Investors think big

In times of stock market uncertainty it is usual to see a flight to quality, with investors favouring larger companies over small, especially those that are perceived to have robust earnings, a strong balance sheet, and whose shares are on an

Investors ran for cover under the major media companies in June, but the best performing business came from the AIM index, says David Forster

In times of stock market uncertainty it is usual to see a flight to quality, with investors favouring larger companies over small, especially those that are perceived to have robust earnings, a strong balance sheet, and whose shares are on an undemanding valuation and ideally offering a reasonable dividend yield.

The IBIS FTSE media index rose 1.3% in June, whereas smaller companies had another tough month, with the AIM media index falling 4.8%, to leave the respective indices down 1.1% and 11.1% in the year to date. Although the variance in performance between large and small companies of ten percentage points is significant, there is even greater discrimination when analysing media on a sub-sector basis. The two best-performing sub-sectors – pay-TV (dominated by BSkyB) and entertainment and content – were up by 13% and 9.7% respectively in the year to date, both comfortably outperforming the overall stock market.

Sub-sector variance

In stark contrast, radio/outdoor and consumer publishing, were down by 21.5% and 10.1% respectively, both underperforming significantly. The massive variance of 34.5 percentage points between the best- and worst-performing sub-sectors shows just how important it is for portfolio managers to get their sub-sector allocations right, and that a strategy of âIâll buy some media sharesâ has all the precision of the proverbial chimpanzee throwing darts at the share price pages of the Financial Times.

Of the seven IBIS media sub-sectors, three, namely free-to-air TV, radio/outdoor and consumer publishing, are heavily consumer advertising dependent, and it is these three sub-sectors that have been 2006’s worst performers to date. Given that the present state of the economy would normally be consistent with a reasonable advertising environment, the current malaise seems to be predominantly down to structural factors.

In terms of classified advertising, the migration to online is obvious to all and is of greatest significance to the consumer publishers with classified exposure. However, with regard to display advertising, there appears to be a confluence of different factors. From ITV’s perspective the acceptance of contracts rights renewal as a condition of the Granada/Carlton merger is looking increasingly like a costly own-goal and has locked the company into an invidious vicious circle, so long as audience share remains a one-way ticket.

Meanwhile, the influence of the BBC on the commercial sector is becoming ever-more apparent as it enjoys revenue growth in excess of many of its commercial competitors courtesy of its bomb-proofed licence fees. What must be even more galling for executives in the commercial sector are the recently revealed BBC pay awards, which are coming into line with theirs.

Although there is a tendency to focus on advertising trends when commenting on media, it actually accounts for a minority of industry revenue; less than 40% in the case of listed UK media companies. The UK’s best-performing major media company this year is EMI Group (up 25.3%), which is currently locked in a bidding war with Warner Music. Its shares are now up 230% from the lows of 2003, showing the extent to which investor sentiment towards the music sub-sector has changed as they have become convinced that a viable online business model for recorded music is emerging.

Among other major media stocks, BSkyB – up 15.5% for the year to date – is starting to see some reasonable performance, with its reliance on subscription revenues placing it in the category of robust earnings. Similarly, Pearson, whose largest revenue exposure is to the US school and college publishing markets, and whose advertising exposure is principally limited to the Financial Times Group, is outperforming the overall market, with shares up 7.1% at the end of June.

While large capitalisation stocks typically expose investors to less risk than small ones, the price of reduced risk is often a lower potential for reward (and loss). Therefore it is not surprising to find that at the half year, the best- and worst-performing stocks are small AIM-listed companies. InvestinMedia, with a market capitalisation of &£25m, was up 49% by the end of June. In particular, it benefited from Celador International’s decision to offer for sale the worldwide rights to Who Wants To Be A Millionaire?

At the opposite end of the performance spectrum is Monstermob Group, which stated at its annual general meeting on June 22/ “The board maintains its conviction that the group’s future is well set, based upon its strong position in a spread of exciting markets around the world. Monstermob is a highly cash-generative, growth business with well-diversified, strong market positions.” Of all of Monstermob’s exciting markets, probably the most exciting is China – as we all know, this is the place every investor needs to get exposure to, except that the time to invest was probably about four years ago.

Scaring away investors

Monstermob started the year with a share price of 435p. Despite the encouraging tone of the AGM statement, it seems investors were not getting the message because by the end of June, Monstermobâs share price had fallen to 140p. On July 5 the company announced it had finalised the consideration payable for the acquisition of Atop Century, with a balancing payment of $69.8m (&£37.9m) to be made in the form of 7.2 million new shares at 350p, and $25.9m (&£14m) of loan notes in addition to the initial consideration of $42m (&£22.8m). A lucky recipient of the new MonsterMob shares, issued at 350p at a time when Monstermobâs actual share price was approximately 40% of that value, was Qian Yongqiang, one of the vendors of Atop Century. In a philanthropic mood, Mr Yongqiang simultaneously announced that in order to motivate Atop employees he would assign entitlement to 1.8 million shares to senior employees and management. He also transferred 843,280 shares to his former wife as part of a divorce settlement.

These transfers were timely because on July 10 Monstermob announced it had become aware of upcoming policy changes affecting all subscription services operated via China Mobile (China’s largest mobile operator). The effect of these potential policy changes was sufficient to take a further 60% off Mostermob’s share price, to 59p, down 84% since the start of the year. That’s one way to motivate your employees.

The moral of this tale? Personally, my exposure to the Chinese market will continue to be through the consumption of crispy duck pancakes.

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.

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).

Methodology

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 included are listed overseas or have split listings.

Indices are based on the market capitalisation of each constituent company but, in common with other recognised stock market indices, they make a number of adjustments.

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