Still ahead of the game

The big stocks provided excitement in 2005 and while this year is unlikely to be stellar overall, there is still some room for progress. By David Forster

A strong stock market performance in December enabled both fully listed and AIM listed media indices to finish ahead for 2005, with AIM media stocks up three per cent on average and fully listed media up 1.5 per cent on average.

However, at the individual company level, it was the main market that provided excitement, with 15 stocks up ten per cent or more, and with the best performing company, Entertainment Rights, up 150 per cent, and the worst performing, Sanctuary Group, down 95 per cent. By contrast, only 10 AIM listed media companies enjoyed a share price increase of 10 per cent or more across the year, with the best performing, YouGov, up 145 per cent, and the worst performing, Deal Group Media, down 65 per cent.

Although marketing services was the best performing sub-sector in 2005, for individual stock pickers the most fruitful sub-sector was professional publishing, which accounted for 10 out of 15 of the best performing fully listed media shares, with Datamonitor the pick of the bunch, up 120 per cent.

UBM won the prize for best performing FTSE 100 media company of the year, with its increase of 33 per cent comfortably ahead of Yell Group, 22 per cent, while Reuters Group and Reed Elsevier both managed gains of 14 per cent. A common feature between the two best performing sub-sectors – marketing services and professional publishing – is that both saw high levels of corporate activity in what are two of the more fragmented sub-sectors of media. Much academic study has been dedicated to the subject of whether acquisitions add value, and statistically it is fair to say “case not proven”. However, there is little question that many media companies have created significant shareholder value over a sustained period by bolstering organic with acquired growth. A case in point is Creston, 2005’s best performing fully listed marketing services company, which has been a serial acquirer and whose shares rose 48 per cent across the year, and are currently 193p compared to a share price of under 40p at their low point of 2003.

Next year’s winners

New Year reviews typically combine looking in the rear view mirror with predictions for the coming year. So, at the risk of appearing foolish in a year’s time, here are a few of our own.

The usual strategy for trying to pick next year’s winners is to either carry on riding with the previous year’s outperformers or to look for the prior year “dogs” to bounce back. The latter strategy suggests that we should consider radio/outdoor, down 19 per cent in 2005, and Entertainment & Content, -10 per cent. However, in order to try and apply some science to the process, it is necessary to consider a number of factors, including the outlook for economic growth, valuation and the challenges to different media business models.

With regard to the economy, the consensus is that 2006 will see continued steady growth in most of the world’s major economies, which is important given that many of the UK’s largest media companies have sizeable overseas exposure. For choice, sentiment has been improving on this front, which should prove positive in the short term for sentiment towards companies with advertising exposure.

The current valuation of the media sector is not far off historic averages with surprisingly little variation between sub-sectors -the most highly rated sub-sector being professional publishing and the most lowly being consumer publishing. Unless profit forecasts for 2006 prove to be significantly optimistic or pessimistic the overall media sector seems to be fairly fully valued. However, while this suggests that 2006 is unlikely to be a stellar year overall, a valuation level that offers something to both buyers and sellers bodes well for continued high levels of corporate activity.

Whereas, historically there have been periods when “challenges to business models” would have featured low on the list of performance “drivers”, there is little question that at this moment in time it is one of the key factors in assessing the prospects of different sub-sectors and companies.

In simplistic terms, one could group the different media sub-sectors into highly challenged (eg music, consumer publishing, free-to-air TV) and less challenged (eg professional publishing, marketing services).

In assessing the likely impact of the various challenges on share price performances, one also needs to take a view of both where each sub-sector is in terms of confronting the challenges and the extent to which investors are discounting future prospects. For example, everybody is aware of the negative impact of digital downloading on the music market’s revenues. The question is whether the industry has come to terms with this and invented a new business model that can deliver sustainable growth.

Private equity investors

Another relatively new factor to be thrown into the mix is the increasing influence of private equity investors, who play by different rules to those played by the majority of institutions that control the fortunes of publicly listed share prices. For example, private equity’s willingness to apply higher debt levels to a company’s capital structure than is the norm for most listed companies means that its valuation of a low growth but cash generative businesses is likely to be higher than that of traditional stock market investors.

A current case in point is Hemscott, the financial information publisher, which has just announced an intention to go private because “the board has concluded that the company is under-leveraged”. It seems extremely likely that there will be more private equity interest in the media sector this year and that this is likely to focus on some of the more challenged sub-sectors, largely because private equity is less obsessed by short-term prospects than the long-term picture.

In conclusion, provided the economic outlook remains stable, the sector should be capable of further modest progress this year. Acquisition activity will remain high. Professional publishers will continue to prosper. Marketing services should do well initially, but could suffer later in the year if the present economic cheeriness evaporates.

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.

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