MoneyTalks: Han solo? Brian's the Aussie media and telecom expert you never knew you were looking for

MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now.

Today we hear from Morningstar’s director of Equity Research Brian Han

MoneyTalks is delighted to welcome Morningstar’s Kingpin of Stock Study Brian Han, who, through the deft application of blackmail, bribes, threats and cajoling is taking us back to where it all started – the ASX’s all but forgotten Media and Telecom stocks.

After a good decade or two as Australia’s preeminent, possibly only, specialist media and telco analyst, when Brian says “the media sector is undervalued,” the boils on the back of one’s neck begin to spurt.

Ew. Can someone get me a Wet Wipe pls.

‘The media sector is undervalued’

Dusting off his Big Book of Lost Corporations, Han says there’s movement among a few of the media/telcos and that understanding the cycle is key to recognising the opportunities therein.

“For media (stocks) there’s concerns about the current advertising market weakness and the lack of any recovery signs on the immediate horizon,” Han says.

But unlike other earthbound ASX analysts, this is a situation Brian doesn’t mind.

Meanwhile, next door, he’s star-bullish on the shifting shapes changing the Aussie-telco landscape.

“The telecom sector is interesting because there are positive catalysts for TPG shares, while Telstra shares are also starting to look cheap again.”

Last month, well a few weeks ago really, Telstra (ASX:TLS) and TPG Telecom (ASX:TPM) pulled out of their joint appeal vs the Australian Competition Tribunal’s decision to reject their idea of a regional network sharing deal.

Neither of the telcos’ share price budged at the decision. That might not be great for regional Aussies who like the World Wide Web, but it’s also no great loss for shareholders. And anyway, the keen beans in the telco trade are largely hanging on the outcome of TPG’s potential $6.3 billion windfall for flogging its fibre assets to Vocus Group.

Those negotiations leaked not long after the network plan was aborted and this time TPG’s share price leapt circa 11%. (TPG stock is still a long distance from coming good on the losses of the last year, in fact, short yet by about 20% for that talk.)

Telstra meantime hasn’t disgraced itself at all. TLS stock has found almost 7% year-on-year, the dominant name in twitchy internet still considered a go-to defensive name, wielding a divvy yield formerly among the best on field.

And then there’s the forgotten corner of the bourse, hidden cravenly behind the telcos: Media.

Having the former treasurer Peter Costello as chair is handy when Nine Entertainment Company’s (ASX:NEC) fiscal fortunes were tossed like an increasingly interesting salad, after the RBA’s 12 straight bumps to the OCR. There’s always a bit of debt about for a lot of media makers and the rising loan repayments start to sting.

The dwindling ad market exacerbates the situation.

Nevertheless, Costello said Nine’s television segment enjoyed “an extraordinary year” delivering record revenue share, if not great telly.

Nine chair Peter Costello:

Whilst we faced tougher economic conditions which have impacted the broader industry, Nine has risen to the challenge, continuing to drive audience and revenue share, and investing in the future of the business while focussing on the efficiency of our cost base.

The Sector…

Brian says the Aussie media sector is currently going through something of a downturn.

“After the COVID-boom years, rising interest rates and the jittery economy are impacting corporate confidence and consumer sentiment.

“There are really two of the key drivers of both advertising spend and consumer expenditure on entertainment.

“However, like all cycles, we believe the market will recover. At a more fundamental level, the industry is investing in digital distribution and content, as eyeballs and attention continue to migrate to new media platforms,” Brian adds.

Meanwhile, he says that the cousins down the road at Australia’s telecom corner have apparently given up on their decade-long, seemingly endless squabbling.

“The telecom sector is finally enjoying some competitive rationality.”

“But only after years of debilitating discounting and market share bun fights, especially in mobile.

“Mobile prices are rising, costs are being taken out and simplification programs are being executed across the industry,” he says.

“At the demand level, the resilience and defensiveness of telecom revenues are shining through, especially in the current environment of rising cost of living and hesitancy on discretionary expenditures.”

The stocks…

Nine Entertainment Company (ASX:NEC)

In the media sector, our top pick is Nine Entertainment.

NEC Refresher: FY23

Revenue flat $2.7bn
NPAT down 38% to $195mn
Group EBIT down 21% to $435.5mn
Net debt up 61% to $523.2mn
Final divvy of 5c, 2023 total of 11 cents, (vs 14c total last year)

B. Han says Nine’s current share price appears to be “extrapolating the current cyclical weakness in advertising and consumer spending”.

That’s to say, there’s a bottom in every cycle and Nine has it covered. But – and it’s a big butt – there’s some stars aligning for NEC.

“However, there’s a tendency to ignore Nine’s improving underlying fundamentals.

“Segment by segment, there’s improvements in terms of ratings for 9TV and 9Now streaming, subscribers for Stan streaming, digital subscriptions and revenues for Fairfax mastheads.

“And then there’s Domain’s strong number-two position in the online property listings space.

“Importantly, the balance sheet is more than strong enough to weather to current macroeconomic weakness and the stock is yielding over 5% at current prices.”

TPG Telecom (ASX:TPM)

TPG Telecom is Australia’s third-largest integrated telecom services company with an extensive stable of infrastructure assets. It goes the broadband, telephony, mobile and networking solutions route – catering to all market segments (consumer, small business, corporate and wholesale, government).

Brian says TPG’s grown significantly since 2008, via both organic growth and acquisitions, before merging with Vodafone Australia back in July 2020.

Right now, in the telecom sector, earnings recovery is firmly on track for TPG Telecom.

“With mobile benefiting from a more rational competitive market and the return of international travellers, cost-cutting and simplifications ongoing, and the enterprise business showing resilience in terms of high margin maintenance and fibre-infrastructure leverage.”

At the start of August, TPG stock jumped after the company confirmed it has entered exclusive non-binding negotiations over a multibillion-dollar transaction with rival Vocus for TPG’s non-mobile fibre assets.

The company’s since said it’s received a number of non-binding expressions of interest in its fixed network infrastructure assets, including its wholesale fibre business Vision Network, which provides broadband access to about 400,000 Australian premises.

Indeed, such is the quality of the enterprise fibre business, it attracted a $6.3 billion bid, with due diligence currently underway.

“So, firstly, it is technically a sale of TPG’s corporate telecom business to Vocus, which itself is owned by a private equity consortium including Macquarie.

“Secondly, the assets being sold, they’re mostly telecom infrastructure network assets used to service big corporates and government enterprises.

“And the third thing to say is that the offer price is about $6.3 billion enterprise value, which equates to about 11.5 times EBITDA, which incidentally is what Vocus itself was sold to private equity back in 2021,” Brian says, (casually pulling out the kind of quirky media/telco sector trivia only he – and possibly the buyer at Macquarie – could answer.)

“We definitely think TPG shares are still undervalued because the company has been under-earning for a couple of years now and that’s due to a number of factors.”

Telstra (ASX:TLS)

Shares in Australia’s largest telecommunications group, Telstra, are also looking interesting says Brian.

“With mobile earnings staging a renaissance, costs continuing to be cut and the damaging impact of the NBN transition is finally over. Indeed, earnings are finally on a growth trajectory after years of decline, and current dividends are sustainable, equating a fully franked yield of over 4%, reflecting Telstra’s defensive earnings.

“With material market shares in voice, mobile, data and internet, spanning retail, corporate and wholesale segments, its fixed-line copper network will gradually be wound down as the government-owned National Broadband Network rolls out to all Australian households, but the group will be compensated accordingly,” Brian says.

“Investments into network applications and services, media, technology and overseas are being made to replace the expected lost fixed-line earnings longer term, while continuing cost-cuts are also critical.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.