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Communication Services

Media - Diversified

Townsquare Media Inc. Class A

Investment Appraisal
 Townsquare Media posted another exemplary quarter with better than expected results. Total company revenue increased a solid 16.7% to $111.3 million, above our $107.8 million estimate. The largest upside revenue variance in the quarter was in its Local Marketing Solutions business, driven by strong revenue growth in its programmatic advertising business, called Ignite, and its own websites and apps, called Amped. These digital businesses which are embedded in its local marketing solutions segment, increased revenues a strong 21%. The company&#8217;s subscription digital business, Townsquare Interactive, was in line with expectations, but, importantly, revenues grew a strong 16.2%. As a result of the solid revenue performance and higher margins, adjusted EBITDA of $29.1 million was above our $27.5 million estimate. Adjusted EBITDA margin of 26.2% was better than our 25.5% margin estimate. Figure #1 Q3 Results versus Estimates illustrate the variance to our estimates.&nbsp;
Given favorable operating momentum, the company once again raised guidance. Revenue guidance was raised from $410 million to $415 million for the full year 2021, which would represent 96% of 2019 revenue. Digital revenue guidance was raised from $190.0 million to $193.0 million, which would represent 19% year over year growth. Adjusted EBITDA guidance was raised from $102.0 million to a range of $104.0 million to $105.0 million. The adjusted EBITDA guidance would represent a remarkable 102% to 103% of full year 2019 levels.&nbsp;
Flowing through the Q3 upside to our full year 2021 put our estimates in line with the company&#8217;s guidance. Management indicated that it is not experiencing Radio spot advertising softness that some of its larger market focused peers are. We believe that the softness in the larger markets, where the economy is largely felt, is transitory in nature, a reflection of labor shortages and supply chain shortages, which should correct over coming quarters. As we expected, Townsquare is somewhat insulated from those issues given its focus on smaller markets. As such, we are maintaining our Q4 estimates. Therefore, we are raising our full year 2021 revenue estimate from $412.4 million to $415.9 million. At that level, our estimate is slightly higher than the top end of the company&#8217;s revenue guidance range. Our adjusted EBITDA estimate is being raised from $102.4 million to $104.0 million, at the top end of the company&#8217;s adj. EBITDA range.&nbsp;
We are raising our full year 2022 adj. EBITDA estimate from $111.1 million to $114.2 million. Our upward revision reflects enhanced margin assumptions. We are increasing our full year 2022 adj. EBITDA margin from 24.9% to 25.6%. Based on our upwardly revised 2021 adj. EBITDA estimate, the 2021 margin is expected to be 25.0%, an increase from our previous assumption of 24.8%. Given the prospect of high margin Political advertising, which is expected to be roughly $10 million in 2022, we expect margins to improve from 2021 levels. Our full year 2022 adj. EBITDA estimate may be conservative if Political advertising is greater than expected, spot advertising is stronger than expected, or there are positive upside surprises in the company&#8217;s Digital businesses. Live Entertainment, which is expected to rebound in 2022 as live events return, could be the swing factor. While the Live Events business carries lower margins, it could offer positive cash flow surprise potential. Figure #2 Full Year 2021 and 2022 Revisions provides detail on our estimate revisions.&nbsp;
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Figure #1 Q3 Results Vs Estimates&nbsp;
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsqq32021variance.jpg" style="width: 335px;height: 731px" />
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
 Figure #2 Full Year 2021 and 2022 Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsq20212022revisions.jpg" style="width: 478px;height: 675px" />
The strong fundamentals allowed the company to rebuild its cash position following the purchase of Oaktree Capital&#8217;s equity stake, which closed March 9, 2021. Figure #3 Balance Sheet reflects the company&#8217;s financial position as of September 30. The company had $31.3 million in cash and roughly $540 million in total long term debt. Given the improved Q3 fundamentals and cash build, net debt leverage is below 5 times. We believe that in the absence of acquisitions, debt leverage will decline to below 4 times by year end 2022, a function of improving adj. EBITDA and free cash flow generation. In our view, the company has financial flexibility to invest in its growth initiatives, which includes expansion into California with a second office for its Digital operations. In addition, the company may pursue acquisitions, which should enhance its long term growth prospects.&nbsp;&nbsp;
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Figure #3 Balance Sheet 
 
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsqbalancesheet.JPG" style="width: 514px;height: 404px" />
We believe that the company&#8217;s strong and valuable Digital operations have gone unnoticed by institutional investors. As Figure #4 Peer Group Digital Revenue illustrates, Townsquare leads its Radio peers in terms of Digital revenues as a percent of total revenues, which nears 50%. Townsquare&#8217;s Digital revenue contributions to total revenues are nearly double that of its closest peer, iHeart Media.&nbsp;
Figure #4 Peer Group Digital Revenue 
 
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsqdigitalpeers.JPG" style="width: 361px;height: 236px" />
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In spite of a history of beating industry average revenue and EBITDA growth, a better growth profile than many of its peers and its valuable Digital businesses, the TSQ shares trade in line with the average industry multiples. As Figure #5 Industry Comparables illustrates, the TSQ shares trade at 6.9 times Enterprise Value to our 2022 adj. EBITDA estimate, or in line with the average industry EV to EBITDA multiple of 7.0 times. We believe that the company should trade at a premium valuation relative to its peers given its above average revenue and cash flow growth. In addition, as Figure #6 Radio Margins illustrates, the company has among the highest EBITDA margins in the industry, reflecting the company&#8217;s strong, roughly 30% margins for its Digital Media businesses.
Figure #5 Industry Comparables 
 
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsqpeers.JPG" style="width: 590px;height: 258px" />
Figure #6 Radio Margins 
 
 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsqmargins.JPG" style="width: 340px;height: 260px" />
 We are raising our price target on the TSQ shares from $27 to $29, reflecting our upwardly revised 2022 adj. EBITDA estimates. Our price target maintains our target multiple of 9.3 times, which we believe is reasonable given the company&#8217;s favorable double digit cash flow growth outlook and valuable Digital businesses. Furthermore, the target multiple would be below that of the company&#8217;s historic trading ranges, discussed later in this report.&nbsp;

Townsquare Media Inc. Class A (TSQ)

Another Beat And Raise Quarter

Fundamental Analysis:

Rating: Log in to view

Alleviates A Stock Overhang (TSQ)

Improving Fundamental Outlook; Boosts Dividend (TSQ)

Highlights From Noblecon19; Compelling Total Return Vehicle (TSQ)

Sum Of The Parts Support Significant Upside Potential (TSQ)

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