Hi All!
I have come across a “Special Situation” in the broadcasting sector, Saga Communications. Below is my investment memo. Remember, do your own diligence, this isn't investment advice.
Saga Communications (SGA: NASDAQ)
Date 8/30/2022
Current Price: $28
Target Price: $36.95
Implied Upside: 34%
Abstract and Investment Thesis
Abstract
I believe Saga Communications (SGA) which currently trades at $28/share is undervalued. My target price of $36.95 implies a 34% upside.
SGA shares are attractively priced given the following catalysts:
Super voting control by the former CEO has been terminated due to his passing
Dual share class has collapsed into one share class
Near-term revenue growth driven by mid-term political advertising spend
Investment Thesis
Given the above catalysts, I believe SGA is uniquely situated for an activist investor to emerge or a competitor to acquire the company in the near-term.
COMPANY BACKGROUND
Saga Communications, Inc. is a broadcast company whose business is primarily devoted to acquiring, developing, and operating radio stations. Saga currently owns or operates broadcast properties in 27 markets, including 79 FM and 35 AM radio stations. Saga Communications is located in Grosse Pointe Farms, Michigan.
Saga's strategy is to operate top billing radio stations in mid-sized markets, defined as markets ranked (by market revenues) from 20 to 200. Saga's radio stations employ a myriad of programming formats, including Active Rock, Adult Album Alternative, Adult Contemporary, Country, and others.
Saga began operations in 1986 and became a publicly traded company in December 1992.
SGA employs 570 full-time individuals and 227 part-time individuals.
SGA owns and operates over 100 radio licenses.
SGA operates in 27 markets including: Columbus, Milwaukee, Norfolk, Des Moines, Charleston, and Ocala FL.
COMPANY BACKGROUND
Saga decentralizes the corporate brand from each local station. This allows the local stations to build their own brand outside of the corporate enterprise and create long-term community goodwill in their respective cities.
In addition to the decentralized corporate enterprise, Saga focuses on winning local advertisement accounts over national advertising accounts. In larger markets, national advertising is less personable as the ad accounts will come from well established companies like General Motors, Apple and Proctor and Gamble.
Focusing on local advertising gives the Saga team an opportunity to build a reputation with small businesses — establishing community goodwill. This decentralized system has given the Company a competitive advantage over larger radio companies in the area who tend to focus more on larger national accounts.
The Company has consistently generated ~$125 million in revenues, ~$25 million in EBITDA and ~$20 million in free cash flow.
Saga Communications operates radio stations in the top 30 – 200 markets. SGA markets are located in the Midwest, Southeast, and Northeast.
Within SGA’s top seven markets, their radio stations are ranked from 1st to 5th in listenership (Nielsen's Audio Ranking).
Of SGA’s 100+ radio licenses, 33 were up for renewal in 2022. These licenses have either been re-granted or are pending approval by the FCC. All other SGA licenses expire in 2027, 2028, or 2029.
MANAGEMENT OVERVIEW
Edward Christian was the CEO of Saga Communications for over 2 decades before he passed away in August 2022.
Warren Lada: Interim CEO. Formerly COO of Saga Communications and a current board member.
Samuel Bush: CFO. Has been with the company for over a decade.
Christopher Forgy: SVP Operations
MARKET OVERVIEW
SGA operates in the radio sector. Radio listenership has remained consistent up until 2020. In 2020, 83% of Americans ages 12 or older listened to terrestrial radio in a given week, a figure that dropped slightly from 89% in 2019. The decrease coincided with a sharp decrease in automobile use during the COVID-19 pandemic.
More than 244.5 million American adults listen to the radio each month. Audiences are becoming more diverse with more than 45 million Hispanic listeners and more than 35 million Black listeners a month.
Competitors include: Townsquare Media, Audacy, Cumulus, iHeart, Spanish broadcasting, and others.
Broadcasting companies can only own up to 8 stations within a specific market. FCC licenses are granted based upon a two-step renewal process. The FCC must find the radio license was used to serve the public interest and secondly no serious violations occurred.
Marketing analytics firm Cross Screen Media had been projecting a bullish $8.8 billion in advertising buys for the 2022 midterms (by way of comparison, spending was $9.5 billion during the 2020 presidential election and $3.9 billion for the 2018 midterms).
As of August 1st, 2022, $3.6bn has been spent on mid-term elections.
Radio advertising spend has totaled $100m as of August.
GROWTH DRIVERS (Catalysts)
Super voting control by the former CEO has been terminated due to his passing
Ed Christian held 100% of SGA’s Class B stock. Class B stock had super voting control. This allowed Ed to control all company and board decisions.
Class A shares received 1 vote per share. Class B shares received 10 votes per share.
Upon the death of Ed Christian, his Class B shares will transition to Class A shares, thus dissolving the dual classes and super voting control.
Dual share class has collapsed into one share class
The radio sector has historically had a dual share class and super voting structure.
SGA will now be one of the only radio stocks with a single share class and no super voting control.
With a single share class and no super-voting control, SGA is ripe for an activist investor to take a position or for an acquisition by other media companies or PE.
Townsquare Media: TSQ has two classes of shares with Class B receiving 10 votes pers share.
Cumulus: Class A and Class B stock.
Audacy: Class A, B, and C stock.
iHeart Radio: Class A and Class B stock.
Near-term revenue growth driven by mid-term political advertising spend
Mid-term elections are held in November 2022.
Political advertising spend is expected to top the 2018 mid-terms and 2020 presidential election.
Mid-term elections drive increased local advertising spend more than national.
Sinclair, Townsquare, Cumulus, and others have signaled strong Q3 and Q4 numbers driven by political revenue in recently earnings calls.
FINANCIALS
Annual revenue peaked in 2016 at $142m. In 2020, revenue declined significantly to $95m.
Radio listenership is highly tied to automobile use. With no one driving in 2020, it caused advertising revenue to decline.
Annual revenue has since recovered in 2021 and 2022.
Total gross revenue resulting from national advertising in fiscal 2021 was approximately $13,138,000 or 12% of SGA’s gross revenue
Revenue has recovered to pre-pandemic levels. Digital revenue has grown from $3.7m in 2019 to $6.3m in 2021. 2022 is projected to generate $8.7m.
Edward Christian’s average annual cash compensation was: $2.1m (Interim CEO salary of $750K).
SGA’s annual historic SG&A was $10m. A reduction of Edward’s salary will have a significant and immediate impact on EBITDA.
EPS has historically been positive up to 2020. EPS has since recovered.
SGA has no long-term debt: “On October 27, 2021, we used $10 million from funds generated by operations to voluntarily pay down the remaining amount on our Revolving Credit Facility.”
SGA has $54m in cash.
SGA pays, on average, a $.20 cent quarterly dividend.
INVESTMENT THESIS
I believe SGA is situated for an activist investor or acquisition in the near-term.
The collapse of dual share classes and removal of super-voting control opens SGA to new investors.
SGA’s fixed assets generate significant free cash flow and with zero debt, SGA could be appealing for PE or a competitor to acquire them.
SGA’s largest shareholder is Towerview LLC at 22%. Towerview could acquired SGA or force a sales process.
Towerview is 100% controlled by the Tisch family. The Tisch family own the Loews Hotel company along with a variety of other companies and the New York Giants (net worth is $6bn). Towerview LLC is managed by Daniel Tisch. Saga Communications is the second largest holding of Towerview LLC.
With super-voting control dissolved, it opens a variety of ways management, or an activist investor could generate value:
Issue a special dividend
Restart their share repurchase program
Increase their own M&A activity
Dividend recap
Sale lease back on towers and real estate
Increase their quarterly dividend
VALUATION & COMPS
SGA currently trades evenly to its sector peers and certain median multiples. SGA is trading on a lower EV/EBITDA multiple compared to peers and the sector. SGA trades at a 20% discount on a median TTM EV/EBITDA multiple compared to radio peer comps.
SGA is also one of the only radio stocks to pay a dividend.
SGA’s share priced increased 12%+ on August 19th due to the CEO passing.
The median EV/EBITDA multiple for acquisitions is 8.5x. This is based on historical transactions.
I used a Sum of the Parts analysis to value Saga Communications. I came to a value through splitting the parts into the operating business, real estate, and towers. Radio stocks have typically been valued based on an EV/EBITDA multiple. SGA’s current market cap is $165m.
Using historical data, I projected revenue to reach $117m in 2022 and EBITDA to reach $23.5m.
I used SGA’s current land value, building value, and tower value. SGA’s land value has most likely not been grossed up to reflect today’s value. I assumed SGA’s buildings are overvalued due to their age. I assumed SGA’s tower value is undervalued based on historic transaction comps. I removed Equipment, furniture, and vehicles from my valuation
Downside Risk
If no catalyst emerges driving SGA’s share price upward, the downside risk is low.
Downside risk is mitigated by potentially robust political revenue in Q3 and Q4, and the stock’s 100 day moving average of $23.97. This implies a downside of 13%.
Saga Communications traded between $30-$35/share in 2019 before COVID. Since Oct 2020, SGA has been on an upward trend.
INVESTMENT MERITS & RISKS
Merits
Experienced management team.
Strong business fundamentals.
Political advertising cycle in the near-term.
Only radio stock with one share class.
Termination of super-voting control.
Private equity dry powder is higher than any point in history.
Historic consolidation in the radio sector.
Risks
Macro environment continues to worsen. A recession decreases advertising/marketing spend.
Private equity lags public markets and could significantly scale back M&A activity.
Rate increase will increase the cost of debt.
Interim CEO transitions to FT CEO.
Management and board don’t act and let the interim CEO run the business as before.
Radio continues to slowly lose advertising dollar share.
Digital revenue grows slower than expected and doesn’t make up for lost Radio revenue.
Low trading volume. Average daily volume is 10K shares. Large purchases could have a significant impact on our entry and exit price.
Position: I own shares in SGA
Leave a Reply