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BCI Global Investment Conference 2016Global Stock Ideas7 June 2016
STONEWOOD CAPITAL (PROPRIETARY) LIMITED IS A PRIVATE COMPANY INCORPORATED IN SOUTH AFRICA WITH REGISTRATION NUMBER 2007/014914/07 AND IS AN AUTHORISED FINANCIAL SERVICES PROVIDER LICENSED WITH THE FINANCIAL SERVICES BOARD (FSP 34385)
1
Entercom Communications
Overview
Fourth largest radio company in the United States
125 radio stations in 27 markets with over 40 million listeners
Operates different formats including music, news, talk and sports content
Strategy to invest in local content irrespective of delivery platform
– Growing local talent and engagement
– Creating and delivering local content to communities
– Actively utilizing digital media to deliver local content
Radio industry trends stabilising
Management
– Substantial shareholders
– Demonstrated ability to execute
– Shareholder friendly– approachable and intelligent with use of cash
Number of significant value catalysts over next three years
2
“People want personality, local insight, and a feeling of connection – all qualities great DJs on radio stations can
share, and streaming sites can’t replicate. A superb presenter can become your friend and confidant”
(Sir Richard Branson, 2015)
“Video killed the Radio Star”(Buggles, 1979)
“In the end, Radio is everything”(Bono, 2015)
Capital Markets Performance
3
2,00
2,50
3,00
3,50
2010 2011 2012 2013 2014 2015 2016
EV / Sales
0
5
10
15
20
2010 2011 2012 2013 2014 2015 2016
Closing price
0
20
40
60
2010 2011 2012 2013 2014 2015 2016
FCF yield (%)
Share price has traded in a range for last 2 years
With a market capitalisation of around $475 million and current year free
cash flow of $62 million, Entercom is trading on a free cash flow yield of
13%
Summarised Financial Performance
4
Initiated dividend in 2016 at only 17% of free cash flow
Substantial debt pay-down
2016 is an election year
Accretive acquisitions– Lincoln Media
Organic revenue growth 4% plus for over 9 quarters
Stable operating margins dependent on election years
Substantial free cash flow generation
Tax losses
Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 FY '16e
Revenue 439 372 391 383 389 378 380 411 460
growth rate -15.1% 5.1% -2.2% 1.6% -2.9% 0.6% 8.3% 11.8%
Operating income 115.3 78.9 97.7 79.5 76.6 92.6 85.6 85.6 101.0
margin 26% 21% 25% 21% 20% 25% 23% 21% 22%
Net interest expense (45.0) (31.2) (30.5) (24.9) (53.4) (44.2) (38.8) (38.0) (38.0)
Net income (512.6) 5.4 46.4 71.1 11.3 26.0 26.8 28.4 37.3
margin -116.8% 1.5% 11.9% 18.6% 2.9% 6.9% 7.1% 6.9% 8.1%
EPS (14.05) 0.15 1.23 1.88 0.30 0.68 0.69 0.73 0.93
Cash flow from operations 130.6 73.9 90.4 85.5 69.7 63.3 65.3 64.8 70.0
Capital expenditures (8.9) (2.5) (2.7) (5.7) (3.7) (4.3) (8.4) (7.0) (8.0)
Free cash flow 121.7 71.4 87.7 79.8 66.0 59.0 56.9 57.7 62.0
margin 27.7% 19.2% 22.4% 20.9% 17.0% 15.6% 15.0% 14.0% 13.5%
Total debt 834 748 663 615 583 517 480 515 470
Industry Dynamics
5
One of the most cost effective ways to reach local audiences
Significant value in stations that are able to engage communities
Digital platforms such as Web, Facebook, Twitter are a way for radiostations to distribute content and engage with their listeners
Mobile streaming
18,1 17,916,5
13,3 14,1 14,1 14,3 14,3 14,5 14,8 15,1 15,4 15,8
0,04 0,44 0,49 0,57 0,63 0,7 0,77 0,85 0,93
0
5
10
15
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
US radio industry advertising revenues ($'billion)
Over-the-air revenues Online revenues
55,4
71,1
17,4 16,8 20,2
8,9 4,5 0,8
83,9 81
18,1 17 1610,7
4,7 0,9
0
20
40
60
80
100
Internet
advertising
TV advertising Radio advertising Consumer
magazine
advertising
Newspaper
advertising
Out-of-home
advertising
Trade magazine
advertising
Cinema advertising
US advertising media market sizes 2015 v. 2019
60,0%67,0% 69,6% 71,9%
75,5%71,8%
61,5%67,5%
72,5% 70,8% 70,4% 71,6%66,3%
55,5%
12-17 18-24 25-34 35-44 45-54 55-64 65+
Network radio's reach, by age and gender
Men Woman
Source: BIA/Kelsey
Source: PWC Global Entertainments & Media Outlook 2015 - 2019 Source: Nielsen
Value Catalysts, Risks and Return Opportunity
6
Value Catalysts
Organic revenue growth is trending at low single digits – we expect this to continue andour Investment Thesis does not rest on significant growth. In fact attractive returns can behad even with negative growth
Debt paydown
– Track record of debt reduction
– Pay down a further $100 million over next 2 years
Reduction in cost of debt – refinance expensive 10.5% debt in next 12-18 months
Further value enhancing acquisitions
Risks
Significant deterioration in radio industry dynamics
Macro – In a recession advertising spend declines
Returns Opportunity
Two year total return of 50%
974 m
834 m
748 m
663 m
615 m583 m
517 m480 m
515 m 496 m
-
100 000
200 000
300 000
400 000
500 000
600 000
700 000
800 000
900 000
1 000 000
Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 Mar '16
Total debt and preferred shares
Value Progression
7
Our investment thesis assumes only minimal increase in Enterprise
Value over a three year investment period
– 4% per annum revenue growth
– Debt refinance reduces market value of debt
Debt paydown is the key driver of value creation in our investment
thesis
Delivers a 50% total return over 2 years with no significant increase
in market valuation multiples
52%
Debt36%
Debt
48%
Equity
64%
Equity
-
500
1 000
1 500
Current 2018e
Enterprise value
Current 2018e
Capitalisation
EV ($'m) 962 1 100
Debt ($'m) 496 396
MV ($'m) 466 704
Financials
Sales 460 500
NI 37 54
FCF 62 90
Valuation multiples
P/E 12,5x 13,0x
P/FCF 7,5x 7,8x
EV/sales 2,1x 2,2x
Share price 11,90 17,50
8
William Hill
Overview
William Hill is one of the largest online and physical gaming operations in
Europe and Australia with a small operation in the United States
Four businesses
– Retail land-based operations in the UK
– Online betting and gaming business in the UK and regulated European
markets
– William Hill Australia
– William Hill US
9
0%
10%
20%
30%
William Hill Ladbrokes Coral Betfred Other
UK market share by number of LBOs
0%
10%
20%
30%
40%
Paddy Power
Betfair
William Hill Bet 365 SkyBet Gala Coral Ladbrokes Other
UK betting market share by online revenue
Capital Markets Performance
10
Weak Performance since mid-2013
The share price has been in a general downward trend since mid 2013 driven primarily by a decline invaluation multiples
– Initially industry wide concerns around regulation and taxation in the UK
– Late 2015 and into 2016 driven by operational underperformance compared to its peers particularlyPaddy Power Betfair
Substantial Valuation discount to closest peer
William Hill is trading at 12.5x 2017 net income whilst Paddy Power Betfair is trading at 25x 2017 net income
Some of this discount is warranted due to business mix and recent performance
Challenges
Market disappointed by failure to complete 888 acquisition and consolidation activity by other competitors
Recent online performance poor both absolute and relative to competitors
– New Point of consumption tax; 2015 online profit down 30%, excluding the increased tax would havebeen up 9%
– 2016 profit warnings: poor win ratios and losing market share
0,0
1,0
2,0
3,0
4,0
5,0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Price
0,0
1,0
2,0
3,0
4,0
2008 2009 2010 2011 2012 2013 2014 2015 2016
EV / Sales
Online Operating Performance
11
Strongly growing business between 2009 and 2015
Amounts wagered grew 5% in 2015
– Core markets grew 11%; UK 5%, Italy 51% and Spain 16%
– Other markets down 27%
Excluding the POCT, Operating Profit would have grown 9% in2015
Q1 2016 group revenue down 3%
– Online down 11% driven by adverse win ratios
– Impacted by high time-outs and self exclusions
Paddy Power Betfair reported Q1 online revenue up 17%
126,5
24,2
66,4 19,6
177,7
47,5
11,5
100
150
200
250
2014 Operating
Profit
Core Markets Net
Revenue
Other Markets Net
Revenue
POCT Marketing Other Cost of Sales
/ Operating Costs
2015 Operating
Profit
Online Operating Profit Bridge 2015
Negative Positive
0%
10%
20%
30%
40%
50%
0,00
1 000,00
2 000,00
3 000,00
4 000,00
5 000,00
2009 2010 2011 2012 2013 2014 2015
Online - Amounts wagered and growth rate
Amounts wagered Growth rate
Summarised Financial Performance
12
£'m Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15Revenue 964 998 1 072 1 137 1 277 1 487 1 609 1 591
growth rate 3,5% 7,4% 6,1% 12,3% 16,4% 8,2% -1,1%Operating income 274,6 247,2 264,6 265,3 317,2 313,3 353,3 271,7
margin 28% 25% 25% 23% 25% 21% 22% 17%Net interest expense (76,7) (53,8) (40,8) (31,8) (31,2) (44,7) (46,3) (42,2)Net income 234,0 61,1 129,7 115,2 189,8 211,2 206,3 189,9
margin 24% 6% 12% 10% 15% 14% 13% 12%EPS 0,44 0,09 0,17 0,15 0,25 0,25 0,23 0,22
Cash flow from operations 225,7 174,3 224,5 243,6 296,9 270,7 370,2 302,7 Capital expenditures (53,4) (36,5) (36,7) (55,5) (66,3) (84,6) (74,6) (67,5)Free cash flow 172,3 137,8 187,8 188,1 230,6 186,1 295,6 235,2
margin 18% 14% 18% 17% 18% 13% 18% 15%
Total debt 1 069 669 549 461 403 896 716 669
Free cash flow substantially in excess of net income driven by intangible amortisation
Value Catalysts, Risks and Return Opportunity
13
Return opportunity
A potential three year total return of 70% including dividend return of12%
Value Catalysts
Industry
UK online gambling market expected to grow at 10% per annum for next 5years
Industry consolidation driven by increased regulation and taxation
Increasing barriers to entry
More stable regulatory and tax environment
William Hill specific
Stabilize the online business and resume growth trajectory followingappointment of new online CEO
Increasing control and ownership of technology front-end – ProjectTrafalgar – allowing more responsive front-end
Return to growth on top and bottom line
Re-rating by market of the implied valuation multiple on online business
Risks
Regulatory and taxation including limitations on gambling
Land-based UK LBO business is in secular decline
Unable to return online to growth path
Value Progression
14
A potential three year total return of 70%
– Revenue grows by 4% per annum. 2016 a difficult year with increasing revenuegrowth in 2017 and 2018
– Initial loss in market share, but with a strong brand and number two in theindustry starts to gain market share again from 2017 as industry consolidates
– Operating margin improves on industry consolidation, stable regulatoryenvironment and improving operating performance
– Improvement in PE multiple on better operating performance
Downside scenario
– Enterprise value remains flat for 3 years
– Debt paydown
– 4% dividend yield
– Total return 7% - 8%
Equity
2 710
Equity
3 750
Debt
669
Debt
350
2016 2018
Value Progression
EV / Sales - 2.1x
EV/Sales - 2.3xEV - £4.1 billion
P/E - 13.9x
Net income -£195m
Margin - 12%
P/E - 15x
Net income -£250m
Margin - 14%
