TEN Network (TEN)

Fat Prophets

Thursday 12th June 2014

TEN Network (TEN)

What’s new?

It is a fairly old story now that TEN, the third largest free to air network TV channel in Australia, has struggled with the structural headwinds facing the media industry. Half year results in April however were not as poor a showing as feared. Television revenues overall increased 4.4% to $315.0 million and TEN recorded its best start to a year ratings wise since 2009 (thanks to the ‘Big Bash’ and Sochi Winter Olympics).

A recovering top line was not enough to stave off a net loss after tax of $8.0 million. Mind, this was small beer to the previous corresponding period’s net loss of $243.3 million thanks to write-downs.

TEN has clearly come a long way in getting back towards profitability and still has further to go, but decisive steps are being taken. TEN has axed its underperforming breakfast program ‘Wake Up’ and early morning and late news bulletins. A leaner cost base will provide more leverage to an eventual recovery in the TV advertising market, and further ratings gains.

Outlook

TEN clearly has much work to do in terms of fixing the fundamental problems within the business such as programming, cost cutting and rationalisation, but we believe the station can be turned around.

Net debt at the half year was $35.9 million, but there remains sufficient liquidity. TEN has used ‘just’ $55 million used of a $200 million debt facility guaranteed by major shareholders Lachlan Murdoch, Bruce Gordon and James Packer (others in a star studded class of shareholders include Gina Rinehart).

TEN ‘could’ end up using this facility in the next few years, however that assumes no material improvement in advertising markets, TEN’s share thereof, or the cost base. Action is being taken on the latter, whilst a cyclical turnaround in ad spend may be on the horizon.

Meanwhile TEN could also partake in industry consolidation. One tie up could be with News Corp where Lachlan Murdoch is co-Chairman. Another prospect is a combination with Fairfax in which Gina Rinehart has a 14.9% holding.

Price

TEN’s share price has been in serial decline since late 2004, losing more than 90% of its value, and the bigger picture would seem very challenged. However the stock has finally broken free from the 10 year downtrend, and appears to be building a base.

On a short dated view TEN’s chart is more encouraging, with 30 cents a key resistance mark set to be tested.

Worth Buying?

TEN is out of favour but has many of the hallmarks of a compelling turnaround story. The low point for earnings may have been passed with costs being taken out of the business, increasing leverage to a recovery in industry revenues over the longer term.

Comfort is provided by the debt headroom, financial backing of key stakeholders, and the prospect of the company participating in industry consolidation, which is likely to maintain tension in the share price.

We therefore believe TEN is worth buying for investors with a high risk appetite, at current levels.

Disclosure: The author, and interests associated with him, hold shares in TEN Network.

Angus Geddes is the CEO of Fat Prophets, a stock market research and funds management business.

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