Media magnets - 7th June 2004
Advertising is a key driver of revenue growth for
media companies - and it is going from strength to
strength, writes Allan Trench.
Analysis - Media
makes a good media company? Whether you are in free-to-air
or cable television, movies, entertainment or publishing
and printing, the experts say that you need only achieve
three things - a strong customer base retained through
strong brands, great content and cost-efficiency.
Achieving all three means success; getting only two
out of three correct means failure.
those media companies that pass the three-point survival
test, the next challenge is to conquer the advertising
market. Although in the long run, advertising revenues
grow in line with economic growth, spending is notoriously
volatile in the short term. As part of the Consumer
Discretionary sector of the ASX, media companies remain
strongly affected by both advertising and the underlying
willingness of consumers to spend. While the effect
will vary between companies, a double-impact is a
reasonable approximation when it comes to profit performance
and advertising growth. That is, if increases in advertising
approach 10%, expect to see bottom line impact in
the order of 20% or even more on the annual profits
of media companies. The opposite is true when advertising
how do Australia's media firms stack up? They are
pretty good by global standards. When it comes to
media, Australia punches above its weight in entertainment
and broadcasting, and also in printing and publishing.
like News Corporation, Publishing and Broadcasting
and television networks TEN and Seven are joined by
John Fairfax Holdings, APN News & Media and West
Australian Newspapers in leading the sector. Signs
of life returning to the advertising market led these
companies to better performance in 2003 than in 2001-02.
Analysts favor continued strength for the media sector,
driven by continued buoyancy in advertising. Recent
forecasts are for year-on-year advertising growth
to come in at around 11%, up from estimates of just
5Ð6% at the start of 2004.
holy grail for a media company is a set of customers
that keep coming back - and spending more money when
they do so. What's even better is if you know precisely
why they come back, and just who they actually are.
Thus, media companies make herculean efforts towards
understanding their customer bases.
issues are market shares, based on both demographic
and geographic indicators. Media companies design
products for different age groups, different lifestyles,
different geographies and different cultures. Each
company aims to be strong in at least one area. The
danger is that in the quest for market share, media
companies can spread their efforts too thin, becoming
weak everywhere in the process. This is the challenge
that faces media companies as they outgrow their traditional
areas of strength in the market.
attract advertisers you have to have a great product
to wrap the advertising around. Additionally, the
product has to appeal to the same demographic that
the advertising is aimed at. For Ten Network, "great
content" means the likes of Neighbours and Rove
Live that target the 16-39 age group. The result has
been leadership in this segment for Ten, with advertisers
of "youthful" products signing up as a result.
for content among media companies can be fierce. The
battle for television rights to sporting events is
a classic case. Equally, high-profile presenters can
be headhunted by rival channels to attract market
share. Competition is fierce for the best writers
and journalists too.
costs may not be sexy, but it is a vital ingredient
in the success of a media corporation. Anyone can
deliver great content if dollars are not an issue.
The ratings for Neighbours would no doubt rise if
Catherine Zeta-Jones were to make a guest appearance.
However, getting the Oscar-winner to front up on Ramsay
Street might prove expensive.
providers can fall foul on cost control. Remember
the battle to secure television rights to the AFL
season? The winners in the race were a syndicate combining
Nine Network, TEN, Telstra, pay TV company Foxtel
and News Corporation. The loser was Seven Network,
beaten in a bidding war. Many analysts regarded the
price paid as excessive.
companies' strategy and profits can be influenced
by government policy. In this respect, the media sector
rivals the likes of banking, telecommunications and
retail, with incumbents highly sensitive to changes
in legislation at state or federal level.
took a look at the leaders in the media sector to
gauge how they are travelling and what might lie ahead.
News & Media (APN)
at $1.8 billion, based upon recent prices of about
$3.85, APN is a diversified media company operating
across radio, magazines and newspapers. APN is the
publisher of the The New Zealand Herald and 14 Australian
daily newspapers. It owns radio broadcasting licenses
in all capitals except Perth and operates more than
90 radio stations across New Zealand. The company
also operates an outdoor advertising division. Dividends
stand at about 4.8% and are fully franked. Share price
growth has been approximately 10% over the past year.
APN completed a $98 million placement in 2003 and
needs to deliver earnings growth to its expanded shareholder
base. Although some earnings growth will come from
retiring a portion of the company's debt and interest
rate refinancing, the challenge remains to find profitable
growth avenues across its asset portfolio. This may
prove difficult at a time when competition is hotting
up to secure radio licences across Australia.
APN points out that several of its newspaper titles
are focused on areas of high population growth - Auckland
and the Bay of Plenty in New Zealand and the Queensland
Sunshine Coast. Record profits in 2003 were driven
by 9% revenue growth.
risks: APN is reliant upon The New Zealand Herald
as the cornerstone of its earnings at about 40%. Gearing
is relatively high, with a debt load close to $1.2
*** Opportunity to take advantage of strong advertising
Austereo Group (AEO)
in at around $570 million market capitalisation, Austereo's
share price performance has been unspectacular over
the past year, despite maintaining a strong dividend
stream exceeding 5% fully franked. Recent prices of
$1.35 compare with $1.45 in June 2003.
company sits on a market average price earnings (p/e)
multiple of 15, with annual revenues around the $230-240
million mark. Austereo is a strong player on the Australian
radio scene, owning the flagship Triple M stations
in Sydney, Melbourne, Brisbane and Adelaide, together
with the Mix 94.5 station in Perth and FM104 in Canberra.
Domestic growth has been hard to achieve for Austereo,
with the company looking to expand its activities
in search of growth opportunities elsewhere, including
the British market. The company carries a debt load
of around $160 million. The much-publicised incursion
of Richard Branson's Virgin brand into the Australian
radio market poses a strong challenge for the future.
Strong brand presence across Australia mitigates the
risk of market share loss in any one capital city.
*** The next exciting growth phase for Austereo is
Fairfax Holdings (FXJ)
of the The Australian Financial Review, The Sydney
Morning Herald, The Age, Business Review Weekly, Shares
and Personal Investor, Fairfax has long since been
regarded as a cyclical stock that benefits from stronger
Australian economic performance. A trend of rising
advertising will drive profits higher. Recent share
price around $3.45 compares with $2.90 a year ago
- an increase approaching 20%. Market capitalisation
now exceeds $3 billion. Dividends are fully franked
and sit around 3.9%
Fairfax has successfully overcome industrial relations
challenges in the recent past. The company has also
made large investments to modernise printing operations
with the opening of new plants. The challenges ahead
are to capitalise upon past investments in printing
technology, complete the bedding-down of the New Zealand
INL acquisition and continue to contain cost pressures.
Upside: Fairfax completed the acquisition of INL publishing
business in June 2003, targeting a lift in sales of
some $500 million. The deal should form a platform
and template for future bolt-on acquisitions. Sustained
improvement in equity markets in 2004 will assist
circulation growth for Fairfax Business Media titles.
The Fairfax internet platform, f2, became cashflow-positive
in the second half of 2003.
risks: Some sectors of the advertising market remain
weak, notably employment advertising in Fairfax's
key markets of Victoria and New South Wales. Newspaper
circulation figures have yet to display sustained
improvement from a flat 2002-03 market.
*** Strong brand network and asset quality provide
a stable platform for growth. Leveraged to the upturn
in advertising markets.
Corp dwarfs other companies in the sector. Investors
can gain exposure to News either through ordinary
(NCP) or preference shares (NCPDP). The 12-month share
price performance has been flat, despite the fact
that News secured its long-run battle to win ownership
of shares in US satellite TV market leader DirecTV.
Other international acquisitions, such as Sky Italia,
have also yet to achieve a full head of steam. Given
its ambitious growth strategy, dividends on News stock
remain at the token level of 0.2% for the ordinary
shares and 0.7% for the preferred shares.
The Murdochs are taking a loss-leader approach towards
pay-per-view TV in order to secure longer-term strategic
platforms for revenue and profit growth.
Growth opportunities abound for News. A strengthening
global economy, strong advertising markets and continued
consumer spending across its major markets bode well
for the remainder of 2004.
risks: News has more technological risk than its peers,
since key aspects of its business model are at the
boundary of information technology. Short-term price
adjustments of 3Ð6% may occur if market regulators
change the weighting of News stock on key indices.
News Corporation has a track record of funding acquisitions
by issuing preferred non-voting shares, with the potential
to dilute earnings per share, at least in the short
***** No shortage of growth options across the News
Publishing and Broadcasting (PBL)
a market capitalisation of around $8 billion, PBL
is the jewel in the crown of the Packer media empire.
Key business units include the Nine Network, ACP Magazines,
Crown Casino and PBL enterprises, the group's business
development division. Revenues approaching $2.7 billion
for 2003 are the highest on record. Dividend levels
are about 2.3% fully franked. The recent 15¢
per share interim dividend exceeds historical distributions
of between 9-11¢ a share.
Share price drivers contain few surprises. The group
needs to grow its TV market share via content enhancements,
leverage the buoyant advertising market and contain
TV production costs. All are more easily listed than
Leaving the tussle among TV channels aside, Publishing
and Broadcasting has considerable upside in its magazine
division, where it already leads the market with about
50% share. Crown Casino has the potential to emerge
from a period of flat revenues. Its revenues already
measure about $1.1 billion, and small percentage gains
translate to significant earnings growth.
risks: Strategic investments such as Ticketek and
ninemsn are still to perform strongly, but do not
place a considerable drag on the group.
*** Some of the resurgent advertising wave has already
been priced into Publishing and Broadcasting.
to its name, Rural Press is a leading provincial magazine
and newspaper provider to rural areas of Australia,
New Zealand and the US. Ninety per cent of revenues
originate from Australasia. Lower newsprint prices
in the 2003 second half assisted Rural Press's performance,
as did advertising growth. The company owns 10 radio
licences, although these contribute only marginal
revenue at present.
price performance over the past year has been strong,
with the stock up some 30% to about $7.40. The fully
franked dividends are about 4.7%. Rural Press operates
a policy of a 70% dividend payout ratio.
A diverse set of assets with a broad geographic spread
requires that strong central management systems be
maintained. Strong growth needs to be achieved across
several regional titles to influence the bottom line
result of the company.
Legacy issues from the extended drought in Australia
are retreating with a consequent rise in sales. Many
of Rural Press's regional titles operate as strong
local monopolies with considerable pricing power in
**** Continued strength in regional markets and local
monopoly status should underpin performance. Translation
of the Rural Press business model to the larger US
market is a long-term opportunity.
Stokes's television and magazine empire has a market
capitalisation exceeding $1.1 billion, based upon
recent share prices of about $5.10. The 12-month share
price performance has been flat. Dividend yield stands
at about 4.6% and is fully franked. Revenues are split
roughly 80:20 between TV and magazines/investments,
and total about $1.2 billion. Asset sales exceeding
$150 million in 2003-04 have been directed towards
Seven has the highest cost base among its television
competitors and is aggressively targeting cost reduction
as a result. The network is downsizing its workforce
and centralising shared services across its business.
The success or failure of these initiatives has yet
to be fully established.
Upside: Leveraging Australia's love of sport, Seven
will broadcast the upcoming Olympic Games in Athens,
the Olympic Winter Games in Torino in 2006 and the
2008 Olympic Games from Beijing.
revenues from these events will drive Seven's earnings.
The magazine portfolio continues to grow in strength,
with lead titles including New Idea, Family Circle,
That's Life! and TV Hits.
*** Focus will be on strengthening the profit performance
of Seven's core TV operations.
Network has a market capitalisation of $1.1 billion
based upon recent share prices of about $2.80. Dividend
yield is 5.1% fully franked. The price earnings (p/e)
multiple appears modest and is below market average
at 11. As a network, TEN has a clear focus on the
under-40 viewer demographic, where it is the sector
Maintaining share price momentum is already proving
a challenge for Ten. Although year-on-year share price
growth is about 30%, six-monthly performance has been
flat. The market is wondering whether Ten can continue
to lift TV advertising revenues that have already
grown by $200 million over two years. Can the network
repeat and maintain the success of Australian Idol,
Big Brother and the AFL?
Ten is reported to be travelling best among the holders
of AFL rights following its poaching of the football
code from Seven. With rights to the lucrative finals
series through 2006, Ten has most to gain from a tight
2004 AFL campaign.
**** The market appears unsure whether strong recent
financial performances can be maintained. The upside
is that Ten need only hold ground to look under-priced.
Australian Newspapers (WAN)
of The West Australian, West Australian Newspapers
enjoys a near monopoly status in Perth for daily newsprint.
Its shares have risen by more than 15% in the past
year, while maintaining a fully franked dividend above
5%. The company is now capitalised at about $1.3 billion
A lack of obvious value-driven growth opportunities
has held back the company's share price performance,
although the stock now trades at about 19 on a price
West Australian Newspapers is often regarded as a
potential takeover target for the larger Australian
printed media players. Strength in the company's advertising
market looks underpinned by the strength of the West
Australian economy. An example is job advertisements
accompanying several large resource development projects
in that state.
***** Should continue to run well on the back of WA's
growth economy and grow its dividend stream.
Disclosure: The author owns shares in News Corp and
John Fairfax. The five-star outlook rating is intended
as general comment only and not financial advice.
Allan Trench invests in Australia, New Zealand and
Britain and works as a business improvement specialist
and associate professor of mineral economics. He holds
an MBA (distinction) from Oxford University and is
author of The Insider's Guides (Wrightbooks). Allan
was previously a consultant with McKinsey & Company.