Investors wondering about the performance of the media sector in the next few months – specifically News Corp and Fairfax Media – have understand the importance to those two of the move by Genworth Mortgage Australia to make a capital return of up to $250 million to its shareholders.
That small announcement by Genworth late last week is an admission that should worry Fairfax and News Corp management – as well as the management of REA Group, which is 64% owned by News.
Genworth is proposing to return to shareholders because it will need capital this year and next to write its main product, lenders mortgage insurance (LMI). In fact it expects to see a second year when its gross written premium income falls by around 20% because demand for mortgage insurance is expected to fall 10% or more.
Genworth believes fewer homes will be bought or built in Australia over the next year or so where the borrower has a loan to valuation ratio of 80% or more, which require LMI policies by the buyers.
Weaker house sales lower demand for lenders mortgage insurance, which in turn means a fall in the amount of insurance written, and a fall in gross written premium income for Genworth. That means weaker growth for Fairfax’s Domain and News Corp’s REA.
And that in turn will be important for Fairfax and News because Domain and REA Group are the only growth businesses in their respective parents and if they go flat in 2016, then it’s going to be a bad year for both veteran media groups (Even if the weaker US dollar this year will help News).
Fairfax Media shares dipped 6.5% in the March quarter – on fears of the slowing housing sector, falling revenues and a belief in the market that the cuts of 130 journalist jobs in Sydney, Melbourne and Canberra will not be enough to rightsize print publishing costs. Fairfax shares lost 3.5% on Friday in the big sell off and closed at 83 cents.
And News Corp shares lost 5.9% in the March quarter, but it down more mid quarter and the shares rebounded as US investors sought safety in larger media stocks and deserted smaller ones.
News shares rose 2.1% in the US on Friday night as Wall Street ended in the green. It is due to report its March quarter results in early May. They will be a loss because of the costs of a court settlement six weeks ago. REA shares lost just over 2% in the March quarter and 0.7% on Friday.
But it is clear that in Australia there is little or no support for the idea that investment in the media is a growth idea, hence the lack of belief that any changes to media law will be anything but defensive moves by companies under pressure from newer rivals such as Netflix, Facebook and Google.
Therefore Communications Minister, Senator Mitch Fifield’s media law reform proposals are seen as a loss making dead end – good for the advisers and no one else.
Perhaps the most significant outcome could be to change market’s thinking on whether Telstra and News Corp can resolve their growing differences over the future of Foxtel (and Fox Sports, News 100% owned arm).
Then the changes could allow News to clean up the mess than remains at Ten (and allow WIN’s Bruce Gordon to bury his losses and move on Nine). Certainly there is little substantial interest in mergers and similar activity, even though Nine has snapped up 9.9% of Southern Cross and WIN has grabbed 14.9% (and more apparently) of Nine.
The free to air TV sector isn’t really interest in deals and growth – the most important issue (outside of News Corp’s secret ambitions) is the move by free to air TV to pressure Canberra to have the remaining 4.5% licence fee dropped.
Seven, Nine and Ten are offering (yet again) the carrot of more local production and warning of fewer local productions if the fee isn’t cut. That’s an old, old story because local TV productions are the programs viewers want- and advertisers. Show me a TV executive who would willingly cede ratings to a rival (and give up bonuses and share options and rights).
It is no mistake that Seven West Media was the best performing stock in the media sector in the March quarter in its area of operations (well, TV, not newspapers and magazines).
Its shares rose nearly 33% after a 40% fall over 2015. In fact Seven was one of the best performed ASX 200 stocks in the latest quarter after being one of the worst in 2015. Seven’s shares dipped nearly 3% on Friday to $1.00 in the big sell off.
And the rebound in Seven’s share price reflects its crushing start to the 2016 TV ratings battle, and the bad stumble by rival Nine whose shares fell 18%. They fell a further 3.8% on Friday to $1.50 Ten shares lost 41% in the quarter (making Foxtel a big loser on its 14.9% stake) and a further 1.5% on Friday to end at 98 cents.
Southern Cross shares ‘only’ fell 2% in the quarter, (but dropped 2.7% to $1.08 on Friday), but that’s because of Nine’s share raid. Prime Media shares fell 27% (it is unwanted because Seven, its feeder network, doesn’t see any gains in buying media assets). Prime shares closed steady on Friday at 36 cents.
