Fighting inside 2014's media thriller

There’s no doubt most media companies would be pleased to see the back of the 2013 financial year.

It offered little respite from the structural challenges that really began to rattle the industry around the time of the GFC which, apart from a small bump in 2010, haven’t seemed to have improved for most of the players.

The back half of the financial year was an eventful one in the domestic media sector. From executive moves to hotly contested rights and programming pursuits, the media couldn’t be accused of standing still.

However, investors remain weary of the sector and its longer term prospects for a variety of reasons, ranging from its over-reliance on advertising revenue to the increased competition coming from international, digitally led competitors such as Google and Facebook and widely publicised and debated changes in consumer media habits.

Agency group Mediabrands chief executive Henry Tajer, told Mumbrella at the end of June that the 2013 financial year was “challenging” but that it was “going to be the last of the really challenging periods.”

Final financial year figures from the various media categories is still being compiled and not yet available, but the general consensus is that for the 12 months ending June 30, TV will be up 1-2 per cent at best, digital will see an increase between 13-17 per cent overall, newspapers and magazines will be down anywhere between 15-20 per cent, radio will be flat, out-of-home marginally down and Pay TV up 4-6 per cent.

When you look at it, aside from print media’s significant decline during fiscal 2013, most sectors that are flat or marginally down are not experiencing unprecedented circumstances. Most would feel confident they can reverse their fortunes with some tinkering rather than through significant structural transformations.

It appears investors aren’t so sure. Looking at the share price performance of the most prominent listed media companies shows a lack of optimism around the main media players.

For instance, Seven West Media, owners of the Seven Network, Pacific Magazines and Yahoo!7 is down 2.52 per cent for the three months ending July 10. This is despite another dominant ratings performance by Seven in the first half of the year and after the company deftly secured both the V8 and Australian Open rights and the appointment of new chief executive Tim Worner and announced cost cutting initiatives.

Ten, for the same period, is down 5 per cent, sitting under 30 cents and a long way from its highs of $4.40 in 2005. Ten has been active over the past three months, with new chief executive Hamish McLennan making some significant executive hires and voicing his desire to rapidly improve on the network’s programming suite. Right now, investors seem unconvinced, but it’s early days.

APN and Fairfax, two companies largely exposed to the broader fortunes of print media, have had a tough last quarter. In the three months to July 10, Fairfax was down 14.8 per cent, even after it announced an organisational restructure across its entire business, expedited cost-cutting measures, significantly reduced debt across the financial year and moved its marquee mastheads behind a metered paywall. APN is in even worse shape - down 21.7 per cent for the same period - investors clearly unimpressed with the lack of strategic direction outlined by the company after the internal turmoil of earlier in the year, which saw the majority of the board step down and chief executive Brett Chenoweth resign. APN is carrying a significant debt load with talk the company wants to do an asset swap with US company Clear Channel, exchanging its stake in the APN Outdoor and Adshel outdoor businesses for full control of its ARN radio assets.

The S&P/ASX 200 is only down 1.2 per cent for the quarter to July 10, and the only large scale ASX listed media business outperforming the market is Southern Cross Austereo, which has held its value over the period with a mere 0.3 per cent decline. Southern Cross Austereo is an example of the appeal of the radio business, which remains highly profitable even in a flat market due to a much friendlier cost base than its print, digital and TV counterparts.

The digital media businesses, which are killing print classifieds, remain mixed. Carsales has been a star performer over the past 3 months, up over 8.7 per cent assisted by still robust new car sales numbers. Real Estate.com.au is up 2 per cent and Seek is down 8.2 per cent impacted by sluggish employment data.

Despite investor concerns around advertising/media sector companies, the fortunes of advertising and marketing services based companies are far stronger both here and abroad. Domestically, the STW group - which has stakes in various media, advertising and marketing agency businesses - is up over 8 per cent. Internationally, the major advertising and marketing services groups are all up over the last three months - WPP up 10 per cent, Interpublic Group up 13 per cent and Omincom up 8 per cent. The global advertising market may be flat, but the main advertising agency groups are performing strongly as a result of significant diversification of their product and a service suite over the past five years. In fact, now more than ever advertising agencies and marketing services providers are directly competing with media pure plays for large corporation marketing budgets.

June-quarter operating results will begin to come through over the next four weeks and should provide more light around the fortunes of the local media sector. The key elements investors will be looking closely at will be advertising revenue, yield and forward looking information on the July-December period; cost containment, in particular operational efficiency savings around staff and resourcing as well as containment of programming and content creation costs; and meaningful and positive profit contributions from digitally led business units, in particular for those companies battling significant revenue reductions in their core operations such as print-led businesses.

The past three months is consistent with the past two years of media sector share price performance, that has seen APN lose 77.3 per cent of its value, Fairfax lose 41 per cent, MRN 45 per cent, TEN 75 per cent and Seven West 44 per cent. Here’s hoping the next two offer a more positive story for the sector and its investors.