Treasure Chest: Media Beholden To Cyclical Downturn

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Brokers are downgrading their expectations for listed media companies as the economy slows amidst RBA tightening, impacting all of TV, radio, online classifieds and outdoor advertising.

By Greg Peel

Whose Idea Is It?

Analysts at Macquarie and Morgan Stanley.

The Subject:

Downturn ahead for Australia’s listed media companies.

The Argument:

Of all the cyclical sectors in the market, media is one of the most tied to economic ups and downs, reflected in demand for advertising. As the RBA begins to tighten policy from covid emergency levels in order to fight inflation, economic growth is set slow.

Typically the central bank would be looking to slow the economy with higher rates when it’s running too hot, leading to inflation, but in this case the economy is already impacted by the covid overhang causing supply and labour shortages, and is thus slowing from its initial resurgence out of 2020-21 lockdowns.

Which is why there is still talk of stagflation. Macquarie’s Macro Strategy team is currently forecasting a 60% probability of a mild recession.

A review of the experience of the GFC, after which Australia avoided two quarters of negative growth but as the economy improved, the RBA began to raise rates, Macquarie concludes the media sector PE multiple tends to decline ahead of earnings revisions with reasonable accuracy. The market is currently implying a sector earnings downgrade of some -20%.

As we are currently at the beginning of the downgrade cycle, Macquarie has shifted its sector stance to negative, moving to Underweight from Neutral. The sector covers companies in the business of television and radio, newspapers, online classifieds and outdoor advertising.

Macquarie notes Carsales ((CAR)) is typically more resilient, enjoying higher listings even as demand fades, hence an upgrade to Outperform from Neutral.

Seek ((SEK)) is the most cyclically exposed, with job ads highly correlated to economic indicators, hence a downgrade to Underperform from Neutral.

REA Group ((REA)) and Domain Group ((DHG)) face real estate-specific headwinds from rising rates. REA is downgraded to Underperform but Domain hangs onto Neutral.

Television and radio earnings are very much linked to advertising spend. Seven West Media ((SWM)) and Southern Cross Media ((SXL)) are downgraded to Neutral from Outperform and Nine Entertainment ((NEC)) remains on Neutral.

News Corp ((NWS)) is on the other hand less exposed to advertising hence Macquarie retains Outperform.

Outdoor advertising should be included as suffering an impact from weaker advertising demand but the reopening of air travel meeting pent-up demand implies primary airport billboard advertising demand should remain supportive. Hence Macquarie retains an Outperform on oOh!media ((OML)).

HT&E ((HT1)) is involved in both outdoor advertising and radio, so it has been downgraded to Neutral.

Seven West

Morgan Stanley concurs that the cyclical and economic outlook is softening.

Seven West Media has undergone restructuring in the last two years leading to outperformance on higher TV ratings coupled with a reduction in debt. The company has made the most of the post-covid recovery in TV advertising, Morgan Stanley suggests, reflected in a strong bounce-back in earnings.

But at its core Seven West remains a TV business, and every 10% increase/decrease in the TV ad market moves earnings by plus or minus 30-40%. Morgan Stanley sees the TV advertising market as mature in the medium term, and declining over the longer term.

Having recently acquired regional TV broadcaster Prime Media, Seven West’s free-to-air TV business, including video on demand, accounts for some 85% of revenues.

The broker has resumed coverage of Seven West Media with an Underweight rating.

The same argument applies to Nine Entertainment but Morgan Stanley retains an Overweight rating, based on a stronger balance sheet and greater digital exposure. The broker believes the strategic value of Stan, as part of a wider TV/screen asset portfolio, is substantial.

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