Be patient’ on Pro7, says bank

chris

German network broadcaster ProSieben-Sat1 has been under pressure this past couple of week with a miserable share price and what’s described as a “panic” over ad-revenues.

Morgan Stanley, in a report on March 5, doesn’t quite say “don’t worry”, but delivers a pile of solid reasons why confidence in the broadcasting giant should be better than it is. Pro7-Sat1’s numbers came out a few days ago and prompted something of a market stampede to exit their shares.

The bank’s note to investors pulled no punches, saying: “in our view, [this represents] a significant opportunity to build a position in a stock that we believe offers well above average returns in the medium term. With 2007 underlying profitability ahead of consensus and our expectations (reported figures were, frankly, irrelevant given the many one-off items), our investment thesis remains firmly intact:

• We estimate that ProSiebenSAT1 will deliver 12.1% compound annual EPS growth between 2007 and 2012
• With a commitment to pay between 80%-100% of earnings out in the form of dividends, ProSiebenSAT’s 2007 payout provides investors with a yield of 9.6%.
• With a 2008 P/E of 7.8x, 2008 and EV/EBITDA of 7.5x, we believe that the market is substantially undervaluing the business given its earnings growth prospects
• While the company is more leveraged than the average broadcaster, its debt maturities are long (2014/2015), its covenants provide headroom, and its cost of borrowing low (6-3-6.5%, and fixed for 5 years).
• Structurally speaking, we think this is by far the best positioned of the European broadcasters with regard to fragmentation, as well as to its position vis a vis the internet - the company has created the third largest online advertising network in Germany.”

Moreover, Morgan Stanley gives Pro7-Sat1 Group a target price of €25, which if accurate makes the current low price an absolute bargain.

The bank summarizes its thoughts thus: “As is the case for all broadcasters, the key risk to our thesis on ProSiebenSAT1 is advertising. Should the TV advertising market be materially weaker than forecast, and for longer than we assume, then there would be sustained downside to our price target. Similarly, if the company were to be unable to extract the synergies that it has targeted through the SBS deal, that would also have a negative impact. Finally, if the company were to experience a material and sustained downturn in profitability, this could put the business at broader risk because of the leverage on the company.”

ProSieben-Sat1 Group did confirm it would sell off its CMore pay-TV division operating in the Nordic region, with a guide-price (says the bank) of €300m-350m. Telenor, already carrying the signals, and Time Warner, are the current names in the frame as possible buyers, while Modern Times Group which operates rival ViaSat could also be an interested party.

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