Digital Gains Traction

Alleviates A Stock Overhang

Improving Fundamental Outlook; Boosts Dividend

Highlights From Noblecon19; Compelling Total Return Vehicle

Michael Kupinski

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Townsquare Media Inc. Class A

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Investment Appraisal
 The company reported quarterly revenue of $121.2 million and adj. EBITDA of $28.6 million, both of which were in line with our estimates. We believe that the company&#8217;s flat year over year revenue results will be among the best in the industry, expected to be down 4%. Notably, its digital advertising business, Ignite, performed strongly, up 11%, largely offsetting softness in broadcast, which was down 6%, as illustrated in Figure #1 Q2 Results. In our view, the recent results reflect a company that is navigating well the current economic headwinds. Furthermore, we believe that investments being made this year in its Interactive business will support revenue and cash flow growth in 2024.&nbsp;
Total digital revenue grew 4% from the prior year period and comprised 52% of total revenue in Q2, which is more than two times the industry average. Notably, Ignite grew revenue by 11% and operating profit margin was an impressive 35%.&nbsp;Importantly, we view 2023 as a year of investment for Townsquare Interactive, with revenue and margin growth expected in 2024.
Management provided Q3 revenue pacings that were somewhat softer than expected. But, notably, the company maintained a favorable adj. EBITDA outlook. We are tweaking lower our Q3 revenue estimate, as illustrated in Figure #2 Q3 &amp; Q4 Revisions. Notably, national advertising pacing is&nbsp;down 18% and&nbsp;interactive is pacing down low-double digits. In spite of the lowered revenue expectations, we believe that the company will likely exceed most of its peers in the third and fourth quarters, with revenue expected to be down low double digits. Importantly, we are reiterating our full year 2023 adj. EBITDA forecast due to direct operating expense reductions. Management reaffirmed its previous 2023 adj. EBITDA guidance of $100 million to $110 million. The favorable outlook is impressive given that it is investing in its new Interactive office in Phoenix. Figure #3 2023 Full Year Revisions illustrates our revenue and adj. EBITDA updates.&nbsp;
As of June 30, the company had $50 million in cash, $518 million in debt and net leverage of approximately 4.4 times, leverage that is lower than many of its broadcast peers.&nbsp;Notably, the company generated $7 million in free cash flow in Q2 and we expect that it will generate free cash flow for the full year 2023, after dividends.&nbsp;The company repurchased and retired 1.5 million shares in Q2, or approximately 8.5% of shares outstanding. We believe that its free cash flow generation will allow the company to invest in its digital businesses and/or return capital to shareholders, or repurchase its bonds, currently trading at a discount to par.&nbsp; 
 
We believe that the TSQ shares had a strange reaction to an in-line quarter and reaffirmed full year 2023 guidance. The shares dropped nearly 20% to close at $9.05. The weakness in the shares highlight the compelling valuation and total return potential in the shares. In particular, In the TSQ shares trade at multiples below Radio peers as illustrated in Figure #4 Peer Group Digital revenue. Near current levels, the TSQ shares trade at 5.9 times enterprise value to our full year 2023 adj. EBITDA estimate, below the industry average. as illustrated in Figure #5 Radio Industry Comparables.&nbsp;
Given that more than half of company revenue comes from its high growth Digital businesses, we believe the TSQ shares justify a multiple in line with broadcast industry peers. Using a sum of the parts analysis, we assigned a blended valuation multiple using average peer multiples to value the portion of its business attributable to Radio (48% of our 2023 revenue forecast), Programmatic Advertising (33% of our 2023 revenue forecast), and Digital Ad Solutions Services (19% of our 2023 revenue forecast), we arrive at a stock valuation of $23. This assumes a multiple of 8.0 times EV to EBITDA for its Broadcast portion, 7.0 times EBITDA for its Programmatic Advertising business, and 13.0 times EBITDA for its Digital Ad Solutions business. Figures #6 and #7 illustrate the comparables for the Programmatic Advertising and Digital Ad Solutions industries, respectively. Digital revenue is expected to account for a greater portion of its business, and we believe its stock valuation should reflect its favorable growth characteristics and multiples of its Digital peers. 
Near current levels, the TSQ shares trade at 5.9 times enterprise value to our 2023 adj. EBITDA forecast of approximately $100 million. Given that high-growth Digital represents 52% of its revenues and is expected to grow in the future, we believe the shares justify a multiple higher than its radio peers. Our $23 price target assumes an 8.8 times EV/2023 adj. EBITDA multiple and a 7.6 times EV/2024 adj. EBITDA multiple. Our price target also falls in line with our sum of parts analysis, detailed above. Given an attractive annualized dividend yield of 8.3%, the TSQ shares offer an attractive total return potential. We view the TSQ shares as among our favorite in the industry given a compelling stock valuation, attractive total return potential, and above average revenue and adj. EBITDA growth, with positive upside surprise potential in an improved economic environment. The shares are rated Outperform with a $23 price target.
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Figure #1 Q2 Results&nbsp;
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/TSQ-Q2-results.png" style="width: 341px;height: 622px" /> 
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Figure #2 Q3 &amp; Q4 Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/TSQ-Revisions.png" style="width: 434px;height: 631px" />
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Figure #3 2023 Full Year Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/tsq-2023-revisions-1.png" style="width: 373px;height: 721px" /> 

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Figure #4 Peer Group Digital Revenue
 
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/digital-rev.png" style="width: 644px;height: 244px" /> 
Source: Company presentation 
 
Figure # 5 Radio Industry Comparables
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/Radio-comps.png" style="width: 500px;height: 237px" />
Source: Noble estimates &amp; Eikon
 
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Figure #6 Programmatic Advertising Comparables&nbsp;
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/programatic-comps.png" style="width: 498px;height: 246px" />
Source: Noble estimates &amp; Eikon&nbsp;
 
Figure #7 Digital Ad Solutions Comparables
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/digital-ad-comps.png" style="width: 496px;height: 278px" /> 
Source: Noble estimates &amp; Eikon

Townsquare Media Inc. Class A (TSQ)

A Surprising Reaction To An In-Line Quarter

Fundamental Analysis:

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Digital Gains Traction (TSQ)

Alleviates A Stock Overhang (TSQ)

Improving Fundamental Outlook; Boosts Dividend (TSQ)

Highlights From Noblecon19; Compelling Total Return Vehicle (TSQ)

Inbox Intel from Channelchek.