Bulls vs. Bears, page-6

Some good discussion on this thread, thanks to contributors.

I took a look at PRT recently, going back through their financials for the last 6-7 years. The thing that jumped out at me is they've done a good job to date maintaining their EBITDA margin (around 25%) primarily by reducing broadcast & admin expenses - these two expenses combined consumed 26% of revenue in FY11, but last year consumed only 21% of revenue. Offsetting the big expense reduction has been the contraction in gross margin - this has gone from 50% in FY11 to 45% in FY16 (and hit a new low of 43% in 1HFY17).

Despite their efforts to cut controllable costs over the last 5-6 years, i think there's a good reason why PRT is as cheap as it is: there's only so far they can cut their broadcast/admin expenses (and i suspect they are already close to their limits here, as the reduction in these expenses basically stopped in 2H15 and they are now consistently spending ~$25-26m per half in these expense line items combined), and they have no ability to stop the contraction in gross margin, because they can't just turn around to the content providers and pay them less because their viewership is falling. So, with an apparently limited ability to further reduce broadcast/admin expenses, and no ability to cut cost of sales, future revenue falls are going to drop down to the operating profit line very sharply.

If you plug into a basic model the ongoing impact of: high single digit annualised fall in revenues (already happening excluding one-offs like Olympics coverage), no change in cost of sales, and no change in operating expenses, you start to understand pretty quickly why the stock is trading on a ~4x EBIT multiple. It's a wasting asset.