Media analyst Christian Guerra warns of write-downs
* Font Size: Decrease Increase * Print Page: Print
Jane Schulze, Media editor | January 29, 2009 Article from: The Australian
LARGE write-downs of intangible assets that could imperil media company dividends and debt covenants are expected to be a key feature of the reporting season, according to a leading broker.
Goldman Sachs JBWere media analyst Christian Guerra said he expected media companies to be examining the carrying value of recent acquisitions, given the environment of declining earnings and falling asset values.
He said that since 2006 many US and European media companies had written down the value of mastheads, TV and radio licences and goodwill on their balance sheets.
"There are numerous examples of global media companies taking impairment charges ... (but they) have been a rarity in Australia," Mr Guerra wrote in his 2009 Media Outlook report released yesterday.
"We believe investors should brace themselves for a number of (1) goodwill write-downs (2) write-downs of other intangible assets such as mastheads and licences and (3) write-downs of other assets such as newspaper presses and (4) redundancy and restructuring charges through the course of 2009."
Mr Guerra said investors should be aware of the knock-on effects of potential write-downs on the retained earnings, dividends and debt covenants of media companies.
According to GSJBW, the companies with the highest level of intangible assets relative to total assets are Austereo at 90 per cent and Fairfax Media at 78 per cent.
Mr Guerra said the media profit reporting season, which starts when West Australian Newspapers reports its result next Tuesday, may also be worse than he had predicted, despite downgrading his expectations four times in 2008.
He said that since the last downgrading in December, GSJBW's international and local economics teams had further reduced their expectations for economic growth.
"This suggests downside risk to our media sector forecasts," Mr Guerra said.
And the structural shift in advertising revenues was also a factor in changing profit forecasts. GSJBW expects the move of advertising revenue from old to new media to accelerate in 2009.
Mr Guerra said this was being driven by continued audience fragmentation as new types of media became more accepted, advertisers' preference for relatively cheaper "new" media, and the effect of cost-cutting on content quality.
As for the revenue impact of structural change, Mr Guerra said he now expected online media to attract another $200 million in extra advertising spend per year by 2011, by which point it would represent about 18 per cent of the total advertising market. That will hurt newspapers, which Mr Guerra expects to leak $120 million in ad revenue per year, so that their share of ad spend will fall from 19.6 per cent in 2008 to 16.5 per cent by 2011.
He also expects the free-to-air TV sector to lose $50 million a year in revenue over the next three years. In contrast, he forecasts pay-TV to lift revenue by 8-10 per cent a year, while there will be immaterial revenue loss in the metro radio, outdoor media and cinema markets.
But there was some positive news among the gloom.
Mr Guerra predicts a small uptick in the share price of media companies in the second half of 2009, as investors move from defensive to cyclical stocks.
But he said the rise -- which would be entirely sentiment-driven -- was unlikely to be sustained, especially among traditional media stocks.
"A recovery in earnings is clearly a prerequisite to sustained outperformance ... but we are expecting very tough conditions for media companies for some time," Mr Guerra said.
"We believe the ad market will fall 3.7 per cent in 2009, rise 2.3 per cent in 2010 and rise 7.1 per cent in 2011."
But the structural issues facing traditional media might also mean they did not fully benefit from the advertising recovery.
