SBS Broadcasting Reports Another Good Quarter

I had to jump in a car to head East on some college visits with my son and didn’t get a chance to provide some color on the SBS Broadcasting (SBTV) conference call that took place on July 28th. As the call started at 10 a.m. ET, the shares were down sharply by almost $3. I thought the quarter was fine but SBTV is a complicated company operating several different media business in about a dozen Northern and Eastern European countries, so I could have missed something.
I was pretty certain, however, that whoever was selling was making a mistake and shortly into the call I put in bids for the shares slightly below the market. Northlake clients have full positions in SBTV so I didn’t bid aggressively, which I now regret as my initial impressions were correct: By the end of trading on Friday, SBTV shares were down only $1, where they remain today despite recent weakness in the broad market…

….I think the seller was probably worried about either the top-line revenue number or the EPS figure. The revenue number did in fact miss published estimates. However, as management explained right off the bat on the conference call, they are reporting revenues at the newly acquired CMore pay TV operation on a net basis after “deducting service fees paid to the cable, satellite and other operators for carriage, marketing and subscriber handling services.” The deduction was worth over 16 million euros and, when added back, the revenue figure was in line to slightly ahead of analyst estimates.
On EPS, SBTV reported 44 cents against analyst estimates that were in the upper 50-cent range. This figure also missed published estimates, but once again management addressed the issue on the conference call right at the start. Analyst estimates did not include an 8-million-euro charge for the early call of the company’s 12% debt (which was replaced by a revolver at 3%). Management also noted that another 8-million-euro charge was taken due to foreign currency losses related to the company’s new facility. It is not clear to me whether analysts anticipated this but I don’t believe the forex loss was fully included in estimates. After adding both of these amounts back to pretax income and applying a 30% tax rate, EPS would have matched or exceeded estimates.
The only issues that came up on the conference call that seemed to cause concern were weakness in the TV markets in Holland and Belgium and the fact that CMore is a seasonal business weighted toward the late 3Q and 4Q. SBTV is outperforming the weak TV markets in Holland and Belgium, as they are in virtually every country where they operate, so I am not overly worried about this fact. At CMore, the seasonal argument is a fair one. TV watching picks up considerably in Scandinavia as the days grow short and slacks off in the summer like the rest of the world. Management remains very confident in their language when they discuss CMore, and given their track record I see no reason to second guess at this point.
I remain very optimistic on SBTV shares on the basis of their excellent operating momentum, the shareholder oriented management, and potentially realizable asset value well above the current quote. The second quarter was just fine. The third quarter will be seasonally weak but the seasonally strong fourth quarter is shaping up very well on the back of ratings gains across almost every station SBTV owns. If Northlake clients weren’t filled on their SBTV positions, I’d be bidding for shares at current price.