Estimate changes to reflect FX/investments, structural thesis intact
* Structural quality improving, higher forecasts than history
We see new online revenue streams, better cost controls, and healthier
industry dynamics driving a healthier structural outlook for media. As such,
we expect higher growth and returns on capital vs. history (organic growth
4.1% in 2014-17E vs. 2.6% 2003-12 and CROCI 11.2% vs. 9.9% ex South EU
TV). Across the sub sectors, publishers are improving returns by disposing
of lower return assets, broadcasters through diversification, and agencies
via increased digital exposure and recent consolidation.
* Greater focus on capital efficiency as M&A risks recede
Over the last five years M&A has consumed two thirds of FCF and we
expect this to fall to one-third over the next five years, leading to greater
scope to return excess cash to shareholders – in particular for Free-TV
* Investment spend rising in some areas
Despite generally low capital intensity across media, we expect rising
investment levels for certain companies, particularly BSkyB (content),
Pearson (digital), and Informa (PCI to drive organic growth). For the
agencies we expect acquisition spend as a percentage of sales to rise from
historical levels given our view that scale drives profitability but see the
focus as accretive bolt-ons rather than transformational M&A.
* Changes to estimates driven primarily by FX and investment
We lower 2015 earnings by an average of 2%, with a range of +2% to -17%
mainly reflecting FX moves and investments. Underlying trends in media
remain healthy and we expect global ad growth to accelerate to 5.7%/6.0%
in 2014/2015 from 3.7% in 2013. We continue to believe growth, returns on
capital, and cash returns are underestimated for certain sub-sectors/stocks.
* PUB, UBM, MS CL-Buys; DMGT to Buy, RTL to Neutral, INF to Sell
Our CL-Buys are structural winners (based on our industry positioning
framework) with scope for cost saving and capital returns (Publicis), and
portfolio realignment (UBM and Mediaset). We upgrade DMGT from Sell to
Buy, downgrade RTL from Buy to Neutral (valuation) and Informa from
Neutral to Sell (organic growth and investment risks). Other stocks rated
Buy are ITV, Prosieben, Sky Deutschland, BSkyB, Vivendi, TF1 and WPP;
stocks rated Sell are Axel Springer, JCDecaux, Solocal and Wolters Kluwer.