Morningstar Equities Research - 12 Dec 2012

Southern Cross Media Group Limited SXL | Brand repair: Disaster recovery plan implemented

Morningstar Recommendation: Accumulate
Michael Higgins, Associate Analyst

Following the unfortunate events of last week, Southern Cross Austero has released a statement suspending all advertising on 2Day FM until further notice and the cancellation of 2Day’s Hot 30 show. The temporary suspension is expected to be short lived and will unlikely materially impact the long term group revenue generating ability of the company. The prank call saga adds to an unflattering list of indiscretions linked to 2Day FM - the station has long tolerated Kyle Sandilands. In saying that, 2Day FM still enjoys a five year reign as Sydney’s number one rated FM breakfast show. Despite the impressive ratings, SXL has suffered from an inability to turn ratings dominance into advertising success—the latest transgression unlikely to help the situation—with Telstra and Coles suspending advertising. In 2012 metro advertising revenue softened 4.7% yoy, driven by local advertising which was down 5.8% and national, down 4.2%. Although clearly not positive for the station’s brand, it’s hard to see that the (likely) short term suspension of advertising will have a lasting impact on group financials. We will reassess our view if the suspension is upheld longer than expected, but at this point, our underlying thesis is unchanged.

Warehouse Group Limited (The) WHS-NZ| Acquisition of Noel Leeming raises more questions than answers
Morningstar Recommendation: Hold
Nachi Moghe, Senior Equities Analyst - NZ
WHS acquired electronics and home appliance retailer Noel Leeming Group (NLG) for NZD 65 million. NLG owns two brands namely Noel Leeming and Bond & Bond. The price paid corresponds to 6 times EBIT and 8.7 times earnings. We are not enthused by this acquisition and remain concerned that margins might come under further pressure due to WHS’ increasing exposure to categories like consumer electronics and home appliances. These categories are facing price deflation because of technological changes and intense competition. In that respect the recent divestment of Dick Smith by Woolworths is poignant given Dick Smiths poor performance and shrinking margins. NLG is a bit different from Dick Smith because of its exposure to home appliances. Still, we do not regard the outlook for home appliances to be vastly different from consumer electronics.

Whitehaven Coal - Downgrade due to price change

Cardno - Upgrade due to price change.

Fortescue Metals - Downgrade due to price change.

Sirtex Medical - Downgrade due to price change.

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