The Media magnets - 7th June 2004
(Credit: f2 Network)

Advertising is a key driver of revenue growth for media companies - and it is going from strength to strength, writes Allan Trench.

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Sector Analysis - Media

What 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.

For 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 revenues decline.

So 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.

Companies 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.

Customer base

The 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.

Key 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.

Great content

To 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.

Competition 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.

Cost-efficiency

Controlling 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.

Media 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.

Media 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.

Shares took a look at the leaders in the media sector to gauge how they are travelling and what might lie ahead.

APN News & Media (APN)

Capitalised 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.

Challenges: 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.

Upside: 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.

Specific 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 billion.

Outlook: *** Opportunity to take advantage of strong advertising yields.

Austereo Group (AEO)

Weighing 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.

The 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.

Challenges: 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.

Upside: Strong brand presence across Australia mitigates the risk of market share loss in any one capital city.

Outlook: *** The next exciting growth phase for Austereo is not clear.

John Fairfax Holdings (FXJ)

Publisher 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%

Challenges: 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.

Specific 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.

Outlook: *** Strong brand network and asset quality provide a stable platform for growth. Leveraged to the upturn in advertising markets.

News Corporation (NCP)

News 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.

Challenges: 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.

Upside: 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.

Specific 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 run.

Outlook: ***** No shortage of growth options across the News empire.

Publishing and Broadcasting (PBL)

With 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.

Challenges: 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 achieved.

Upside: 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.

Specific risks: Strategic investments such as Ticketek and ninemsn are still to perform strongly, but do not place a considerable drag on the group.

Outlook: *** Some of the resurgent advertising wave has already been priced into Publishing and Broadcasting.

Rural Press (RUP)

True 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.

Share 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.

Challenges: 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.

Upside: 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 advertising markets.

Outlook: **** 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.

Seven Network (SEV)

Kerry 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 debt reduction.

Challenges: 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.

Advertising 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.

Outlook: *** Focus will be on strengthening the profit performance of Seven's core TV operations.

TEN Network (TEN)

Ten 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 leader.

Challenges: 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?

Upside: 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.

Outlook: **** 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.

West Australian Newspapers (WAN)

Publisher 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

Challenges: 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 earnings basis.

Upside: 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.

Outlook: ***** 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.

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