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Info TVs 'darkness before dawn'
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Info TVs 'darkness before dawn' - 13-October-2008, 12:20

TVs 'darkness before dawn'

Europes commercial broadcasters are in a revenue mess. ITVs share price is in the bargain basement, while revenues across the rest of Europe are near-catastrophic. Q3 saw in the words of bankers Morgan Stanley another lurch down with even Italy and Germany, both of which saw summer revenue improvements, now seeing weakness.

A comprehensive report from Morgan Stanley examines Europes main markets, starting with France. Following a technical recession (negative GDP growth in Q2 & Q3 in France), high inflation and rising unemployment, TV advertising spend has continued to shrink in Q3. We estimate gross TV adspend fell around -9% in Q308, and forecast TF1s and M6s Net Advertising Revenues (NAR) to be down -4% and -3%, respectively, says the bank.

Some key advertisers have accelerated budget cuts: the food industry, for instance (24% of TF1s NAR, 20% of M6s NAR), has cut its total adspend by -17% in August. A natural consequence of weakening demand is the shrinkage of TV advertising volume, which is down -12% in June, -7% in July and -11% August; severely declining demand weighs on both TF1 and M6, but in different ways. Indeed, while M6 reduces its TV spots length to maintain decent pricing, TF1 favours volumes (up slightly year-on-year) over pricing.

In such a context, regardless of which pricing/volume strategy the broadcasters are adopting, says the report, we believe short-term upside from regulation benefits will be very limited. Indeed, as the essence of the reform is to allow the broadcasters to increase advertising volumes, particularly in the key slots, and because we believe demand will remain lacklustre in 2009, we do not believe the French Broadcasters will be able to both fill their grid and maintain prices. Prices or volumes will have to suffer from the advertising slump, in our view. We still believe the audiovisual will be positive in the long run, but do not expect benefits to be material before 2010.

Germanys Prosieben issued its second profits warning of the year n Sept 24. The bank says: Although July and August were roughly flat YoY, German NAR collapsed in September, and October is indeed not shaping up well. This warning crystallised investors fears over the groups ability to recover from its sales models problems, and refocused investors more notably on leverage concerns and management changes. In the current environment of extreme bearishness and volatility, Prosieben has (i) high debt (ii) strongly declining top line (iii) highly fixed cost base (about 75%) (iv) management changes and (v) high exposure to TV adspend. With macro indicators slowing, TV adspend shrinking all across Europe, excessive reliance on spot advertising money and uncertainty regarding management changes, we believe Pro7 should experience a tough 2H08e and 1H09e. We think good long-term value resides in Prosieben, but high uncertainty and a lack of clear leadership prevent us from being more bullish at this time.

However, we note that Pro7 would benefit notably from a potential loosening of the credit market and could be substantially re-rated despite poor trading. While this will take time to materialise, we see about 80% upside from the current share price to our base case if fear regarding the groups debt fades away and leadership is restored, says Morgan Stanley.

Last week Italys Mediaset joined forces with public broadcaster RAI to mount a high-profile challenge to Sky Italia. But for Mediaset, the worst is yet to come, says the bank report. Mediaset has achieved reasonable performance this year, in comparison to other broadcasters, with NAR up about +2% over the Jan-Aug period, Pay-TV trading in line with expectations, and other activities delivering broadly the expected levels of profits. However, we believe that with just +2% NAR growth in the summer and September showing signs of weakness, Q408 and 1H09e will prove challenging. The stock is more expensive than its peers (11% premium on 2009 PE versus peers excluding Pro7); we believe the somewhat lacklustre NAR growth delivered in 1H08 versus easy comps will slow in Q308e (we are on +1.1%), Q408e (-1%) and 1H09e (-3.8%). With the consequences of a major European TV adspend downturn yet to be felt, tougher comps and a relatively full valuation, we believe Mediaset presents significant downside risk. We remain Underweight as we believe the group will perform less well than its peers and should benefit less than some of the worst-affected names from (i) an easing of the credit market (Pro7), (ii) TV adspend recovery (TL5 and A3) (iii) regulation benefits (TF1 & M6), says the banks report.

Our European tour ends in Spain, where TV adspend has collapsed says Morgan Stanley. While in the first four months of the year TV adspend was down just about 2%, management at TL5 and A3 have been recently saying that May and June were down about -10%, July was down around -15%, and August -10%, and we estimate September was down as much as -20% to -25%. In addition, September is typically a fairly good indicator to how advertisers will behave in 4Q, which, given the current circumstances, is not encouraging for the end of the year. Thus we do not expect the advertising decline to let up in 4Q08, and most likely again in 1Q09e. Therefore, we expect Q3 NAR to be significantly negative for both TL5 (we are on -18.3% for Q308 & -10% for FY2008e) and A3 (we are on -19.6% for Q208 & -15% for FY2008e). In light of the much steeper than originally forecast adspend shrinkage which occurred in Q208, we have recently reduced our revenue and profits forecasts dramatically for both TL5 and A3 and upgraded TL5 to EW on the basis that valuation had dropped low enough, in our view, and that we expect TL5 to perform much better than A3 in the near term.
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