Will Advertising Return To ‘Normal’ Soon?

This story features SEVEN WEST MEDIA LIMITED, and other companies. For more info SHARE ANALYSIS: SWM

-Ad outlook turns more positive
-TV, radio most rewarded
-Share price upside for some
-Potential media reforms?
 

By Eva Brocklehurst

Australia's federal election has now passed and advertising agencies can get on with doing more mundane things, like selling product. The election spending provided a welcome injection of funds into the market and Citi notes feedback from management and industry players has turned incrementally more positive for the second half of 2013. Lead indicators of advertising spending continue to signal improvement in advertising conditions, with consumer confidence moving higher, equity markets rallying and interest rates supportive.

JP Morgan believes the FY14 outlook is dependent on whether the positive trend in the advertising market continues now the election has passed, or whether weakness returns. Most traditional media companies under coverage gave a relatively solid outlook for advertising in the first half of FY14 after the FY13 results but, in order to become more positive, the broker wants business and consumer confidence to improve sustainably. It remains to be seen how well companies which pulled advertising in the lead-up to the election come back with their purses open.

JP Morgan notes advertising data continued to strengthen in FY14 although, excluding political advertising, the underlying FY14 market is flat. August bookings were up 6.1% but political increased by 331%, with strong increases from metro TV (8%), regional TV (12%) and digital (19%). Given the subdued start to FY14 by a number of major advertising categories such as retail, banking, finance and motor vehicles, and the one-off impact from the election, underlying conditions are considered still weak.

August was the third consecutive month of growth in advertising bookings and both JP Morgan and Credit Suisse note TV and radio benefitted most. Metro newspapers failed to benefit from the increased political spending and the declines continued. Newspaper bookings declined by 15% in August, while magazines were down 18%. Credit Suisse observes it was the fourteenth consecutive double digit contraction in metro advertising spending in newspapers. Regional newspaper advertising decline moderated to be down 2% in August. In contrast, digital advertising shows no signs of slowing, up 19% in August. Credit Suisse notes growth was evenly split between traditional display and new platforms such as mobile and online video.

Goldman Sachs has made no change to forecasts in the wake of the August ad data. The broker finds the last few months have produced a flattening in underlying growth although the latest consumer sentiment survey indicated a promising 4.7% improvement in September. The broker would rather wait and see how the ad market performs in September and October, to exclude the election babble and get a better gauge for the December quarter and first half of FY14. Currently Goldman is expecting the underlying ad market to deliver a flat first half and more modest recovery in the second half of around 3.2%.

Citi does not expect all media players to be equally rewarded in the improving outlook. Forecasts already reflect a recovery in advertising for FY14, but trading multiples are lagging in the broker's view. Category battles are looming ahead of the December quarter and October and November will be critical for sentiment. TV advertising is expected to rise 6.8% and radio 4.8% in the second half, outperforming on a relative basis to other media, alongside continued robust growth in online advertising, driven by search and mobile.

The broker expects share price upside to come from multiple expansion on the back of renewed confidence in the outlook. The stocks on Citi's radar are Seven West Media ((SWM)) and Southern Cross Media ((SXL)). The broker also likes the quality assets of Carsales.com ((CRZ)). Ten Network ((TEN)) is seen in turnaround mode while the broker is Neutral on Fairfax Media ((FXJ)) and APN News & Media ((APN)). The Sell rating on SEEK ((SEK)) is a valuation call as the stock is seen priced for a material improvement in volume.

Credit Suisse likes Seven West as a strong story in the traditional media sector while Ten is viewed favourably for leverage to a recovery in ratings and advertising. Carsales.com has strong exposure to digital advertising which the broker observes is maintaining strong momentum throughout the current cyclical downturn. JP Morgan retains a preference for the Free-To-Air category and is Overweight on Seven West and Prime Media ((PRT)) while Underweight on Fairfax because of the current negative revenue trends and a view that, excluding Domain/Stayz, the company's digital assets lack strong growth. The broker is also Underweight on SEEK, given a view that 2013 employment volumes continue to look challenged.

JP Morgan has also looked at what the new government might have in the way of media regulatory reform. Reforms are more likely in FY15 and, according to JP Morgan, could include scrapping of the 75% reach rule, which could trigger industry consolidation and a review of the FTA licence fee, currently 4.5%. The former is considered quite likely with minimum local content requirements attached. A parliamentary committee has supported removal of the rule with the view that it had become redundant with the advent of the internet and converging media. The support for the scrapping of the rule relies on legally enforceable undertakings on local content requirements in regional Australia. The most likely beneficiaries of the reach rule being scrapped are Prime Media and Southern Cross, in the broker's view. 

The licence fee reduction cannot be ruled out but is considered less likely. Should it happen, JP Morgan expects there would be further legislative requirements such as increased Australian content obligations. In the broker's modelling, a 0.5ppt and 1.0ppt reduction in the fee means FY15 earnings estimates rise by 2% and 4% respectively for Seven West while for Ten estimates rise by 6% and 12% respectively.
 

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