Jenny Ruth: Little things add up to a lot

CanWest managing director Brent Impey says demand for TV time remains strong. Picture / Paul Estcourt

Canwest MediaWorks' share price graph since it listed last July looks like a child's drawing of a mountain. It peaked in mid-January and has been mostly on the slide since.

That's even though it beat its prospectus forecast for the year ended last August and is confidently predicting it will at least meet, but probably exceed, the $61.1 million earnings before interest, tax, depreciation and amortisation (ebitda) forecast for the current year.

And that's despite it managing to keep pushing up its television advertising rates. When it reported its first-half result last month, a 12 per cent jump in ebitda to $37.9 million, the company said it had achieved a 7 per cent average rate increase for the June quarter. Managing director Brent Impey says it has secured an average 9 per cent rate increase for the September quarter.

He says Television New Zealand is the market leader and it managed a 13 per cent average rate increase.

"Demand for television time remains very strong. We have firm demand for inventory on TV3," Impey says.

The company has filled all its advertising space through to September and advertisers can cancel without penalty up to 60 days before their commercial is broadcast. Impey says the company does get such cancellations every quarter but that it's easy to track.

"You can predict pretty accurately what the level is going to be."

The first-half result also showed ebitda from the television part of the business, up 27 per cent to $20.2 million, was higher than the radio division, up 7 per cent to $19 million, for the first time. The company's 70 per cent shareholder, CanWest, bought TV3 out of receivership in 1991.

Impey won't comment on the share price but suggests analysts haven't appreciated how seasonal the company's earnings are.

As a rough rule of thumb, between 30 and 35 per cent of the company's earnings are made in its first quarter ending November, he says. That's because retailers and other advertisers spend most in the lead-up to Christmas.

Earnings in the second quarter, which spans summer when far fewer people, particularly in TV3's key 18-49 market, are watching television, are in the order of about 20 to 25 per cent. The remaining 40 to 45 per cent of annual earnings tends to be split over the third and fourth quarters.

Another reason some might be feeling disappointed with the company's performance is that while first-quarter ebitda jumped 26 per cent to $26.4 million, the second-quarter result was down 10 per cent to $11.5 million.

But that reflects how busy the company has been lately and, particularly, some of the costs of launching the Campbell Live programme on TV3 on March 21 and its Radio Live nationwide news and current affairs radio station last month.

The next ratings period for Radio Live isn't until September, giving it some time to build an audience before it comes under scrutiny. Impey says the company is pleased with its own tracking research and that the response from advertisers has been good.

Campbell Live has considerably strengthened TV3's audience figures, not just in its own 7pm time-slot, but it is also helping to draw in viewers to the preceding news and the programmes that follow it.

MediaWorks' first-half presentation claimed an 18.2 per cent share of 18- to 49-year-olds were watching at 7pm on weeknights through that period (to February 28).

Impey says Campbell Live is rating at 28 per cent for its target age group in the major cities and at about 22 per cent nationwide.

He said staff for both shows were employed ahead of the launches when there was no revenue coming in from either and some of those costs weighed down the second-quarter result.

Campbell Live is expected to break even only this year, but Rob Mercer at Forsyth Barr estimates that each one percentage point of extra market share TV3 can gain in the crucial 6pm to 10pm period will increase advertising revenue by about $5 million and ebitda by about $1.25 million.

MediaWorks has also launched Radio Kiwi, which plays only local music and replaces Channel Z; rebranded all its easy-listening radio stations as Breeze; and bought two Gisborne radio companies and another in the Coromandel. It has also rebranded 15 of its local stations under the More FM brand.

While the television side of the business is performing well, it is much more vulnerable to a downturn in the economy than the radio part. Impey says that as well as having a large number of retail advertisers, the radio market is much more "rational" because there's much less state ownership.

With the Government owning TVNZ, "there are real issues as to their transparency" in how it accounts for its different sources of funding. "Our reaction is to isolate TV3 as much as possible from the effect that distortion of the market has."

The primary job at TV3 during the past three or four years has been to make the channel as strong as it can be to withstand not only competitors but also unfavourable economic conditions.

"There's always going to be ups and downs in ratings and there's always going to be cycles in which studios are going well, have good hits and other studios haven't," he says.

"What I'm absolutely convinced about is that TV3 is in a much stronger position to withstand competition and the external market than it was a few years ago."

Impey describes the process of strengthening the business as "just a lot of little things. There's no magic wand. There's no big-bang theory."

The company has been trying to stem C4's losses and succeeded in wringing a positive contribution to ebitda from it in the latest first half.

With a general election soon, there seems to be little downside risk to TV3's advertising revenue.

Mercer says the risk to this year's earnings is on the upside because of the likelihood of Campbell Live lifting its viewership. In early April, he valued the stock at $2.02 compared with yesterday's $1.63 share price, and rates the stock a buy.

A major comfort for investors is that despite the share price slide, they are still trading above the $1.53 issue price.

MediaWorks background

* CanWest MediaWorks HQ: 3 Flower St, Eden Tce, Auckland.

* Management: Managing director Brent Impey, chief financial officer Peter Crossan, TVWorks chief operating officer Rick Friesen and RadioWorks chief operating officer Sussan Turner.

* Results: The company reported a 12 per cent rise in first-half Ebitda to $37.9 million and is predicting it will at least meet its $61.1 million Ebitda for the full-year forecast in its prospectus.

* Market capitalisation: $374 million - the share price slide from $2.44 in mid-January has knocked $179 million off the market capitalisation.

* Major shareholders: CanWest MediaWorks Ireland Holdings.