It all falls down

Company results are generally positive, yet media investors seem to be spooked by softening ad spend and online pressure. By David Forster

October was a dire month for UK media stocks, which was interesting because the normal excuses for a significant setback were conspicuous by their absence.

US stock markets were relatively robust and outgoing Federal Reserve chairman Alan Greenspan, in his valedictory testimony, confirmed that in his opinion US economic growth looks set to continue for the foreseeable future. Meanwhile in the UK, the overall market continues to be supported by bid activity; most recently by Telefonica’s offer for O2, while in media land Aegis has been subject to intense bid speculation, BSkyB has announced a recommended &£211m offer for Easynet, Trinity Mirror’s offer for Hotgroup has gone unconditional and TV Corporation has announced that it has received an offer from Tinopolis.

Furthermore, company trading updates were generally positive, with WPP Group, Reuters, Creston, Delling, ITE, Haynes, UBC and YouGov all releasing results or trading updates that confirmed solid performance and/or progress towards a satisfactory financial year.

So what more could you want, given that broader markets are generally firm, takeover activity suggests that corporate buyers see value and most trading updates are satisfactory?

The answer appears to be a lot more, since fully-listed media stocks fell by 5.1 per cent on average and AIM media stocks fell by 6.9 per cent in October. Both fully-listed and AIM media stock indices are down in the year to date, by an average of 4.9 per cent and 1.7 per cent respectively.

October saw 33 out of 40 fully-listed media stocks and 27 out of 32 AIM media stocks fall. This suggests a widespread sell-off, as opposed to a response to company-specific considerations. This raises the question: what has got media investors spooked when there seem to be so many reasons to be cheerful? Firstly, it is worth highlighting that the stock market is a discounting mechanism rather than something that simply reacts to events. For example, the prize for arguably the worst set of statistics during October went to GCap, whose latest RAJAR figures for Capital were awful. Yet, GCap’s shares rose 6.3 per cent on the month, making the company the second-best performing fully-listed media share of the month. The message here is that the market was discounting the poor operating performance and sees GCap as vulnerable to a bid.

However, doing badly is not normally the key to good stock performance, so with regard to the wider market, the key to understanding the media sector’s current malaise is probably more complex. Two culprits suggest themselves. Firstly, those close to the market will know that recent advertising spend has been softening and that a number of companies that only a few months ago were suggesting that things were on track for the full year are feeling less confident today.

Furthermore, it appears that many investors do not believe the so-called experts who say everything on the economic horizon is rosy. Given that advertising is often a leading indicator of going into recession, the current softness could presage a weakening general economy. Secondly, the effects of technology – and specifically online – are putting many established media business models under increasing pressure, so even without the effects of an economic downturn, advertising growth is proving difficult to achieve for several established media sub-sectors.

Of course, if you combine fears of an advertising recession with concerns about a structural decline in advertising share for some media sub-sectors, then one could get seriously bearish about certain areas of media. Looking at the performance of the UK media sub-sectors shows some clear indications of how the media investor jury is voting.

The Entertainment & Content subsector is down by 20.9 per cent in the year to date. This is not all due to Sanctuary Group’s near evaporation, but to concerns that the likes of EMI have yet to reinvent the recorded music business model on a satisfactory basis.

Consumer publishing is also suffering, down 8.8 per cent year to date, and once again it is structural pressures, including the migration of classified advertising to online, which seems to be agitating investors.

The 7.7 per cent year-to-date decline of Radio/Outdoor is the hardest to justify, except for the fact that GCap’s and Maiden’s results confirm that these sub-sectors are suffering. However, it can be argued that of all media, radio and outdoor are among the least susceptible to online audience erosion. Therefore, their periphery position on advertising schedules could be making them susceptible to online’s market share gains. Of course, it is extremely difficult to prove whether UK media stocks are under pressure because of a pending economic recession – only time will tell. It is also difficult to demonstrate that online media spend is growing at the expense of other media areas.

However, if online is eroding audience from traditional media and audience ultimately equals advertising, then it seems safe to conclude that we are seeing some migratory shift in ad spend. Of course, it would be easier to conclude online was a factor in this malaise if there were a reasonable number of quoted media stocks whose performance could be observed. But the UK market is conspicuous by the almost total absence of quoted pure online media companies. Also telling is the buying of online media companies by traditional UK media groups such as Daily Mail & General Trust, Trinity Mirror and ITV.

Furthermore, in the US, where there are a reasonable number of quoted online media companies, the likes of Google, CNET and Valueclick are all up between 50 per cent and 100 per cent over the past six months even though the shares of many traditional media companies are languishing.

The IBIS Capital Media Indices

IBIS Capital is a corporate finance advisory and investment business focused on the media sector. The IBIS Capital Media Indices are a set of proprietary analytical tools developed to monitor the UK media industry from the perspective of the share price performance of publicly listed companies.

The indices group companies with similar business models into sub-indices. Over time, significant variations in sub-sectors’ performances can be seen. The indices also include a split between media companies fully listed on the London Stock Exchange and those listed on the Alternative Investment Market (AIM). The junior market, with its less stringent listing requirements, has been enjoying a relative boom in investor interest, and many media companies have listed on it. However, fashions change, and when the AIM does suffer a setback, its lack of liquidity relative to the LSE means it is likely to underperform the senior market. The IBIS indices will highlight the relative performance of the two markets and may give an early indication of a change of direction.

As well as being of interest to those concerned with the performance of the UK’s media industry and its sub-sectors, the indices are useful to directors considering a flotation of their own company, or for anyone else considering the purchase or sale of a media company or shares.

The indices monitor all UK media companies listed on the London Stock Exchange and on the AIM with a market capitalisation over &£10m. Some companies are included that are listed overseas or have split listings.

The indices are based on the market capitalisation of each constituent company but, in common with the practices of other recognised stock market indices, they make various adjustments.

Factors taken into consideration in the compilation of the indices include: changes in the share prices and number of issued shares of the constituent companies and the number of shares in free float. The effect of initial public offerings, bringing new companies into the indices, and of mergers and acquisitions, which may take companies out of the indices or create new companies, are also considered.

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