Another gloomy downgrade for the Australian media sector, this time from analysts at Citigroup.
They have done more work on the sector and updated forecasts issued a couple of months ago.
Investors in media stocks won’t like them because they tell us that Citigroup sees two more years of depressed returns, and possible asset and maybe ownership changes.
If you look at the accompanying story about the economic forecasts from the National Australia Bank, you can see what the Citigroup forecasts are saying.
The NAB sees no real upturn in economic activity from a deep slowdown before late 2010: it sees inflation falling (good), interest rates falling further than anyone else is saying (good, but a sign of the depth of the slump), but unemployment rising (bad for everyone, especially business and the media) and the federal deficit blowing out (and no doubt followed by state ones as well).
Citigroup warned in a client note yesterday that the Australian media industry faces the "worst advertising downturn in 40 years" and that major players like PBL Media, Network Ten, PMP and Seven will "trade at a loss through the cycle".
In its research, Citigroup analysts made it clear that the local media groups are in for a pounding next year and into 2010.
It warns that the trading losses incurred by some groups "could lead to structural changes in ownership or capital".
We have already seen the burst of speculation about the financial position of PBL Media as CVC Asia Pacific seeks up to $3900 million in new capital to maintain its agreements with the 60 banks funding the $4.2 billion in debt.
James Packer and John Alexander abandoned PBL Media to its own defences last month by stepping down from the board and catergorically ruling out any chance Consolidated Media, 38% owned by Packer, would contribute any new capital.
Citigroup said that profit warnings (are) starting to flow – Of the four media sector profit downgrades last week (PMP, APN, SKT and SEK), three imply the advertising outlook is deteriorating much faster than originally expected.
News Corp also downgraded its worldwide earnings and pointed to lower revenues and profits from the Australian papers. Rupert Murdoch said job ads at News’ Australian suburban papers were weak. News Corp’s commentary pointed to weaker job advertising and lower circulation revenues at its papers.
The Seven Network confirmed Monday that it was expecting first half profit to be down "around 50%". Previously it was in a range of 40%-50%. Seven made no forecast about the rest of the financial year.
Fairfax Media holds its AGM in Melbourne tomorrow and the market is expecting another downgrade for its 2009 performance.
Citigroup described 2009 as "make or break for the media sector" and that profits will not reach a trough until the 2010 financial year, meaning over two years of more painful adjustment and cost cutting or losses.
"Total 2009 advertising expenditure to decline 8.8% – In looking at the downturns of the early 1990s and early 2000s we now make one simple assumption: the worst of history will repeat itself. Further downgrades necessary.
"After materially downgrading forecasts in May and October, and despite being below consensus for the majority of 2008, we again downgrade estimates.
"We now forecast media profits to trough in FY10e and are now 48% below FY10 consensus.”
Citigroup said that attempts to sell assets to raise cash and cut debt could strike problems.
"Asset sales may attract a significant discount – In the event of forced sales of media holdings (i.e. potentially APN or TEN), we believe a discount of at least 25% is appropriate, given we view the credit market as prohibitive for most potential trade buyers, particularly considering existing gearing levels and trading outlook.
"FXJ & APN downgraded to SELL – Given the pace at which APN Q408 earnings appear to have declined, the valuation impact of FY10 EPS revisions and the height from which consensus will likely fall, we downgrade FXJ & APN from Buy to Sell."
Given this gloomy outlook the chances look slimmer by the day that Tony O’Reilly will be able to get the $4 a share he’s rumoured to want for the 39.1% of APN that he has put on the market.
And investors should keep a close eye on the Ten Network whose Canadian parent, CanWest, is laboring under a huge debt burden, falling advertising revenues and a worsening Canadian economic outlook.
Ten Network shares fell 3.5% to $1.375, News Corp shares eased 24c to $12.40, Seek dropped 6.8% to $3.01, PMP dropped 4.6% to 93c and Seven was steady on $5.55. Fairfax closed down at $1.745, a new low.
