As a result, Wireless is now focused on its flagship talkSPORT radio complex and a further 12 local UK radio stations, which in aggregate generated operating profit of £11.7m last year. In Ireland the group is the largest local radio operator with seven stations broadcasting, which made an operating profit of £4.4m. So, net of central operating costs, these stations are generating a net operating profit of £13m.
One reason for my positive stance on the shares is down to prospects for a decent performance from the home nations in the UEFA European Football Championship 2016. Northern Ireland, The Republic of Ireland, Wales and England have all booked their place in the last 16 knock out stage of the tournament. This should be good news for TalkSPORT and its new sister station talkSPORT 2, which are broadcasting more than 400 hours of football coverage over the month-long tournament.
Bearing this in mind, Richard Huntingford, chairman of Wireless, has guided investors to expect that "while a major football tournament typically would drive a 10 per cent increase in sales over the course of a calendar year, talkSPORT is experiencing good underlying sales growth in addition to the positive effect of the Euros which augurs well for 2016." When the tournament was held in Poland and Ukraine four years ago, talkSPORT's revenue surged by 16 per cent in the first half of 2012 and its contribution over the course of that year rose by a quarter.
In other words, talkSPORT's advertising revenue could outperform analysts' expectations if the home nations maintain an interest in the tournament. And it's clear to me that the public's interest in the tournament is high: more than 14m people tuned into ITV for England's first game against Russia, and a further 9.3m tuned into England's afternoon fixture with Wales on BBC1 last Thursday. Clearly, the timing of that game will have prevented some workers from viewing the match live during a weekday, so even after accounting for the 2.3m audience who clicked on the BBC's website and started to live stream the football, that still leaves millions of supporters, from both Wales and England, who were probably following the action on the radio.
Boasting on average more than 3m listeners every week, and with strong demand for the younger, mostly affluent male demographic segments of those listeners, talkSPORT will have undoubtedly captured a chunk of the captive audience for all the home nation's games, and should be exploiting the advertising potential by adjusting its spot advertising rates accordingly. Furthermore, talkSPORT's international broadcasting business, now in its fourth season, continues to achieve double-digit sales and profit growth, highlighting the wider audience beyond these shores. And let's not forget that following a competitive bidding process, talkSPORT has been awarded three live UK audio packages for the Premier League for the next three seasons, so it is the only national commercial radio station that carries live English Premier League. It will also broadcast more Premier League coverage than ever when the new football season kicks off again in August.
Of course, we will have to wait for a trading update after the European championships have ended to see how Wireless's financial performance has fared, but given the success of the home nations to date, it's looking good. And it's not as if the share rating is punchy to start with. Analyst Robert Stokes at Davy Stockbrokers in Dublin forecasts that the radio stations will deliver underlying pre-tax profit of £13.2m on revenue just shy of £80m this year, so the shares are only being rated on 11.5 times forecast earnings per share of 15.4p. Add to that prospects for at least a 7.3p a share payout in 2016, implying a prospective dividend yield of 4.1 per cent, and the rating is attractive.
So, having recommended buying Wireless's shares at 184.5p (equivalent to 170.75p a share adjusted for the aforementioned dividends) ('On the right wavelength', 26 Oct 2015), and subsequently reiterated that advice at the same price ('Talk is cheap', 4 Apr 2016), I feel the investment risk here remains to the upside.
On a bid-offer spread of 178p to 179p, valuing Wireless's equity at £123m, I still expect a decent result here. Indeed, backing out the trophy talkSPORT flagship asset which analysts at Peel Hunt believe is worth £85m, and this implies the other radio stations are being value on a miserly one times revenue. I maintain my 215p fair value target and continue to rate the shares a buy.
