Analysts at Goldman Sachs JBWere reckon the Australian media can expect up to two years of sub-trend growth with downward pressure on earnings and revenues.
In a note to clients overnight, they again downgraded the earnings prospects for Australian media companies for next year, and extended their gloomy forecasts for the first time to 2010.
Telstra, Austar and News Corp were the group’s preferences in the communications, media and entertainment sectors.
Ad revenues estimates for 2009 and 2010 have been cut across the board for papers, metro and regional, metro and Pay TV and for online businesses. Metro TV looks like being a relative outperformer because the drops being forecast are not as large as those for newspapers and online businesses.
Goldman Sachs does forecast a return to positive growth in 2010, but at a much lower rate than in previous forecasts.
A major driver is the belief by the Goldman Sachs JBWere economic group that the Australian economy is either in a recession, or on its way there by the end of this year, and getting out of it will take much longer than previous forecast and we won’t see any real signs of an upturn for a year or more.
We have downgraded our earnings estimates for the majority of media stocks under coverage,” the media analysts team writes …
Our more cautious economic outlook drives media company earnings lower via: (1) another downgrade to our ad market forecasts; (2) lower circulation revenue forecasts for Australia’s newspaper publishers; (3) a slowing online market (i.e. SEK); and (4) lower pay TV subscriber growth.
We have also incorporated Goldman Sachs’ new ad market assumptions for the US and Europe into our NWS earnings estimates.
It is important to note we have downgraded our ad market forecasts for both FY09 and FY10. We had previously assumed FY09 would be a cyclical low for the ad market. We now see a real prospect of the contagion spreading into FY10. Our new ad market forecasts are: – FY09 ad market growth: -2.7% (was +0.4%);- FY10 ad market growth: +4.2% (was +6.2%).
The Downgrades to the economic outlook comes from the firm’s “Economics team has downgraded economic growth forecasts for 2008 and 2009. We are now forecasting a recession in Australia. Importantly, our Economics team has downgraded forecasts for the three key drivers of ad market growth: (1) corporate profits; (2) business investment; and (3) consumption.”
Goldman Sachs recently downgraded GDP forecasts for the World’s major economies (US, Eurozone, Asia). This will impact our ad market given offshore advertisers comprise 30-35% of Australian ad market spend.
Discussions with our industry contacts: We have met with our media industry contacts to calibrate our views.
Revised exchange rate forecasts: We have incorporated our Economics team’s new forecasts into our earnings estimates.
We have been cautious on the traditional, ad market-dependent media stocks for two reasons: (1) earnings risk (due to cyclical and structural headwinds); and (2) valuation. While valuations are looking more reasonable, we remain wary of the risk to consensus earnings. In our view, our latest earnings downgrades show this risk remains real.”
We continue to prefer stocks with: (1) reasonable valuations; (2) robust earnings momentum; and (3) strong franchises/business models.
Were’s said its preferences across the Communications, Media and Entertainment sectors are: TLS (Telstra); NWS (News Corp) and AUN (Austar).
Were’s said it had “made a number of other revisions to our media company earnings estimates.”
1. Lower circulation revenue forecasts: We have marginally lowered our circulation revenue forecasts for Australia’s newspaper publishers. We expect publishers will raise cover prices in an attempt to preserve revenue lines. However, we believe this will be largely offset by: (1) falls in circulation; (2) continued subscription discounting.
2. Slowing online classifieds market: GSJBW’s Economics team is now forecasting that unemployment will rise from 4.3% currently to 6.5% by the end of 2009 (was 5.1%). We have adjusted our SEK forecasts as a result of this.
3. Lower pay TV subscriber growth: We have lowered our pay TV subscriber growth forecasts for Foxtel and Austar (and hence for Premier Media Group). For Foxtel, we have lowered FY09 net adds from 90k to 85k and left FY10 unchanged at 80k. For Austar, we have lowered FY08 net adds from 55k to 53k and FY09 from 55k to 50k.
4. Downgrades to US and Europe ad market forecasts: Goldman Sachs recently downgraded its ad market forecasts for the US and Europe on the back of the downgrades to economic growth in those regions. We have incorporated Goldman .Sachs’ new ad market forecasts for the US and Europe into our NWS earnings estimates.
The most significant changes we have made to our ad market forecasts are:
• Metro newspapers: FY09 now -7.9% (was -3.0%), FY10 +1.4% (was +3.0%).
• Online: FY09 now +10.3% (was +20.5%), FY10 +14.9% (was +20.0%).
• Metro TV: FY09 now -6.6% (was -5.0%), FY10 +1.9% (was +4.0%).
• Regional newspapers: FY09 now -1.3% (was +0.3%), FY10 +2.5% (was +4.0%).
Traditional media down 4.9% in FY09, new media up 9.9%
In terms of traditional media vs new media, our forecasts are as follows:
• Total ad market: FY09 now -2.7% (was +0.4%), FY10 +4.2% (was +6.2%).
• Traditional media: FY09 now -4.9% (was -2.8%), FY10 +2.3% (was +3.5%).
• New media: FY09 now +9.9% (was +18.4%), FY10 +13.8% (was +18.5%).