Media Sector Can’t Ad

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– Total ad market in Australia grew slightly in six months to June
 – August numbers were weak 
 – Online advertising market share now exceeds newspapers
 – JP Morgan cuts earnings estimates for media companies
 

By Chris Shaw

For the six months to the end of June, Commercial Economic Advisory Service of Australia (CEASA) data showed the total advertising market in Australia rose 1.7% in the June half of 2012, or by 0.6% when adjusted for online ad spend.

The CEASA data showed online's 26.9% share of the advertising market has overtaken that of newspapers at 24.1%. This switch has occurred over the past year, as Goldman Sachs notes online's share has risen by almost 5% in that time while total newspaper share has fallen by around 3%.

The largest media type for advertising spending remains TV, this sector accounting for 30.7% of the total market. Metro TV stands at 20.6%, Pay TV has 3.5% of the market and Regional TV has 6.6%, though Goldman Sachs notes TV's total share of the market declined slightly in the June half.

Also doing it tough are regional newspapers and magazines, both performing worse in the period than Goldman Sachs had expected. Regional newspapers delivered an 18.5% decline in total ad market, against the broker's forecast of a 5% decline, while regional magazines registered a decline of 26% against a forecast of a 15% fall.

In general, Goldman Sachs suggests the CEASA report included little new information, meaning no major changes to ad market forecasts. For FY13 Goldman Sachs expects ad market growth of 4.2%, rising to 4.4% in FY14. These estimates are up from previous forecasts of 4.1% and 4.3% respectively.

The recent trend of weak advertising data has extended into August. JP Morgan notes Standard Media Index (SMI) data for August showed an acceleration in the currently weak advertising market, as total bookings for the month fell 14.3%. As Credit Suisse points out, the decline in August follows revised falls of 5.0% in July and 1.9% in the previous corresponding period.

Newspapers and magazines fell the heaviest, Credit Suisse noting newspaper advertising spending fell 24% in year-on-year terms in August, slightly better than the revised 28% fall in July. Magazine advertising fell 31% in year-on-year terms, extending the print advertising decline to 18 consecutive months.

JP Morgan notes metro TV data for the month showed a decline in advertising of 13.9%. Metro radio showed a 9.7% decline, while digital advertising recorded a decline of 8%. JP Morgan suggests the Olympics may have impacted on this category in particular.

In category terms, Credit Suisse notes retail reported static numbers for August, while Auto ad spend fell 1% in year-on-year terms and sectors such as Toiletries and Cosmetics and Communications saw significant declines of more than 30% for the month on year-on-year terms.

Prior to the release of the August SMI data, JP Morgan had already lowered earnings estimates across the media sector to reflect a weak outlook for ad spending. The changes reflected market feedback indicating a short ad market and some structural trends were impacting on ad spending in general.

Changes to earnings estimates put through by JP Morgan ranged from minor in the case of both Fairfax ((FXJ)) and Prime Television ((PRT)), where earnings per share (EPS) numbers were lowered by 2.0-4.0% through FY14, to significant in the case of Ten Network ((TEN)) and Consolidated Media ((CMJ)). EPS forecasts for the latter two companies were cut by 18% to 65% in FY13 and by around 15% in FY14.

The changes to forecasts prompted cuts to price targets for most stocks under coverage by JP Morgan, with the exception of REA Group ((REA)). Forecasts for this company were increased by 4-5% through FY14, which generated in increase in price target to $15.16 from $14.35.

Despite the reductions to numbers, JP Morgan cautions risk to consensus earnings forecasts for FY13 remains to the downside for a number of companies in the sector. These include Ten, Fairfax, Seek ((SEK)), Southern Cross Media ((SXL)), Seven West Media ((SWM)) and APN News & Media ((APN)). This reflects an expectation of only a modest increase in ad spending in FY13. JP Morgan is forecasting an increase of 1.4%, down from 2.0% previously. 

This risk leaves JP Morgan conservative on the sector, as the broker rates only Prime Media and Seven West Media as Overweight. This reflects a more positive view on TV ratings and a category preference for free-to-air given sport and local drama is regarded as less of a commoditised product.

Both Seek and Southern Cross Media are rated as Underweight, the former given JP Morgan has a negative view on expected job volumes for FY13 and the latter given adverse revenue and ratings trends for the coming year.

While Fairfax and Ten Network are trading at depressed valuation levels both are rated as Neutral, JP Morgan suggesting a cautious approach on both stocks is appropriate given the potential for downside risk to consensus earnings forecasts. APN News and Media, Consolidated Media and REA Group are also rated as Neutral by JP Morgan. 

Stock ratings in the sector also reflect the current extreme polarisation in valuation evident between traditional and new media companies. As pointed out by JP Morgan, traditional media stocks are trading on earnings multiples of as low as three times at present (APN News & Media), rising to a multiple of more than 20 times for the perceived growth stock REA Group.

While a different growth profile goes some way to explaining this spread in valuations, JP Morgan notes the valuation gap between perceived higher and lower growth sectors of the media market has expanded over the past 18 months.

Sentiment Indicator readings in the FNArena database for the Australian media stocks updated by JP Morgan range between 0.9 for Seven West Media, 0.8 for Prime Media, 0.6 for Southern Cross Media, 0.3 for REA Group, 0.1 for Consolidated Media and Seek, 0.0 for APN News and Media and Fairfax to minus 0.4 for Ten Network.

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