update

The final stages of the business re-structuring of TMS must now be quite close, judging by Terry Savage's resignation from the TMS Board.

Terry Savage is the executive Chairman of Val Morgan and had been on the TMS Board since 1995. Savage was originally employed by Val Morgan in 1972, before becoming CEO in 1986. Aged 51, Savage's entire business career has been spent with Val Morgan.

With Savage's departure, the Board of TMS now comprises:
1)
Tony Hartnell (Chairman, an independent, but closely aligned to and associated with both PBL and with TEN).
2)
Peter Myers (Non-executive Director, and GM, Corporate Development @ TEN, and formerly the Chief Financial officer @ TEN). Myers is a 13 year veteran of TEN (in 2 separate stints), spread over a 20-year television industry career.
3)
Brett Daley (Non-executive Director, and Chief Financial Officer, Nine Network Australia, and a 19 year veteran of the PBL camp).

With Savage's departure, Board control is now 100% direct /indirectly aligned to the TEN /PBL camp.

Between them, TEN /PBL account for ~27% of the total issued capital.

This suggests the following:
1)
finalisation of the Val Morgan exit /sale is now either very close, or has now been finalised (and approved by ACCC);
2)
Val Morgan's sale of its South American operations are nearing completion;
3)
Val Morgan's sale /exit from UAE and Hong Kong is either now on the cards or is also nearing completion;
4)
control of TMS is about to pass into the hands of PBL /TEN (by a variety of different ways).

Going forward, the residual TMS business (comprising Global Television and OmniLab) should be quite profitable, particularly at the EBITDA and EBIT levels.


FY02 BUSINESS SNAPSHOT:

OVERALL:
Overall TMS revenue in FY02 (excluding the North Ryde proceeds) was $166m. EBITDA was $13.1m, and EBIT was -$8.7m. With a net interest expense of $5.3m for the year, this left TMS with a pre-tax loss of -$14.0m. Adjusted for minorities, the overall net loss was scaled back to -$12.9m.

Net abnormals (primarily, the write-down associated with the carrying value of the Val Morgan system) accounted for a further -$63m in losses (one-off adjustments, below the operating line).


GLOBAL TELEVISION:
Global's revenue increased significantly in H2, compared to H1. Whilst operating costs were also up, EBIT improved significantly.

Overall FY02 revenue was $52.1m (excluding the North Ryde proceeds), with H1 contributing $21.1m and H2, $31.0m.

Operating costs (inclusive of depreciation and amortisation) were up significantly, due to the cost of acquiring, fitting out, and deploying into service, the OB digital fleet that Global now has in place.

Overall FY02 costs were $46.8m, with H1 being responsible for $19.3m of this amount, and H2, for $27.5m.

This resulted in an FY02 EBIT of $5.3m (10.2% margin), of which H1 contributed $1.8m (8.5% margin), and H2 contributed $3.5m (11.3% margin).

This effort has continued into FY03. At its AGM (28/11), TMS' CFO (Ross Pearson) advised the meeting that Global's FY03 performance was running to budget.

This suggests that Global's actual FY03 performance is running nearer to the h2FY02 outcome, both from a revenue growth, and an EBIT improvement /margin perspective.


OMNI-LAB:
Contrasting the performance of Global was that of the Omni-Lab post production business in which TMS holds a 50% share of the business.

In H1, TMS' share of this revenue was $7.3m and flat-lined to $7.2m in H2, for an overall revenue result in FY02 of $14.5m.

In H1, operating costs were $7.4m which increased to $9.4m in H2, for an overall result of $16.8m.

This translated into an EBIT loss of $2.3m on FY02, of which the H1 loss was -$100K, and the H2 loss was -$2.2m. The resulting margin impact was -15.9% overall, -1.4% in H1, and -30.6% in H2.

In FY03, however, the Omni-Lab business has stabilised and, based on what was said at the recent AGM, appears to be tracking closer to break-even, or better.


VAL MORGAN:
Clearly, the main disappointment in the TMS business model has been the Val Morgan experience.

From EBIT margins of +12.7% in H1/01, Val Morgan's EBIT margins fell away in FY02, to -9.0% overall, comprising -4.9% in H1/02, and accelerating to -13.8% in H2/02.

The need for the Val Morgan business to be right-sized was clearly apparent on this basis, with H1/02 revenue of $53.5m, falling away to $45.5m in H2/02. The overall VM revenue result for the year was $99.0m.

Operating costs also fell away in H2/02, but not before H1/02 costs of $56.1m, and H2/02 costs of $51.8m. Overall OPEX for the year was $107.9m.

The resulting EBIT, however, revealed the extent of VM's problems with H1 EBIT loss of -$2.6m, followed by a H2 EBIT loss of -$6.3m. The overall VM EBIT loss was -$8.9m.

WEIGHTED AVERAGE COST OF CAPITAL (CAPM APPLIED):
With the resulting reduction in net outstanding debt, TMS' interest profile has reduced by ~$2.3m, whilst its WACC has increased to somewhere between 6 -6.5%, depending upon the particular equity risk weighting used, and applying a Beta of 2.0 (Aspect website).

If a 2.0% EQR weighting is used, then TMS' WACC is ~5.9%, vs 6.5% WACC, if a 3.0% EQR is used.


COST OF EQUITY:
TMS' Cost of Equity (CEQ) is somewhere between 9.5% (2.0% EQR), and 11.5% (3.0% EQR), applying Beta of 2.0, EQR of 2 -3.0%, and risk free return (based on 10-year Government Bonds) of 5.5%.


COST OF DEBT:
Conversely, TMS' Cost of Debt (COD) is closer to 4.1%, based on the following:
1)
"weighted averge interest rate" (WAVIR) in FY02 of 5.85%;
2)
WAVIR to NOV02, of 5.88%;
3)
tax rate of 30%;
4)
tax effected WAVIR of ~4.1% (in FY02, and to NOV02).


VALUATION:
Using a WACC of 6.0% as the jutsification for determining an appropriate NPV calculation for Global's business going forward, the resulting valuation approximates 20c per share.

This assumes current debt levels, reduced interest costs (down ~$2.3m YoY)) and no adjustment on account of future contributions from OmniLab, VM (exits), North Ryde (re-zoning bonus payment), revenue sharing exit in the USA, and reduced OPEX costs.

This continues to sit approximately to where I have previously suggested the Global valuation should sit (on an EV, EBITDA multiples basis, etc). In previous posts, I have suggested a valuation for Global of between 15 -17.5c.

Deutsche Bank is also suggesting a price target closer to 15c (albeit this hasn't been changed since DB's most recent research piece, dated 8th November).