• Growth and stability of the Australian economy
• Growth of online advertising and users
• Available sources of capital such as venture capital
• Growth in global markets
Threats
• Weakening of the TV advertising market
• Increased competition from other media and firms in the industry
Conclusion and recommendation
The company needs to address the challenge of weakening TV market by diversifying into other areas like online advertising, among other measures. Given the above analysis, I would not invest in the company’s stock. Although it has maintained its dividend payout, the weaker performance of the TV market is a great concern. Revenue growth forecasts have been reduced and if the situation does not change, investing in the stock will result in more losses to shareholders.
References
Gibson, C. (2009). Financial reporting & analysis. Mason, OH: South-Western Cengage
Learning.
Hillier, D. (2010). Corporate finance. London: McGraw-Hill Higher Education.
Horngren, C. & Harrison, W. (2012). Accounting. Upper Saddle River, N.J.: Pearson/Prentice
Hall.
Stice, E. & Stice, J. (2012). Intermediate financial accounting. Mason, Ohio: South-Western
Cengage Learning.
Weil, R., Schipper, K., & Francis, J. (2014). Financial Accounting: An Introduction to
Concepts, Methods and Uses. Mason, OH: South-Western, Cengage Learning.
