Investing in media – where do some of the UK's media giants stand?

Above-the-line advertising (things like TV, print and billboards ads) is expensive and optional. So, in times of economic hardship it's among the first to be cut. That's made the last year a very difficult time for media companies, who saw their revenue streams squeezed.

But as we start to emerge from the Covid fog, where do some of the UK's media giants stand? The sector is still huge – and there are opportunities as well as risks investors should be paying attention to.

This article is not personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser. All investments rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future.

Investing in individual companies isn't right for everyone. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

ITV – living through its own soap opera

ITV wants to be known as a producer of TV content, and not just a TV channel. That's a great idea in our view – but the identity change is some way off – Broadcast made up 62% of pre-pandemic group revenue.

We admire the group's efforts to rely more heavily on content production. As we pivot away from traditional TV and onto streaming platforms, being a content creator is a much better place to be than vying for a declining number of viewers as a broadcaster.

Chart showing ITV advertising revenue (£bn)

Source: Refinitiv Eikon, 09/04/2021.

ITV's Broadcast revenue fell 2% in 2019, the year before the pandemic struck, when the group was already in a messy battle to “transform” the division. Transformation relies on pulling off a huge shift to ITV's online hubs. That space is seriously crowded, and competitors like Netflix and Amazon have much deeper pockets.

The shift away from traditional TV has been sped up by the millions of extra people who signed up for streaming accounts like Netflix in the pandemic. That's a long-term growth opportunity for those in the business of content creation. Enter, ITV Studios.

However, while the longer-term picture makes sense when it comes to boosting ITV Studios, the nearer term looks murky. As the Studios arm started heating up, the pandemic hit. Studios come with fixed costs, and making productions socially-distanced doesn't come cheap. This compounded the declines in broadcast advertising revenue in 2020. Group underlying profits fell 21% to £573m in the last year – which included a 43% drop in Studios profit.

Unfortunately the scrapping of the dividend means investors aren't being paid to wait and see how quickly Studios re-finds its feet. And it's vital that it does, because for now, ITV still relies on broadcast advertising revenue too much to be anything other than a traditional media company.

ITV is an example of a company having a lot of the right ideas. Content creation is a growing market, and there should be long-term opportunities available. But investors should make no mistake: ITV is still very much a media company, and while the strategic pivot away from broadcast is ongoing, we think investors should take note of the risks.

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WPP – giants feel pain too

WPP is one of the world's leading marketing business' and makes lots of its money from traditional marketing agency work. To give an idea of scale, as at April last year, the giant employed over 106,000 people across 112 countries. Its clients include 348 members of the Fortune Global 500 and 69 companies from the FTSE100.

But giants feel pain too, and the pandemic took a hammer blow to profits. Operating profit of £1.3bn in 2019 swung to a £2.3bn loss for the last financial year. That reflects the revenue decline as blue-chip clients reined in marketing spending. WPP was forced to recognise some of its assets were simply worth less than they had once been.

Its huge size is both WPP's biggest asset, and biggest challenge. We'll go with the difficult stuff first.

Pre-pandemic, WPP was grappling with the changing face of marketing – namely the rapid increase in demand for digital analytics and platforms. And the group's sprawling size means progress was slow and messy. This risk of losing market share will still exist when the pandemic's over.

But the pandemic has actually injected some hope into the mix. It's kickstarted more extreme efforts to refocus the business and streamline. The accelerated shift to online shopping also means e-commerce advertising is a huge opportunity – WPP is expecting double digit ecommerce growth in all but one region for 2021.

We're also intrigued by the group's assertion that demand for its PR and reputation products are on the up. The current climate of cancel-culture and increased environmental and social pressures, means this could be a long-term growth opportunity.

A hoard of hefty existing clients, including HSBC and Unilever, gives the group a good base on which to build. Especially as these large customers tend to change direction slowly, giving the group a reasonably sticky customer base. A much healthier balance sheet – net debt (readily available assets minus debt) of £0.7bn is the lowest it's been since 2004 – also gives the group some breathing room to get its house in order.

Chart showing WPP net debt (£bn)

Source: WPP 2019 annual report, 2020 preliminary results.

Overall, WPP has a genuine opportunity to come out of the pandemic thriving. Its existing scale and accelerated transformation efforts means it has all the right tools to execute its so called “pivot to digital”. But the speed of that spin is what's crucial – take too long and new business wins will fatally falter.

For now, analysts predict a 3.2% yield over the next 12 months, so investors are being paid for their patience. Remember, yields are variable and are not a reliable indicator of future income.

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Daily Mail and General Trust – more than a famous face?

The clue's in the name – DMGT is home to the Daily Mail, The Mail on Sunday and ‘i' newspapers. This kind of consumer media makes up about half of the group's £1.2bn annual revenue.

Advertising revenue dipped because of the pandemic. Particularly in print media. That's unsurprising when you consider there was a drop in the amount of newspapers being circulated during UK lockdowns. Add in very difficult conditions in other divisions (including an events and exhibition business), and revenues fell 10% in 2020.

But that fall could have been much worse. A few things helped here.

A large one is the group's huge digital news presence. Digital advertising was less adversely affected by the pandemic, a pattern often seen when the economy's not doing as well.

The other source of strength is DMGT's less obvious businesses. The second biggest revenue earner after Consumer Media is Risk Intelligence – DMGT's software helps insurers and financial institutions manage catastrophe risk (preparing for anything from hurricanes to terrorism). In fact, over half of DMGT's profit has come from its analytics products used in business-to-business (B2B) activity.

Chart showing DMGT's underlying revenue by division

Scroll across to see the full chart.

Source: DMGT 2020 annual report.

This kind of business is known as Software as a Service (SaaS), which is where a company's main product is software, or something digital, rather than a physical item. SaaS tends to be higher margin, because once the software exists, adding a new customer is basically costless.

Most of these B2B areas actually grew last year and underpinned the group being able to increase the dividend. The prospective yield is 2.8%, but remember no dividend is ever guaranteed and yields are not a reliable indicator of future income.

When looking to the future, DMGT should be well positioned. When one area of the portfolio stumbles, the other can pick up much of the slack. We think the risk business in particular offers a long-term growth opportunity. And the world's insatiable appetite for news isn't going away. So even though there's a structural decline in print media, the Mail brand is likely to endure.

Analysts expect operating profits to recover to around 91% of 2019's levels by 2023 – so clearly recovery won't happen overnight.

Ultimately, we admire DMGT's diverse business model and robust brands. But investors have to pay for these strengths – a price-to-earnings ratio of 32.2 is a lot higher than the average. We therefore can't rule out ups and downs.

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Let us scan the horizon for you

There's certainly a lot of change in the sector. It's equal parts exciting and troubling for the big names. We cover a number of the UK's and global media stocks in our share research, so our analysis on these companies could be emailed to you for free.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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