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 MARKET REPORTS |
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Analyst report - stocks
Media stocks to watch
October 29, 2007
Brendon Lau, ShareAnalysis
Almost all media stocks have underperformed the S&P/ASX 200 over the past several months as investors weigh up news of corporate activities in the sector. However, the media sector could soon outperform, as a few of these activities take an important step forward.
One of the key developments is the carve up of Southern Cross Broadcasting's (SBC) assets by Macquarie Media Group (MMG) and Fairfax (FXJ). Late last week, the ACCC gave its approval to the deal conditional upon MMG selling eight of the radio stations in its portfolio. We hold a positive view on this transaction for MMG and FXJ, and we have adjusted our valuations for both stocks in anticipation of the deal being completed.
Meanwhile, PBL shareholders will be voting on splitting the company's media and gaming assets on 23 November. Last week's 3% fall on talk that the new tax regime would delay the de-merger highlighted how sensitive investors are to any bad news relating to the completion of the deal. Fortunately, PBL's shares recovered the next day after the government said that the new tax rules would not apply to deals announced before 13 October 2007. Nonetheless, PBL has given up about $1B in market value since announcing its spin-off plans.
Despite the lacklustre performance of many media stocks, we believe the operating environment for the sector will remain robust over the next 12-18 months due to strong spending on advertising. In the short term, the Federal election will see millions of dollars a week flowing through the advertising market as the major parties desperately jostle for swing voters.
Over the medium term, we expect our solid economy to underpin growth in the advertising market. Both the Australian Treasury and the International Monetary Fund have lifted Australia's 2008 GDP forecast by 0.5% to 4.25% and 3.8%, respectively, and this should keep retail sales and consumer confidence near record highs.
The recent reporting season reinforced our positive outlook for the sector. Of the 13 media companies that have reported, 10 posted adjusted NPAT increases on the previous corresponding period (pcp), including seven that posted double-digit profit growth.
We believe that large media companies with substantial exposure to digital media will be best placed to take advantage of opportunities that lie ahead. This is because large media organisations typically enjoy considerable synergies from cross-promotion and content generation, while digital media continues to be the fastest-growing area. Online advertising revenue is tipped to rise 50% in CY07 over the previous year.
Some of the star performers from the reporting season were Austereo Group (AEO) and News Corporation (NWS). AEO's profits exceeded our expectations on the back of national radio advertising gains, and NWS's double-digit NPAT growth is largely due to its film unit, cable business and satellite TV Sky Italia. Unfortunately, the waning greenback will negatively impact NWS's earnings growth in Australian dollar terms.
Despite these developments, we believe AEO is well overpriced and we maintain our bullish outlook on NWS.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
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Markets: Measuring the strength of the Australian sharemarket
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Forex: US dollar collapse to catapult Australian dollar
Stocks: Media stocks to watch
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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