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Broker Watch
What brokers think about media stocks
Jill Fraser - March 12, 2008
 Ten years ago it would have taken 20 hours to download a short podcast of 30-40 megabytes. Today the process takes a matter of seconds and will only get faster once Australia gets with the program and rolls out high-speed broadband.
The impact of the internet and accessibility to free news is causing dramatic consequences for the rapidly evolving media sector. "The sector is still booming because people are accessing more and more information," says IBISWorld’s Senior Business Industry analyst, Edward Butler.
The print media is in decline, ditto free to air television. Digital radio is dead and radio generally is stagnant. But pay TV and online news services are flourishing and concurrent with the spectacular growth of online services is the continuing surge in the online advertising market.
Figures released last month by the Interactive Advertising Bureau and PricewaterhouseCoopers reveal that online spending escalated 34.5% to $1.35 billion during 2007 and when it comes to advertising revenue the net continues to be the fastest growing media sector.
Advertisers find online websites more appealing because they can target their advertising spend more effectively. Online advertisers can gain a more accurate measure of the success of specific advertising campaigns, especially when compared to print, outdoor and television advertising.
But there are inconsistencies.
The boom in the Pay TV industry goes against the trend. People are opting to pay for content when they can get it free online. The big shift in the Pay TV market came as a result of the adoption of sport, which has led to a huge boost in subscriptions for Foxtel.
Ten doesn’t rate nearly as well as Seven or Nine but their shares perform equitably because they have targeted a youth audience, which is the group that advertisers want exposure to.
Seven is winning the ratings war but its shares have dropped because Kerry Stokes is being expansionist and trying to get into print media.
"The print media is seen as a declining industry and the West Australian is not a national brand, which is causing hesitancy in investors," says Butler.
Maintaining that only the luxury end of the sector – magazines such as Marie Claire and Ralph – may be affected adversely by the slowing economy, Butler says that history has shown that the media remains resilient through economic travails.
"There’s no reason to expect the media sector to suffer any significant problem in the next five years," he concludes.
| Company |
ASX code |
Analyst recommendation |
Share price |
|
PMP Ltd |
PMP |
BUY – BBY (Mark McDonnell) |
$1.62 |
|
Fairfax Media |
FXJ |
BUY - BBY (Mark McDonnell)
OVERWEIGHT - JPMorgan |
$3.85 |
|
Seek Ltd |
SEK |
BUY - BBY (Mark McDonnell) |
$6.30 |
|
Seven Network |
SEV |
HOLD – BBY (Mark McDonnell)
NEUTRAL - JPMorgan |
$10.22 |
PMP Ltd (PMP) – BUY (BBY)
In September catalogue, magazine and book printer PMP bought Times Printers (Australia) from its parent company, Singapore-based Times Publishing Ltd for $80 million, a move that BBY analyst, Mark McDonnell says has contributed to its slow but steady turnaround. "It has started paying dividends again and reduced what was a very stretched balance sheet to now being quite conservatively positioned," says O’ Donnell noting that getting the ACCC’s agreement to the acquisition of Times Printers was an important achievement.
PMP’s purchase of Times Printers helped consolidate the printing industry in Australia to its own benefit. Equally important is that the takeover acquired significant new presses for PMP, (whose clients include companies such as Coles, Woolworths and Bunnings), which allowed it to avoid up to $100 million in future capital expenditure.
PMP’s other big win was that it received $43.1 million from the settlement of a tax audit, freeing up significant cash flow over the medium term.
Fairfax Media (FXJ) – BUY (BBY) OVERWEIGHT (JPMorgan)
BBY’s Mark McDonnell sees both Fairfax and PMP emerging from the doldrums.
"Fairfax was seen as takeover target for a long time. I don’t think it is now," he says. "Partly because J.B. Fairfax has 14% to 15%. But more importantly CEO David Kirk has done a very good job," notes McDonnell.
Fairfax’s merger with Rural Press, acquisition of Southern Cross Broadcasting and television production company, Southern Star plus their strong online presence (including dating site RSVP) has vastly diversified the business and provided some operational leverages that McDonnell believes "have a coherent strategy for growth".
JPMorgan in its February report notes that the key focus for Fairfax over the next 18 months to two years is bedding down the integration of its Rural Press, Southern Cross Radio and Southern Star acquisitions and cautions "until complete, management distraction from the existing operations remains a risk".
SEEK Ltd (SEK) – BUY (BBY)
Internet job recruitment company, Seek has 56% market share and boasts over 150 thousand jobs online.
Consolidated Media Holdings owns a 27.5% stake and despite CML reducing its shareholding in February James Packer remains chairman. The word is that Packer intends to use Seek stock as currency in his anticipated takeover of Consolidated Media with Lachlan Murdoch.
Although McDonnell admits that the growth rate that Seek has enjoyed over the past four to five years is going to be difficult to sustain into the medium term (due to the tightness in the Australian labor market and the large number of listings that SEEK currently boasts) he still sees foresees strong revenue growth year on year.
BBY has a 12-month price target on the stock of $7.29. Currently it’s trading at $6.49.
Seven Network (SEV) – HOLD (BBY), NEUTRAL (JPMorgan)
JPMorgan heads its February report on the Seven Network, Please Explain? And for BBY, "strategy confusion and poor execution" sums up its assessment of the TV company.
BBY analyst, Mark McDonnell remarks that Seven "is a very frustrating company to analyse" remarking that the network has spent over $700 million investing in a volatile market and questioning why a successful media organization is pursuing telecommunications companies (it has a 33% stake in internet telephone company, Engin and secured an over 90% ownership of WiMAX spectrum holder Unwired) when "it lacks the expertise on the board or in management to run telecommunications businesses".
Last week Seven’s executive chairman, Kerry Stokes, tried to oust the board of West Australian newspapers, the company 19.4% owned by Seven, in an attempt to gain two boardroom seats for himself and Seven board director Peter Gammell.
The key issue for JPMorgan is that Seven remains a reinvestment risk which, "until the cash balance is reinvested, is likely to attract a substantial holding company discount".
Concerned with Seven’s recent investment of around A$730mm in "high yielding, liquid investments," JPMorgan believes that this will increase market perception that the company is becoming a quasi fund manager.
More articles from this edition of CompareShares:
Broker Watch: What brokers think about media stocks
Investing: Measures to work out if your share portfolio is a success or a failure
Resident Trader: Secrets for Profiting in Bull and Bear Markets
CFDs: How to trade CFDs without losing your shirt
Expert Panel (Futures): Using futures to pick the market direction
Rates: More banks go for big rate increases
Market: ASIC launches probe into market rumours
Property: House prices rise 12 per cent nationally
Takeovers: Incitec makes friendly bid for Dyno
Whatever your views, you can discuss this article - or any of Jill's articles - on our message board Your 2 Cents.
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
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