TEN's improving performance lost in industry overhang

Revelations that Ten Network (ASX: TEN) has returned to profit for the first time since the first-half of 2012 may have staunched the disastrous share price run since bouncing progressively lower from a two year high of $3.46 early in 2014, but the improving market sentiment has failed to push the share price higher from the $0.95-$0.99 band it's been trading at since early February.

While the narrow first-half net profit of $13.4 million in the six months to February 29 was a massive improvement on last year's loss of $264.4 million – for the equivalent period – it did include a one-off $24.8 million gain on its sale of US outdoor advertising business, EYE US.

What should have given the market some renewed optimism in the embattled network were signals that much of the result was due to increased market share and revenue, and not cost cutting per se.

Also contributing to TEN's revenue boost was its arrangement with Multi Channel Network (MCN) for advertising sales representation. It's understood that MCN – in which it's bought a 25% stake in 2015 – is having a material impact on how advertising is bought and sold in Australia by delivering brand-safe premium video across multiple platforms, in the world-class landmark trading environment, with real and measurable data.

TEN's television revenue was up around 8% to $348.48 million, compared with a 1.7% decline across the capital city free-to-air market as a whole – while revenue share improved 23.4% – and advertising revenue is expected to increase by about 8% in the first two months of the second half of the financial year.

TEN was also the only free-to-air broadcaster to increase its prime time audience in the 2015 ratings year – with the uptick continuing across the 2015-16 summer – with the network achieving its best ever summer audience among people 25 to 54, and its highest summer commercial share in total people since 2003-04.

While TEN's share of television revenue rose 2.5 percentage points between September and February, rival free-to-air networks Seven (ASX: SWM) and Nine Entertainment (ASX: NEC) declined by a corresponding amount.

CEO Paul Anderson attributes much of the improved result to TEN's investment in fresh and innovative prime-time content and the expansion of its digital media business Tenplay which is also producing encouraging results.

On an equally pleasing note, February 2016 also marked the 12th consecutive month TEN has increased its revenue and revenue share year-on-year, and it has definitely bucked the trend of shrinking free-to-air audiences.

But while TEN's performance is arguably improving – with net debt cut to $20.2 million following the capital injection it received from Foxtel taking a 14.99 stake in October – the stock's share price seems caught up in the overhang the market has on the sector at large.

Until the free-to-air TV industry manages to convince the government to abolish broadcast licence fees, cost reductions will remain one of the industry's ongoing preoccupations.

The other big overhang the market and the industry at large is waiting patiently on is the abolition of ownership restrictions which restricts network coverage to 755 of the population, and the two out of three rule, which stops any one group owning more than two of a newspaper, commercial TV licence or radio licence in a large market.

TEN's long term cash flow relative to reported profit is strong, with earnings per share (EPS) forecast to improve from $-0.03 in 2016 to $0.04 in 2018. However, the stock does look inexpensive relative to its 12 month high of $1.96 late March 2016, and against an average target price of $1.26.

While the abolition of ownership restrictions does look likely, it's now less likely to happen until after the federal election.

Watch closely for further news that ownership restrictions will be lifted, and any re-ratings on the stock that this may trigger.