The key is in the detail
Media as a whole has made no progress this year, but look closely at the sub-sectors and there are obvious winners and losers. By David Forster
With the end of the year approaching, a clear picture of the winners and losers of 2005 is emerging. The best-performing sub-sectors in media have been professional publishing and marketing services, both up 2.9 per cent on the year to date. By contrast, it has been a torrid year for entertainment and content companies and radio and outdoor outfits, with these sub-sectors down 13.5 per cent and 18.1 per cent respectively. This variance highlights the diversity of business models in the media industry and the need for investors to think not simply/ “Do I want to buy media shares?” but to add to that: “If the answer is yes, which areas of media do I want to have exposure to?”
Of course, hindsight is a wonderful thing but, notwithstanding, it is interesting to try to understand what has underlain the performance of the sector in 2005, not least because it may provide some clues to the prospects for 2006.
Overall, the media sector has gone nowhere this year, with fully listed media shares down two per cent on average and AIM-listed companies up 0.5 per cent. Concerns about advertising revenues have persisted throughout the year, structural pressures on various sub-sectors have been apparent and the best-performing area of media – online – is not reflected due to the dearth of sizeable online investment opportunities represented on the UK stock market. However, it is worth noting that, since the start of the year, Google’s valuation alone has risen by more than $45bn (&£26bn). (It would be interesting to contrast that with an aggregation of the fall of traditional US media companies’ valuations to get a sense of the net transfer of value.)
The lack of exposure to advertising by professional publishers has undoubtedly been a factor behind their resilience, and their use of the subscription-based revenue model means this sub-sector is seen as having a certain “safe-haven” status. Furthermore, online is typically perceived as being less of a threat here than in many consumer markets. This is due to the different nature of client relationships/ in professional publishing, online distribution is seen as offering efficiencies and end-user benefits, albeit at the cost of the pricing power that is at publishers’ disposal in a print-based environment.
The other star sub-sector of 2005, marketing services, is perhaps a surprise given the fact that concern about advertising has been a dominant theme throughout much of the year. However, marketing services, dominated by WPP Group, represents a play on global spend, not just the UK, and this sub-sector has continued to be buoyed by extensive corporate activity.
Furthermore, concerns surrounding advertising revenue have been less about the overall level of growth in advertising and more to do with how it is shared between various media. Arguably, the increasing complexity of the advertising market is beneficial for marketing services, as it provides operators with the scope to move up the value chain as clients seek increasingly sophisticated solutions.
The factors behind the travails of the entertainment and content sector are less easy to distil, especially given the fact that at individual company level there has been huge disparity, as demonstrated by the presence of both the best- and worst-performing individual media shares for the year to date – namely Entertainment Rights, up 132 per cent, and Sanctuary Group, down 91 per cent. Due to its size, EMI is a significant factor in the performance of the sector, with its fall of 12 per cent in the year to date representing a significant drag. However, there is growing belief that the music industry may be moving beyond its darkest days as it gets to grips with issues surrounding digital downloading – consistent with this is the heightening of the perennial bid speculation that seems to surround EMI. The 2005 wooden spoon in terms of sub-sector performance looks set to go to radio and outdoor, with the radio market suffering from a loss of advertising share and a recognition that the consolidation game is largely played out, with premium bids from US buyers conspicuous by their absence. Given that radio has one of the most fixed cost business models in media, the decline in advertising has proven particularly painful, especially given the fact that a number of companies started the year on fairly heroic valuations.
By contrast, the outdoor industry has had a reasonable year, at least in terms of overall revenue growth, supporting the thesis that outdoor is more resilient to the onslaught of digital than most media. However, Maiden Group’s value has fallen by more than 48 per cent so far this year, with its share price seeming on an inexorable slide from a high of 575p in 2001 to 106p today. The moral of this tale would seem to be that getting the sub-sector right is a start, but you still need to pick the right stocks and managements within it.
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 (LSE) 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 LSE and on the AIM with a market capitalisation more than &£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.
