SALM - Salem Communications

[Packer16]

After the last high risk play, this one is a little more straighforward.  Salem is a Christian/conservative talk media firm with radio, publishing and online properties.  A majority of its revenue comes from radio with a majority of the radio revenue from block programming which has a high renewal rate (90%+).  As a result of the block programming and increase in online property revenues, Salem's revenue was down only 2% in 2009 (versus double digit losses for your typical radio station).  As of Q2 revenue was up 4% versus an increase of 3% for Citadel (one of the larger other players).  Management has been shrewd purchasers of online properties such as Tangle (purchased for a lower price 1 year after the original offer) and a Washington DC radio station for reduced price.  The equity trades for 3.4x FCF.  Debt interest coverage is about 2x.  This is an illiquid stock but given its demographic, I think it will do better than other radio stations (whose LT growth rates are on the order of 2 to 3%).  There is a good overview in the presentation section of the website. 

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[ragnarisapirate]

Packer, long time no talk!

Are you worried about the notes that are due in 2016? It doesn't seem that they can pay them off with c/f, so, are the PIK? What happens if interest rates spike in the next 6 years?

Additionally, are the bonds trading right now? I would be interested to see what they are priced at right now, given that at par, they would yield just under 10%.

Basically, what I am getting at here, is that there is no doubt that this company will have a decent return on investment, I am just worried about a return of investment.

thoughts?

[Packer16]

The notes can be prepaid by $30m per year until 2016.  They plan on pre-paying the debt for the first option using a lower cost (LIBOR +350bp) bank loan.  The bonds are fixed payment at 9.75%, an above market rate for about 2x coverage rate on a FCF basis and about 2x on an EBITDA - cap ex basis.  One correction SALMs EBITDA declined by 2% and sales declined by 10%.  If they use the FCF over the next 5yrs they can retire over $100m in debt.  Last I checked, the bonds are trading at around par.  I can do another recent check.  This clearly is not at the $0.80 price of Aug 2009 when we spoke at the SNS meeting but it still is cheap.  The other factor which I am hesitant to rely on but is a data point is they are less levered (5.5x EBITDA) than all other radio firms (ranging from 5.7 to 7.7x) except SGA (another interesting situation) (2.9x) and the recently restructured Citadel (3.1x).

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[ragnarisapirate]

The notes can be prepaid by $30m per year until 2016.  They plan on pre-paying the debt for the first option using a lower cost (LIBOR +350bp) bank loan.  The bonds are fixed payment at 9.75%, an above market rate for about 2x coverage rate on a FCF basis and about 2x on an EBITDA - cap ex basis.  One correction SALMs EBITDA declined by 2% and sales declined by 10%.  If they use the FCF over the next 5yrs they can retire over $100m in debt.  Last I checked, the bonds are trading at around par.  I can do another recent check.  This clearly is not at the $0.80 price of Aug 2009 when we spoke at the SNS meeting but it still is cheap.  The other factor which I am hesitant to rely on but is a data point is they are less levered (5.5x EBITDA) than all other radio firms (ranging from 5.7 to 7.7x) except SGA (another interesting situation) (2.9x) and the recently restructured Citadel (3.1x).

Packer

No doubt, this is very interesting. As with my thesis on UWN, it seems that there could be an interest rate shock and SALM could certainly weather it, provided that their banker doesn't call their loan. The thing that I love about these levered plays, is that you personally don't risk more than your principle (not even that, it seems, in the case of SALM), but, stand to profit all the outsized gains that leverage can provide... Kinkda like with Dollar Thrifty Auto.

[Packer16]

VIC has a brief write-up on SALM that is lacking the details about the on-line growth and increased election revenue from the Repub primary.  The decreased proftibaility over the past year appears to baffle folks but it is due to re-instating wage increases that were cut 2009 to deal with the downturn.  It also has a good rationale for radio but does not mention EMMS which is just as cheap as SALM is but has more hair on it.  They place a value of around $9 on the share around my fair value estimate.

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[Hielko]

Haven't really researched this yet, but when I look at the financials I see that they have been paying down debt from 361M to 277M (I like) the past 5 years but at the same time book value is also going down every year?

[Packer16]

This is due to the mark-to-market valuation they do every year for their FCC licenses.  However, they only mark them down but not up which is a quirk in the accounting.  I have focused on the FCF generating ability of SALM as the BV can be distorted by the MTM accounting.

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[Hielko]

Makes sense, see that they even include a table in the 10K with some info on how much fair value exceeds carrying value, although it seems impossible to really do anything with it.

What about the dual share structure? Seems to me that some discount is warranted since the A class shares have 1/10 voting power (even though insiders would control 50%+ anyway).

[Packer16]

If you look at these for each of the public radio firm you can get some market info about the industry expectations.  I actually have put together one of these analyses and it is typically vetted extensively by the audit firms.   

As to the dual class, I have not seen management take advantage of shareholders like I have seen in other radio firms (see Radio One for this) so it did not bother me and the large managemnet share does provide an incentive if they don't hose minority holders. 

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[Hielko]

Decided to buy SALM, and posted an analysis of the company on my blog @ http://alphavulture.com/2012/02/22/salem-communications-salm/ (started to do this for every buy/sell decision).