John Kelly, incoming CEO of ASX-listed Southern Cross Media Group (SXL), has quite a task ahead of him.

Shares in the television and radio group have sunk by almost a third since the start of the year, weighed down by depressed earnings hit by a slowdown in the advertising market and a protracted recovery since the COVID-19 pandemic.

The substantial fall has pushed Southern Cross further below Morningstar’s assessed fair value estimate (FVE) for the stock.

In fact, Southern Cross recently displaced online retailer Kogan (KGN) as the most undervalued ASX stock in Morningstar’s coverage universe.

That’s despite Morningstar slashing its FVE for the company by 42% back in February this year.

At the time, Morningstar analyst Brian Han said the 7% drop in earnings before interest, taxes, depreciation and amortization (EBITDA) in the company’s first-half report was a tipping point to reassess expectations.

He notes that the near-term earnings trajectory remains hampered by the current advertising market and the company’s heavy investment spending on its digital radio segment.

But even following Morningstar’s substantial downgrade, Han says shares still “looked cheap”, at a major discount to the new “dialed down” fair value estimate—though that statement isn’t without caution.

“It is possible shares in Southern Cross are a value trap. It is up to management to show the group can deliver operating leverage and project a clear trajectory to a higher earnings base.”

Han recently outlined a two-point "wish list" of priorities that could kickstart a recovery in Southern Cross’ share price.

1. Re-focus on costs


The wish list was prompted by the arrival of new CEO John Kelly, who took over following Grant Blackley’s eight-year stint in the top job.

Kelly arrives as the company continues to struggle to recover earnings back to pre-pandemic levels. Looking at the company’s most recent 2022 financials, Southern Cross' traditional broadcast radio EBITDA came in 27% below its pre-pandemic amount in 2019.

For comparison, Han notes that rival radio group ARN media's (A1N) broadcast EBITDA of $66 million in 2022 is down just 11% from its pre-pandemic levels.

“It appears all the cost efficiency initiatives undertaken during the COVID-19 mayhem reduced Southern Cross' broadcast radio costs by just 7%, compared with a 16% reduction for ARN.”

Consequently, Han lists a “resharpened focus on costs” as an initiative he would like to see implemented by the incoming CEO, who he notes may be well-experienced to shepherd the company in that direction.

“Kelly is certainly well-equipped to lead the group, not just due to his familiarity with Southern Cross, but also given his solid executive experience,” Han says.

“Indeed, he was the CFO of Ten Network during the halcyon and highly profitable days of 2007 to 2010 when its metropolitan free-to-air TV advertising revenue share was around 30%.”

2. Digital radio spending needs more ‘scrutiny’


As well as a renewed focus on costs, Han also foresees a need for the company to apply “deeper scrutiny” to the recent bout of investment into digital radio, which helped drive earnings losses in 2022.

“At face value, Southern Cross' digital radio revenue of $24 million in 2022 dwarfs the $15 million generated by ARN. This arguably justifies the aggressive investments made to stake the group's position in the digital space,” Han says.

“However, for all that effort, the extent of Southern Cross' leadership in digital radio and audio streaming is unclear. Depending on who you listen to or what enigmatic metrics you use (downloads, signed-in users, monthly streams, hours listened to), it seems the market leader is in the eye of the data ‘massager’.”

As a result, Han says if the company used more concrete, comparable metrics to its peers, it may improve investor confidence in the major digital investment.

But while Han says both these areas warrant attention, it remains to be seen if the new CEO has them in his own sights.

“Of course, having been Southern Cross' COO since 2016, Kelly is likely to have very firm views of his own on what areas warrant greater management attention under his leadership.”

“As a CEO, he needs to balance the interests of many stakeholders (shareholders, staff, advertising customers, viewing patrons, creditors), and not just entertain some whimsical musings of an equity analyst.”

Shares in Southern Cross Media Group last traded at around a 59% discount to Morningstar’s fair value estimate of $1.80.