I. Sector Landscape and Outlook
The Australian Media sector entails the print and digital media, cinema, television, and music, all of which have reported steady growth in recent years. The Entertainment sector may comprise of online streaming and video services, gaming, films, animation, etc., and has been thriving on multiple revenue opportunities from technological advancements. Both the media and entertainment sector have witnessed significant transformation due to a shift to digitisation. Consumers, too, play a significant role in defining what the industry offers. Changing preferences in the wake of COVID-19 and demand for quicker and more comfortable means of consuming content have compelled these businesses to rethink their business models.
As charted below, S&P/ASX 200 Media & Entertainment Index has outperformed S&P/ASX 200 Index by a significant 17.06% year till date 2020.
Figure 1. S&P/ASX 200 Media & Entertainment (Industry Group) vs S&P/ASX 200 (YTD)
Data Source: Refinitiv, Thomson Reuters *31st Dec 2019 – 22nd Oct 2020; Chart Created by Kalkine Group
COVID-19 Impact: The Traditional Media & Entertainment sector struggled to maintain operational continuity due to the outbreak of coronavirus. Publishers and media companies have witnessed losses in advertising revenues, while film production companies witnessed delayed releases, production stoppages and theatre closures.
On the contrary, digital media or new age media and social marketing have picked up drastically post the advent of COVID-19. Other avenues such as video gaming and virtual production channels remained resilient even during the shutdown period. The consumption of news coverage reached unprecedented levels across the online and media sectors.
Government Support to the Media Sector: To support the sector, the government allowed for 100% rebate on Commercial Broadcasting Tax for 12 months to commercial television and radio broadcasters. This rebate will offer a tax relief of $41 million from 14th February 2020. The Government also announced a Public Interest News Gathering (PING) program worth $50 million to support public interest journalism delivered by commercial television, newspaper, and radio businesses in regional Australia. Another funding of $5 million from the Regional and Small Publishers Innovation Fund has been announced for 41 regional and metropolitan publishers and content service providers of public interest journalism.
Government Support to the Entertainment Sector: The Government announced a package of $250 million to restart the entertainment, arts, and screen sectors after the adverse impact of COVID-19. The package included $75 million in competitive grant funding in 2020-21 help production and event businesses to put on new festivals, concerts, tours and events; $50 million to support local film and television producers to start filming again; $90 million to assist creative economy businesses; and $35 million to support significant Commonwealth-funded arts and culture organisations.
Growth Drivers
Online Video: The entertainment industry is being driven by online video production, including subscription-based services provided by Netflix and Amazon Prime. YouTube videos and visual media on social networking platforms are promoting an increase in the rate of online video consumption and is fuelling growth in the entertainment sector.
Increased Usage of Smartphones & Portable Devices: Changing consumer preferences have changed the ways media and entertainment companies operate. Improved internet connectivity has resulted in increased mobile wireless connections, which, in turn, boosted the audience for digital media. With increased usage of smartphones and portable devices, consumption of media and entertainment services has undergone a significant transformation. The ease of using smartphone and countless ways of consuming content in a single click hold fortune for the Australian media and entertainment industry. According to a data released by ABS for 2016-17, entertainment was among the most popular online activities with 80% of internet users accessing such services, as compared to 59.8% in the previous reporting period of 2014-15. Moreover, 91% of the households were using smartphones in 2016-17 as compared to 86% in 2014-15. As per the data reported by ABS, the internet consumption through mobile phones and fibre network is rising (as shown below).
Figure 2. Broadband Internet Subscribers
Data Source: Australian Bureau of Statistics; Chart Created By: Kalkine Group
Prevalence of Video Games: The new features offered by smartphones and tablets along with the growing demand across the modern video game industry is attracting enormous attention for the entertainment sector. Such trends will lead to increased revenues for the digital entertainment industry and will create more jobs in areas of game development, programming, animation, sound design, etc. According to the latest (2015-16) Film, Television and Digital Games data released by ABS, total income of digital game developers increased by 24.3% on the previously reported data for 2011-12. End-to-end digital game development formed the largest source of income.
Figure 3. Digital Game Developers Performance Data
Data Source: Australian Bureau of Statistics; Table Created By: Kalkine Group
Ad-Driven Viewing: Ad-supported content has become popular across the globe, which requires companies to carefully decide on their promotional expenditure to create enough user data for targeted advertising. Suitable ad-interruptions in between video streaming which can be beneficial for the players in the sector.
AI and Machine Learning: As more and more consumers look for content personalisation, media companies will create content based on the demographics of the audience, which is well-supported by modern applications of predicting user behaviour, like Artificial Intelligence and Machine Learning.
Key Risks
Figure 4. Key Risks/Challenges
Source: Kalkine Group
Pandemic and Government Restrictions: The impact on activity levels within the economy threatened the operations across theme parks and cinema exhibition businesses. Further Government restrictions in response to the outbreak may prove detrimental for the sector.
Changing Technology: The ever-changing ways of receiving content directly impacts the media and entertainment businesses. Increased digitisation and portability have become the key focus for many consumers which can impact performance if firms fail to adapt these changes.
Threat of Piracy: Cinema Exhibition and Film Distribution businesses are threatened by the ongoing issue of film piracy. This risk, however, was minimised after the implementation of legislative changes in Australia which resulted in many sites being blocked.
IT & Cybersecurity Threat: Failure to address security risks to the digital network, IT systems, and personal information may result in system suspension and failure or a potential loss of intellectual property for media companies. Henceforth, a well-developed Cyber Security Strategy is essential to avoid such risks.
Outlook: Australia’s media and entertainment industry stands to benefit from its booming tourism sector and permanent migration numbers. Australians spend a substantial amount on entertainment and the country is a hub for excellent entertainment content creation, including film making, animation, game design, etc. These factors will result in growth of the sector as individuals from diverse backgrounds fuel new ideas and options into the market.
Due to increased competition, media companies should also look for ways to develop innovative strategies for larger customer attention. For instance, advertising is expected to be driven by greater penetration of smart televisions with Over the Top (OTT) television capability. Also, increased use of mobile internet, faster connections, app innovation, and convenience offered by smartphones are some other factors offering potential growth opportunities in the sector.
II. Investment theme and stocks under discussion (OML, VRL, EGG and NEC)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘EV/EBITDA’ method.
1. ASX: OML (oOh!media Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 804.83 Million)
oOh!media Limited is a leading Out of Home media company offering services to advertisers.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~20.3% on 22 October 2020 closing price. For the said purposes, we have taken peers such as HT&E Ltd (ASX: HT1), Village Roadshow Ltd (ASX: VRL), Nine Entertainment Co Holdings Ltd (ASX: NEC), etc. At the same price, the stock of OML was offering a dividend yield of ~8.08%.
2. ASX: VRL (Village Roadshow Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$ 425.75 Million)
Village Roadshow Limited (ASX: VRL) owns and manages drive-in cinemas in Australia. Its business is spread across theme parks, cinema exhibition, Film distribution, and marketing solutions.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~33.5% on 22 October 2020 closing price. For the said purposes, we have taken peers such as Nine Entertainment Co Holdings Ltd (ASX: NEC), SKY Network Television Ltd (ASX: SKT), Southern Cross Media Group Ltd (ASX: SXL), etc. At the same price, the stock of VRL was offering a dividend yield of ~2.29%.
3. ASX: EGG (Enero Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$ 157.71 Million)
Enero Group Limited (ASX: EGG) is engaged in the operation of marketing and communications businesses.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~29.4% on 22 October 2020 closing price. For the said purposes, we have taken peers such as Nine Entertainment Co Holdings Ltd (ASX: NEC), oOh!media Ltd (ASX: OML), HT&E Ltd (ASX: HT1), etc. At the same price, the stock of EGG was offering a dividend yield of ~3.29%.
4. ASX: NEC (Nine Entertainment Co Holdings Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$ 3.71 Billion)
Nine Entertainment Co. Holdings Limited (ASX: NEC) is a media firm operating through its Broadcasting, Digital and Publishing, Domain Group and Stan divisions.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~10.4% on 22 October 2020 closing price. For the said purposes, we have taken peers such as Southern Cross Media Group Ltd (ASX: SXL), HT&E Ltd (ASX: HT1), Seven West Media Ltd (ASX: SWM), etc. At the same price, the stock of NEC was offering a dividend yield of ~3.21%.
Note: All the recommendations and the calculations are based on the closing price of 22 October 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
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