By Natasha Gillezeau
Top fund managers believe the coming reporting season will be a sombre affair for the media sector, which was already under pressure before the COVID-19 pandemic.
However, those companies with good cash flow, a strong digital focus and subscription-based models baked into overall revenue diversification will weather the storm better than their rivals.
Wilson Asset Management equity analyst Shaun Weick and Martin Currie Australia investment analyst Patrick Potts have low expectations for the reporting season – advertising spending is down as much as 30 per cent to 40 per cent for the June quarter after advertisers retreated amid the pandemic’s spread in Australia.
Mr Weick says that in general, WAM has put underweight ratings on Australian media stocks because of the structural and cyclical headwinds most of these businesses face following the technological and COVID-19-related disruption.
“My view is that we are really just seeing an acceleration of the structural shift of media and advertising expenditure towards those digital and online channels. And that’s occurring in the traditional media formats like free-to-air, radio, magazines, newspapers and the like,” Mr Weick said.
“The other thing is that with the increasing fragmentation of the media landscape, it is almost self-reinforcing. It drives a ‘race for reach’. Online and the digital channels and those traditional media businesses that are more savvy in the digital spaces, like The Australian Financial Review, for example, they are the key beneficiaries as that kind of audience grows.”
He said COVID-19 had made companies across various sectors pull back their ad spending this year to enter a cash preservation mode, which when combined with longer-term trends, would put many media and marketing businesses between a “rock and a hard place” this reporting season.
Forward ad bookings
Mr Weick said investors should look out for any statements from Nine, News Corp and Seven West Media on how quickly they believed revenue would recover from the effects of COVID-19, the visibility on forward ad bookings and general points around cash flow and debt.
News Corp will report its results on August 7, Seven West Media on August 25, Nine – the owner of this masthead – on August 27, and media agency WPP AUNZ on August 20.
In agency land, Mr Weick says it is his view that full-service media agencies such as WPP AUNZ are running business models that are being “competed away” by smaller and more specialist agencies such as ASX-listed Enero Group, a boutique network of marketing and communications businesses that Wilson Asset Management is invested into.
“We like Enero because over 30 per cent of their business is exposed to digital and online companies. They are working with the likes of Facebook, Pinterest in the United States, and then healthcare and consumer staples as the remainder of their client base that have fared much better in general during this COVID period,” he said.
“Nine is probably the only traditional stock outside of Enero that we are positive on. They’re doing a good job transforming TV assets to streaming, with SVOD business Stan and AVOD business 9Now. We’re looking for businesses that are evolving with the times, and are trying to capture that shift of eyeballs and wallets. That is the type of business that is a beneficiary of COVID-19. ”
On scrutinising the coming results, Mr Weick’s advice was to look at whether companies were clearly breaking out any benefits earned from the federal government’s JobKeeper program in their revenue and profit numbers.
This had been a problem for some retailers, he said, including Kathmandu and Nick Scali, which included the JobKeeper upside in overall results in ways that could arguably distort the true picture of how COVID-19 had affected their businesses.
Mr Potts, who is living through Melbourne’s second lockdown in six months, said that until recently, consumer and business sentiment had been expected to pick up off the trough as the economy opened again and that this would flow through to marketing and ad spending, and be a positive for media companies.
“But given what’s happened in Melbourne going back into lockdown, and concerns of a second wave elsewhere – a lot of that pre-activity getting ready for an increase in ad spend may be slowed until we are clearer on where we are going with restrictions.”
Mr Potts said that while COVID-19 had affected the ad market quite severely this year, subscription-based business models across both streaming and news had fared well in the context of the lockdowns as consumers sought out more entertainment as well as and trustworthy news sources.
Beyond more traditional media stocks, Morgans analyst Ivor Ries says COVID-19 has led to a “once in a decade opportunity” to buy Australia’s leading online marketplace stocks including REA Group, SEEK, Carsales and IRESS at significant discounts to their long-term value.
“We have to go back to the darkest days of the global financial crisis to find times when such yawning gaps emerged between prices and valuation.
Three of the big four online media and tech platform stocks – REA, Carsales and IRESS – have strong balance sheets and produce strong operating cash flows capable of paying dividends even if economic conditions deteriorate further,” he wrote in an analyst note.
“The outlier is SEEK, which has a modest amount of debt, but the amount of capital it would be required to raise in the worst-case recession would be around $300 million.”
Mr Ries wrote that while online media leaders suffered during economic downturns just like other companies, they also enjoy some unexpected benefits.
“Tight capital markets starve their competitors, many of whom operate at a loss, and deprive them of the capital they need. Economic downturns are Darwinian moments where the fit get stronger and the weak fall by the wayside.”