Key Calls for 2014 and 2015 — We are positive on Prof Pubs and Internet, selectively positive on Pay TV, Outdoor and Agencies. We are negative on broadcasters and consumer publishers. Our top picks for 2014 are TF1, DMGT, ELSN, PSON, BSY, all rated Buy.
>>> 5 Most Preferred Stocks
Our top picks come from across the strategies we highlight above. Going through them in brief:
* TF1 (TFFP.PA, Buy, PT €19) — Our view is that the TV ecosystem in France is
stabilising and TF1 audience share has not only leveled out but started to grow.
In the ST there should also be support from one-off events and easy comps.
More importantly, we see scope for significant medium-term margin rebuild driven
by better top line and focus on cost savings. The scale of margin disconnect vs.
peers is underlined by a massive EV/Sales discount.
* DMGT (DMGOa.L, Buy, PT 1180p) — In the past 12 months we believe the
market has better recognised the c.75% of EBIT coming from B2B. What is still
under-recognised in our view is the strength of B2B organic growth. At 8.6%
FY14E on our forecasts, well ahead of peers, it is becoming harder to ignore. In
addition, we think DMGT enjoys a strong position within consumer media and
see upside from 3 areas: (1) UK recovery — 1% on advertising adds c.1% to
EPS; 2) cover price levers - 5p on the Mon-Fri Mail adds c.3% to EPS; 3)
valuation and earnings upside for online assets, both Zoopla and MailOnline.
* Reed Elsevier PLC/NV (REL.L/ELSN.AS; Buy, PT 1100p/€20.8) — Reed is
already delivering organic growth across each of its operating units with scope
for a further acceleration in trends in 2014 as developed market macro recovery
takes hold. We also see scope for meaningful upside to margins driven by (1)
Legal where current margins of 15% could expand to over 20% in time; (2) BI,
where we see scope for margins to move to 20% or more as the division
migrates toward Data Services. Finally we see scope for earnings enhancement
from (1) active portfolio management; (2) proactive cash usage.
* Pearson (PSON.L, Buy, PT 1350p) — Medium-term we see strong growth
trends driven by continued worldwide demand for educational services — both
instructional materials and, increasingly, learning platforms. We also see scope
for better margins over time as the business migrates away from print and
becomes more of a professional information company. Pearson was the best
‘through the cycle’ earnings grower over the last cycle (with compound growth of
around 15% p.a.); we think it can deliver across the next cycle as well.
* BSkyB (BSY.L, Buy, PT 1000p) — Although uncertainty from the launch of BT
Sport is clearly unwelcome, we don’t think the investment case is broken. We
think valuation is underpinned at the current level and see scope for upside from
three areas: (1) greater product penetration; (2) better yield/pricing; (3) optionality
on management being able to extend the life of Sky Sports beyond 2017.
>>> 5 Least Preferred Stocks
Our least preferred names are largely focused on the more cyclical end of the
sector, but the common thread is a sense that valuation is potentially running ahead
of events (recovery or M&A). In each case, we have to acknowledge that the
absolute downside is not massive; we also note that to a varying degree, near-term
newsflow for each name is likely to continue to be positive. In this context our Sell
recommendations largely represent a call to take profits or use the companies as
potential source of funds, rather than signaling significant absolute downside.
* ITV (ITV.L, Sell, PT 191p) — Over the past 3 years every metric we monitor or
care about at ITV has improved, and in some cases substantially. Looking into
2014E we remain enthused about economic recovery and think ITV should fully
participate in this but worry about three issues. (1) we worry that the market is
overly sanguine about the sustainability of growth and the impact of sports rights
losses on 2015E/2016E growth. (2) With BBC Charter renewal and the potential
sale of Channel 5, we think the UK TV landscape could become more
competitive rather than less, at least in the near-term (3) Looking at valuation, we
believe much is already discounted: ITV’s long term average EV/Sales is 2.0x-
2.5x — this compares with the group at nearly 3.5x 2014E EV/Sales today.
* ProSiebenSat.1 Media (PSMGn.DE, Sell, PT €32) — P7S1 is much like ITV. It
is hard to pick a hole in short-term performance, but again three factors weigh on
our view: (1) while sports rights are not an issue in Germany, we do worry about
the effect of increased competition from new entrants, both linear (cf. Disney) and
non-linear (cf. the proliferation of OTT launches, from Watchever to Netflix). (2)
Second, and linked, we note that margins at P7S1 are at all time highs (recurring
EBITDA margins of nearly 35% for the core broadcast business). The point here
is that we fear the market potentially underestimates the amount of investment
risk, especially as P7S1 is proportionately more reliant on acquired (as opposed
to commissioned) content than its major competitor RTL. (3) Given the stage in
the cycle, valuation looks rich at 3.2x 2014E EV/Sales and 10.3x EV/EBITDA.
* Vivendi (VIV.PA, Neutral, PT 19.8) — Of our least preferred names, this is
perhaps the most risky because there are so many permutations over the scope
and mode of value crystallisation at Vivendi. We highlight two risks: (1) many
investors assume that GVT will be disposed of but there is uncertainty on this
point and running GVT is much less preferable to a clean sale, in our view. (2)
Virtually all analysis assumes no further deterioration in u/l EPS momentum,
which we think may be optimistic (our ests. stand almost 20% below consensus).
* Mediaset (MS.MI, Sell, PT €2.70) — Stock performance and fundamentals have
rarely diverged as much as in 2013. Despite a short summer truce, advertising
remained heavily negative throughout the year: whereas consensus was initially
pointing at -4/5% for ad-collection for 2013E, we estimate advertising should
have ended the year down 11-12%. Pay TV (PPV) has also remained poor, even
if Mediaset has done well on costs. Our concerns focus on two areas (1) we
continue to worry about the structural outlook for TV. The advertising industry
may well recover part of the c. €3.0bn of revenue lost since 2010, but we worry
that both FTA and Mediaset will struggle to maintain market share, at least
without costs coming back in. (2) We are less convinced of the value creation
from divesting the group’s PPV businesses.
* Mediaset Espana (TL5.MC, Sell, PT 5.0) — Our view here is directly that the
market is too optimistic on recovery potential, at least ST. The issue with
Mediaset Espana (in contrast to Neutral-rated Atresmedia) is that the group
trades at a continued valuation premium. This doesn’t necessarily make A3M
cheap, but we think the gap will close in time driving a more benign view.