MoneyTalks: With advertising spend at 2019 levels, this fundie sees big potential in the communication services industry
MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Investors Mutual portfolio manager Lucas Goode.
One sector Goode is bullish on heading into 2022 is the communication services sector, which encompasses both media and telecoms.
“Valuations are pretty reasonable across the sector; they are paying solid yields – increasingly important with fundamentals and valuations seemingly back in vogue!
“There are high barriers to entry and a limited number of licences for the mobile network operators, tv networks, and radio stations per market etc,” he says.
“These companies are reopening beneficiaries (both of borders and the economy) and finally they are not subject to supply chain pressures in the same way that other sectors are such as manufacturing and retail.
“Not only are these companies not subject to material near term supply chain or labour cost pressures (unlike much of the rest of the ASX), but they are actually inflation beneficiaries as well – they are largely fixed cost businesses so any yield or price increases drop straight to the bottom line.
“If we take media for example, ad spend is a function of nominal GDP growth – and there is a strong outlook for Australian nominal GDP growth as we head into 2022.
“We are already seeing this with TV rates, which are at or near all-time highs despite two major advertiser groups in travel and auto being below normal spending due to border closures and supply chain problems respectively.
“The ad market should get even stronger when those sectors do start to come back (plus a federal election), and we are now starting to see that strength in TV bleeding into other formats such as radio – Commercial Radio Australia announced last week that Q4 radio spend was back at 2019 levels.
“So, in summary we think there is a really strong outlook for advertising spend and within media, two stocks that we hold are Nine Entertainment and Here, There, & Everywhere.”
With Nine, Goode says they forecast 6% TV growth in the first half when upgrading earnings guidance at the AGM, but he expects they may be doing better than that.
“In addition to the advertising strength they’ve also got an increasing proportion of revenue coming from digital subscriptions, in both their publishing division and Stan.
“And as the majority shareholder of Domain they are also benefiting from the strength in the property market, listings are taking off now and obviously pushing through price rises with property advertising is pretty easy in a market where you’ve got house prices going up 25% in Sydney and Melbourne.
“A lot of things are working in their favour and the stock is trading at a P/E (price to earnings ratio) of 15 times with a 5% yield; we think that looks really attractive.”
Here, There & Everywhere (HT&E) owns Australia’s number one metropolitan radio network, which is Australian Radio Network and features by far the biggest revenue generating program in the Kyle and Jackie-O show.
“The company finally settled a long running dispute with the ATO late last year, which was a pretty good outcome; they paid out a lot less in the end than what the ATO was claiming and potentially what the market expected them to end up paying,” he said.
“The resolution of that dispute enabled them to make the transformational acquisition of Grant Broadcasters, which is an owner of regional radio stations – so for the first time this now gives HT&E full national reach to offer their advertising clients.
“The deal should enable them to claim higher market share at their metropolitan stations because of their newfound truly national reach while also introducing national advertising clients into the regional radio markets which would have been more difficult for Grant to do on their own.”
The stock he says also just looks “really cheap” at 11 times P/E with a 5% yield.
Another company Goode highlights is TPG – one of only three full-service telcos in the Australian market following its merger with Vodafone.
“TPG has been faced with a bit of a perfect storm over the last few years,” he said.
“The roll out of the NBN crushed consumer broadband profit margins due to the large access costs to allow NBN to earn an allegedly commercial return.
“You had Optus leading a multi-year price war that ate into industry returns within mobile and the closure of borders really impacted Vodafone because they lost all their roaming revenue and the company over-indexes with immigrants and international students.”
But as we look ahead to 2022, he says TPG should enter the next couple years with a bit of a wet sail.
“NBN is now increasingly becoming a tailwind for TPG because NBN’s move into enterprise means that TPG can now service areas where they don’t have their own fibre and we’ve seen that in recent big enterprise wins for Qantas and NAB.”
Mobile pricing has stabilised with Optus pulling back from its aggressive discounting and both higher inflation and the rollout of 5G should be positive for industry revenue.
“What’s 5% more on your phone bill when your weekly supermarket visit is costing 10% more already?” Goode says.
“Finally, we will see the merger synergies from the Vodafone transaction start to come through and hopefully the strategic review of the company’s tower assets will result in a partial or full disposal following the fantastic prices achieved last year by both Telstra and Optus for their own mobile towers.”
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