The slumping Australian and global economies have seen Goldman Sachs JBWere downgrade the outlook for Australia’s media sector for the third time in four months and the second in six weeks. The firm told clients that instead of projecting the recovery to start in 2010, it now saw Australia suffering a deeper recession than previously thought, and one that would last well into 2010. It now believes the recovery won’t appear until 2011, more than 12 months later than the original forecasts earlier in the year.
Goldman Sachs also said the credit crunch and dislocation in financial markets would have a big impact on local media companies, helping force dividend cuts and more cost cutting measures on the companies.
The newspaper companies like Fairfax Media, APN (and News Ltd’s papers, although News Corp is a favoured stock) will be hit hard and will lose sales. Ten Network, Fairfax and Prime Media are some groups seen as having vulnerable dividend payout levels.
Dividend cuts have been factored in for all companies (that was a view shared this week by Credit Suisse and Merrill Lynch.) GSJBW’s Australian economics team have been bearish on the outlook for the Australian economy since early October. They again forecast a contraction in economic growth in the third quarter ahead of today’s release of September’s National Accounts at 11.30am.
More worrying is that Goldman Sachs’ global economics groups now believe the developed economies of the world will suffer their bitterest recession since 1961, when records were first collected.
In a note to clients this morning, Goldman Sachs said:
We have downgraded our media sector earnings estimates again, just six weeks after our last sector downgrade on 23 October. This is largely a result of the worsening macro outlook. We now see the downturn lasting through 2010. The key drivers of our changes are:
…There is little doubt that global growth expectations continue to deteriorate at alarming speed. Goldman Sachs’ global growth forecasts for 2009 have fallen precipitously. Currently, we expect global growth to average 1.2% in 2009 and growth in the developed nations to contract by 1.0% in 2009 — which would be the worst outcome since data on developed nations’ growth was first collated in 1961.
They wrote that there was a “strong correlation between global growth, Australia’s terms of trade and domestic demand growth suggests the RBA is faced with the difficulty of dealing with a twin headache of a large negative income shock via falling commodity prices and the complexity of short circuiting a debt deflation cycle.”
They also cut New Zealand’s growth forecast (The NZ Reserve Bank is expected to produce a 1% cut in its official cash rate tomorrow morning, and there’s talk it could chop by a huge 1.5%, such is the extent of the slump there).
Goldman Sachs said the downgrades for global growth were important as “this impacts our ad market given offshore advertisers comprise 30-35% of ad market spend.”
As a result of these factors, the firm said: “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 newspaper publishers; (3) slowing employment market (i.e. SEK); and (4) lower pay TV subscriber growth. We have also incorporated Goldman Sachs’ new ad market assumptions for the US into our News Corp earnings estimates. Given our Economics team’s view (i.e. deeper recession, shallower recovery), we now assume a deep ad market recession in FY09, minimal growth in FY10, and a cyclical recovery in FY11: – FY09 ad market growth: -3.7% (was -2.7%). – FY10 ad market growth: +2.3% (was +4.2%).”
The team went on:
In our view, the veil has been lifted on Australian media company valuations. We believe global peer valuations are far more relevant and a more important metric. At present, Australian floor valuations are at the top end of global peers.
We have again 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; and (2) subscription discounting. While not strictly a discretionary item, we believe newspaper circulations will come under pressure in an environment of contracting private and corporate discretionary spend. As part of our media sector earnings review, we have also cut dividend forecasts across the sector. This reflects: 1. Earnings are declining: Earnings are in decline for most companies in the sector as a result of cyclical pressures and structural headwinds. 2. Credit market issues: The dislocation in credit markets, in conjunction with the earnings pressure discussed above, is placing pressure on corporate balance sheets.”
Fairfax Media is already under pressure from major shareholders to cut its 20-cents-a-share payout, a move that will adversely impact major shareholder, JB Fairfax. That was the main issue raised at last week’s board meeting in Sydney. Ten Network is also on the list of companies that analysts expect will be forced to cut dividends, but it too has to maximise the payout to benefit its 56% major shareholder, the struggling CanWest group of Canada.