Lorna Tilbian: Lessons for the media sector from the last economic upturn

Nick | 23 Jan 2009, 11:07

C&binet ambassador Lorna Tilbian is the UK’s top-rated media analyst and an Executive Director at Numis Securities.  Her latest industry update is entitled “Lessons from the Last Upturn” and although it focuses on the UK media sector, its insights are applicable more broadly. 

In October 2007, Tilbian published Lessons from the Last Downturn, which detailed the cyclical, structural, financial and valuation risks facing the sector. She says:

“At that time, we favoured the professional / educational publishers and large agencies, and warned of the challenging outlook for FTA broadcasters and leveraged B2C groups.
“This assessment proved directionally correct, though we were taken aback by the scale of deterioration. We are not calling the turn, and retain our view that 2009 will be a hostile environment for the sector, with share prices not bottoming out until forecasts have stopped falling.

“However, as we progress through 2009 we believe the market’s gaze will turn to recovery. Our experience of the 2003-07 upturn identified two phases of recovery. The first is re-rating, which runs for a year from when the market turns. In the year following the March 2003 trough, the sector p/e expanded from 13x to 22x as the market discounted recovery.

“The speed at which share prices rebounded was extraordinary, with classic recovery plays such as the agencies and FTA broadcasters rising +141% and +99%, respectively, over this period. The second phase is driven by EPS growth, and here both structural and cyclical factors play their part. The agencies and B2B groups, which we view as structurally sound, enjoyed growth through the cycle, while the structurally-challenged B2C publishers and FTA broadcasters were unable to convert a benign economic backdrop into higher EPS, and therefore share prices.“

Her analysis leads her to conclude that many professional and educational publishers like Pearson, Reed Elsevier and Thomson Reuters offer “excellent long-term value” while agencies “offer an excellent risk/reward balance” and their variable cost bases offer protection for shareholders should the downturn be protracted, since most of their costs are consumed by salaries, rather than fixed cost infrastructure.  She also praises the way in which B2B publishers have managed the transitition from print to digital and believes their shares generally represent excellent value.

On the other hand, she is less positive about the outlook for free-to-air (as opposed to subscription) broadcasters, she says “we can think of no more economically sensitive group than an FTA broadcaster, which given economic uncertainty makes them higher risk investments. However, with digital migration nearly complete, we view them as better placed structurally than in the previous cycle.“

Finally, she believes that B2C publishing is “an intriguing category, and we view the newspaper / directory publishers as ‘death or glory’ stocks, which are probably best played (if at all) through a
basket of stocks to minimise specific risk. The B2C groups outside of this area have less extreme recovery potential, but with lower risk profiles.“