Media in 2019 - The Micawber rationale
24 January 2019
It is the week after the overwhelming rejection of Theresa May’s first Brexit proposal. Looking ahead into 2019, there is a beguiling form of uncertainty. Two years of negotiations have been rejected and a modern version Mr Micawber’s policy of “something will turn up” seems to offer a level of comfort to investors – a solution will be found because the worst surely cannot be allowed to happen. In Q1 19 we are relying on not only the emergence of a UK consensus, but also that the resultant revised UK stance will be acceptable to the other 27 EU states. So, what do we know today?
• The nature of the UK’s exit from the EU and the trading arrangement is wholly undecided.
• There is a diversity of views on the direction of the UK economy and of sterling, driven by competing views on the political process.
• There has been a general weakening of global GDP expectations, with slowdown in Europe more pronounced, driven by changes in monetary policy.
• Political tensions – most notably between the US and China – are putting already weakening global trade at risk.
• UK equity markets are perceived to be modestly valued in a historic context.
Where does the UK Media sector stand in all of this?
As ever, the delight of the sector lies in its diversity, both at the sub-sector and individual company level. It remains an amalgam of diverse business service and consumer-facing models. The Media sector valuation was more resilient in 2018 than the wider market after an M&A-fuelled year, but on an absolute basis the valuation of the sector is nonetheless 6% lower than a year ago. The current weakness in the market provides an attractive entry point for investors to add strong performing media names to their portfolios. For the sector itself (macro uncertainty aside), we see five ongoing trends.
1. International exposure to faster growing economies
International exposure, which we favour to give companies exposure to economies that are growing faster than the UK and to mitigate the risk of single territory exposure. However, we recognise that this has the potential for exchange rate risk. Generally, we forecast at $1.32:£ vs $1.29:£ spot today.
2. Further M&A expected to drive upgrades
Second, we expect the sector will see more M&A in 2019. Last year, we saw the acquisitions of Sky, ZPG and UBM. Bids for quoted companies are also distinctly possible, especially with UK assets looking cheap for international investors. The sector has limited capital needs and is highly cash-generative. Most management teams are active in their management of capital resources. M&A will be an ongoing source of upgrades for many.
3. Digital to contribute most to total ad growth
Weak consumer confidence will be continue to form a difficult backdrop for traditional ad-funded models, especially in broadcast and national print. The twin pressures of shifts in consumption patterns (where the audience is) and the functionality of digital advertising (effectiveness and measurability of ad spend) Aggregate UK ad spend is expected to grow by 4.8% in 2019, with the key driver of growth being digital advertising, offsetting declines in traditional media.
4. Specialists vs generalists
The demand for more focus and specialism, especially in digital capabilities, alongside rising pressure from in-housing of functions by clients over the years have given rise to the specialist marcoms groups. Concentration on a vertical (Tech or Healthcare for example) or on a service (marketing information) is allowing smaller marcoms companies to complete globally and to deliver superior returns. Size and reach no longer determine success, a trend we expect to continue in the near future.
5. It pays to help the consumer
There are business models that may indeed prove more resilient than expected in a weakening economy. In particular, PCWs are designed to save a consumer time and money through product or price discovery; this becomes more attractive as the consumer comes under pressure.
Additionally, certain dominant domestic platforms – despite their UK bias – will display more resilience than expected thanks to their strong operating models. Given the diversity of business models in the media sector, our stock recommendations are aimed to capture both the fundamental attractions of a stock (balance sheet robustness, geographical diversity and management of transformation) and valuation opportunity.
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