ProSiebenSat.1: “5 Positives”

Pro7/Sat1 is Germany’s second-largest commercial broadcaster (after RTL) and in a fresh report from investment bank Morgan Stanley it seems the broadcaster is in much better shape than this time last year. Pro7/Sat1’s management is committed to paying investors “at least” 80 per cent of its underlying Earnings/Share in the future, which the bank translates as “a potential dividend per share of around €1.28 next year” and a few Euro cents ahead of their own estimates.

The reason is a (very) slowly recovering German advertising market, as well as future growth opportunities outside Germany. “German TV adspend came in ahead of expectations in September,” says Morgan Stanley. “Q3 ended up +3-4 per cent, inline with Q2. October is looking positive so far and even without a push from late bookings, German net advertising revenue should be flat in 2011 per Pro7.” As a result the bank’s own EBITDA forecasts for the broadcasting group rise from a previous €825 million to €840 million.

The CEO stated that German TV revenue growth in Q3 would be inline with Q2 i.e. +3-4 per cent. This is better than the +0.5 per cent we were going for. September in particular exceeded expectations. Concerning Q4, management stated that October had started well and seems like it will be up low single-digits. The swing factor will come from late bookings. Pro7 highlighted two scenarios: (i) if late bookings are inline with last year’s, German TV growth could reach 3-4 per cent again in Q4 which would lead to a 3-5 per cent growth for German-speaking in 2011. (ii) If late bookings are down -5 per cent to -6 per cent vs. last year, pure German TV would end the year flat implying German-speaking would be up around 2 per cent. Mr. Ebeling, CEO, said that he could not foresee a worse outcome than scenario 2. Throughout the year, Pro7 raised net prices by -5-7 per cent.”

The bank’s report says: “Pro7 stated that, if German adspend proved very weak in 2012, a €50-100 million cost-cutting plan could be rapidly implemented. This means that German Net Ad Revenue has to be down in excess of -5 per cent to -6 per cent for Pro7 to start seeing EBITDA decline YoY. This coupled with a high dividend yield should provide the stock with decent support despite uncertain macro [conditions].”

Additionally, Pro7/Sat1’s balance sheet is strong, with net debt/EBITDA likely to fall to just 2x by year-end, and no plans for refinancing this side of 2015. The bank’s report said perhaps the broadcaster should consider some targeted Merger/Acquisition activity, although said there was – in the bank’s view – a “low probability” of that happening”.

Nevertheless, “Pro7 expects revenue to grow by >€750 milllion between 2010 and 2015 (we forecast €324 million),” said Morgan Stanley. “80 per cent of incremental revenue will come from outside of German TV. 90 per cent will be organic. While we are reluctant to push up our medium-term estimates in the current environment, we reckon Pro7’s initiatives in structurally growing platforms and its ability to leverage unsold advertising inventory constitute upside risk.”

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