It may come as a surprise, given the fading revenue momentum experienced in the second half of 2012, to find that the share-price performance of the media sector was strong in 2012, with an average increase of 25 per cent. Clearly, this was aided by the acquisition of Aegis by Dentsu, but performance was robust across the agency, business-to-business, business-to-consumer and broadcasting sub-sectors. Along with Aegis, notable gains were recorded by ITV, Perform and UBM, which rose by around 50 per cent each.
In part, this strong performance reflects survivor bias after five tough years, as groups that are exposed to structurally challenged markets and burdened with high debt and pension obligations now represent a very small part of the quoted media sector.
The sector is now dominated by structurally secure businesses with experienced management teams and strong balance sheets. The latter, which we highlighted in our annual review at the start of 2012, is a very strong positive for the sector.
From the heady days of 2007, debt has steadily been reduced, with the average company in the sector now having a very prudent 1x net debt/EBITDA, while many have net cash. Further, companies have put in place long-term debt facilities at attractive rates and cash continues to pile up on balance sheets, providing firepower for acquisitions, organic investment or returning capital to shareholders.
How companies balance these three uses of capital will continue to be the key theme in 2013.
The sector enjoyed a flurry of take-overs in the first half of the year, as confidence was high and the animal spirits started to stir. Aegis/Dentsu was not the only consolidation in the agency sub-sector, with WPP (AKQA), Omnicom (Adam & Eve) and Publicis Groupe (Bartle Bogle Hegarty) also participating. As confidence waned in the summer and autumn, takeover activity became more subdued, but any increase in confidence in 2013 could see a return to the acquisition trail.
Investors will always reward companies that can grow organically rather than having to buy growth, as evidenced by the continued strong share-price performances and lofty trading multiples enjoyed by groups with revenue streams that benefit from structural tailwinds, notably digital and emerging markets. With balance sheets strong, groups have the funding to develop businesses in these areas organically. For example, M&C Saatchi, whose shares rose by 50 per cent in 2012, has built strong capability in mobile while also expanding its international network.
We see core revenue streams in traditional markets and developed economies making limited progress in 2013. For example, in broadcasting, we expect only modest net direct-to-home customer additions at BSkyB and flat advertising revenues at ITV. But, in both areas, the ability to develop new revenue streams could be rewarded by the market. We are optimistic on the prospects for targeted advertising, which will be launched by Sky in 2013. The stockmarket is forward-looking, so will reward companies as evidence of successful new business streams builds well before these revenues become a significant contributor to the group.
The third use of strong corporate balance sheets is returning capital to shareholders, whether through the ordinary dividend, a one-off special dividend or a rolling share-buyback programme. Capital returns should not be viewed as an indication that management has run out of opportunities for acquisitions or organic investment – they are applauded by the City as evidence of a management that has a disciplined approach to capital allocation.
So, with balance sheets in good shape, we expect another good year for share-price performance. Exactly how this develops will depend, as ever, on macroeconomic trends.
The consensus view is that emerging markets will continue to perform well in 2013, with the US producing another solid performance. Western Europe will continue to make limited progress, which will in turn hamper the UK. We largely concur with this, though see scope for an upside surprise from the US and the possibility of further disappointment emerging in Europe.
By discipline, it is clear that digital will continue to drive the sector. We view agencies as media-neutral and expect another solid performance.
In B2B, the triple play of online (particularly subscriptions), face-to-face events and print continues to provide a well-balanced ecosystem. B2C seems to learning, finally, from the lessons of B2B, with newspaper and magazine publishers’ digital businesses building momentum. Clearly, Daily Mail and General Trust (with Mail Online) and Future deserve particular credit here. We see modest scope for progress in the core revenue streams of Sky and ITV, but see opportunities to develop ancillary revenue streams.
Overall, we expect another positive year in 2013, particularly for groups that continue to develop revenue streams in faster-growing areas and use their strong balance sheets wisely.
Paul Richards is the director of equity research, media, at Numis Securities