Shares digital

by Susanna Twidale

The advent of the internet has had a huge impact on all industries but for companies in the media agency sector it has completely revolutionised the way they do business. Shares have floundered on fears of an economic downturn and the credit crunch but the internet is the one area that is certain to continue to grow. All the disciplines in the sector from marketing, PR and market research have had to adapt quickly over the past few years in order to keep up and ensure they are the ones to benefit from the boom

Large agencies such as WPP carry out all these disciplines. They have various divisions, which can perform all of the necessary functions, creative arms to make up the adverts, buying arms to know where to put them, PR arms to make sure the company is well received and market research arms to show exactly what the effect of all of the above has been. Throughout the stock market and Aim, however, there are swarms of companies that each offer one or two of these functions and are all vying for a slice of large corporates’ spending budgets.

The research side of things tends to stand up better in a downturn, as media agencies buy the research to persuade advertisers that spending big money on campaigns is working. In turn, companies may carry out their own research to see which type of advertising they should be spending on and, in tough conditions, where less effective advertising budgets should be cut.

This is something that has not been lost on advertising giant WPP. Although it already has the world’s third largest market research organisation in its stable in Kantar, this hasn’t stopped it looking to grow, and it has recently made a bid for market research player Taylor Nelson Sofres.

Impact of the internet

The market research industry perhaps more than any other, has been turned on its head in the past few years by the emergence of the internet.

The overall worldwide market research industry is thought to be worth around $25 billion a year. ‘Geographically, the US accounts for around one-third of research revenues, the UK, France, Germany and Japan, together account for another third, with the last third accounted for by the remaining countries,’ says Landsbanki’s Charles Peacock. Online research is thought to represent around 40% of survey-based research in the US, 10%-15% in Europe and 5%-10% in other countries.

Although online research is thought cost somewhere between 50% and 66% less than traditional methods it has had its critics, with some arguing that the internet under-represents some demographics, and that there are quality issues, with examples of respondents filling in multiple forms under different email addresses.

However, recent successes by companies such as online pollsters YouGov in the London election have led to a new questioning of traditional methods. ‘The beauty of the London election is that it really took it beyond the industry to the average professional and investor because they saw it so publicly,’ says YouGov chief executive Nadhim Zahawi. ‘The telephone guys are the ones who have had to admit they need to go back to the drawing board and say hold on we’ve got a problem here.’

It was also YouGov’s constant success that has led industry stalwart Ipsos Mori to admit it now needs to review its approach to its research.

But it isn’t just Ipsos that needs to adapt. The predominant amount of market research done by industry giants such as WPP and TNS is done via traditional methods, and both of them are now looking to bulk up their online offerings.

Online is the bottom line

Marketing companies are also increasingly finding that an online presence is a must. Unlike magazine inserts or mail-outs, the results from online and email marketing can be instantly tracked.

‘Direct marketing performs better in a downturn as the the results are more measurable,’ says Ingenious Securities analyst Ian Daly. Google has been a huge beneficiary of this move, with marketeers keen to ensure their company comes up top in its search engines.

Google, however, is now targeting the advertising sector itself through its acquisition of online ad servicing network DoubleClick last year for $3.1 billion. The company was described as a ‘frenemy,’ by WPP chief executive Sir Martin Sorrell, who has recently announced a link-up with rival search engine Yahoo to buy ads on its online exchange.

Search engines have also had a big impact on other areas of the sector. ‘The internet is changing everything in our world. We now have complete transparency, and anyone can find out if what you say and what you do are the same thing,’ says Chime Communications’ chief executive Chris Satterthwaite. ‘Communications has always been an opportunity, but nowadays it’s also a threat,’ he says, adding that, for companies and high-profile individuals, managing their reputations is more difficult but also more important than ever.

For this reason most analysts are predicting that PR companies should be more resilient to a downturn than others in the sector. At the time of its full-year results in March, Huntsworth chief executive Lord Chadlington said that a Mori poll had suggested 82% of companies using PR had said they would maintain or increase their PR spend in 2008, which backs up this suggestion.

To some extent all of the companies are affected by the amount of money companies choose to allocate to advertising spend. In the past this has always been stimulated by major events, and this year should benefit from the US elections, European Football Championship and Beijing Olympics, which will give some companies a chance to target the rapidly growing but notoriously difficult to penetrate Chinese market for the first time. Without the credit crunch and the spectre of a US recession most would have tipped 2008 to be a bumper year for those involved in advertising, but now the goal posts

have shifted.

The internet, however, is the one area that gives all of these companies an opportunity to grow, and it will be their ability to embrace the new technology that will determine which ones succeed and which fail.

Key indicators

The economics:

• Big business advertising and market research budgets

• Shift in spending from traditional media to online

• Changing patterns in media dissemination

• Growth from emerging markets

• Cyclicality and event driven markets

• Low valuations leading to consolidation

TOP ANALYSTS

Lorna Tilbian – Numis Securities

Focus is key

Lorna Tilbian is the City’s best-known and most respected media analyst, but given her down-to-earth demeanour it would be easy to underestimate what an opinion former and pillar of the industry she has become while covering the media sector over the past

22 years.

She joined Numis in 2001 after previous positions as a director at SG Warburg from 1988-1995 and an executive director at Panmure Gordon from1995-2001. She was recently listed as the 19th most influential person in the media sector in a Telegraph list, which placed the likes of Sir Alan Sugar at 17, Sir Andrew Lloyd Webber at 27 and Express Newspapers impresario Richard Desmond at a lowly 99. She also became executive director at Numis in 2005, holds a 6.7% stake in the company, and is a non-executive director of Jupiter Primadona Growth Trust.

She says ‘focus’ is the key to her success and jokes that her blackberry is never far away, even when she is on holiday. She says knowing who to turn down can be as important as winning new clients, and is proud of the calibre of companies Numis represents.

Steve Liechti – Investec

Detail junkie

‘Being a detail junkie’ is what first promoted Investec’s Steve Litchti to become an analyst, making the jump from fund manager at Threadneedle over ten years ago.

Since then he has covered the leisure sector as well as media, and previously spent eight years working at Merril Lynch.

He irreverently says that walking out of there of his own accord was one of his greatest achievements, but a six-month stint at Arden Partners was to follow before taking up the role at Investec.

The switch from a behemoth like Merrill to a small boutique like Arden proved to be too much of a jump but he has found happy middle ground at Investec, where he has been covering the media sector for the past two-and-a-half years.

He says around 15 stocks is the optimum level of coverage for an analyst and that currently most of his media stocks are in the media agency sector but that he also keeps his fingers in the publishing and broadcasting pies.

He says a company’s ability to weather the cyclicality of the economy will be important this year and the crunch time will come when the second-half numbers start coming through.

Roddy Davidson – Altium

Funds to analysis

‘As an analyst you immerse yourself in an industry and become an originator of information, but as a fund manager you tend to take forecasts made by analysts rather than starting from scratch,’ says Altium analyst Roddy Davidson on the differences between being an analyst and his previous incarnation as a fund manager.

Prior to joining Altium he worked as head of smaller companies at Britannic Asset Management while before that he worked at both Scottish Amicable Investment Managers and Murray Johnston, amassing a total of 14 years’ experience as a fund manager before making the switch to become an analyst, joining Altium in October 2004.

As a fund manager he looked at some six or seven sectors, and notes another difference between the disciplines: ‘Analysts have a much narrower focus and you look at companies primarily drawn from one sector,’ he says.

Consolidation will continue to be one of the key themes for the sector this year ‘especially given current valuations,’ he says, adding that the current merger talks between industry giant WPP and TNS will provide further impetus.

STOCK FOCUS - BEST BUYS

Huntsworth - PR strength

Many analysts have said the PR-focused companies in the media agencies sector will be better equipped to weather a downturn, and a recent interim statement from Huntsworth confirms this theory.

It already has 80% of its 2008 forecast revenue contracted in, up from 65% at the beginning of the year. The company says it is benefiting from a redeployment of clients’ budgets spending, into building up reputations, ‘digital public relations projects and corporate and social responsibility programmes’. In the first quarter of the year it has won several high-profile mandates, including one with Coca Cola Great Britain to raise awareness about recycling.

Its health division is also performing well and has gained several new clients in the UK such as AstraZeneca, Pfizer and Shire, while its global account wins include Roche and Novartis.

It is working to reduce debt levels, with analysts forecasting these to be cut by 38% by the end of the year to £33.3 million and to £9.3 million by 2010.

‘Whereas net debt has been an issue for the group, the disposal of CapitalBridge brings this under control at less than one times net debt/EBITDA,’ says Lansbanki analyst Andrew Walsh, referring to its recent $31.7 million cash sale of the non-core market intelligence business. He has a buy recommendation on the stock as does Altium analyst Roddy Davidson. Numis analyst Paul Richards believes there could be the potential for earnings upgrades later in the year and has a 100p target price for the shares, a 22% premium on their current 82p level.

ITE - Benefiting from emerging markets

While UK and US markets are floundering because of the credit crunch, emerging markets are still going strong, and conference and exhibition organiser ITE is set to benefit from this momentum. It specialises in events in Russia, central Asia and south east Europe, which are still seeing buoyant markets on the back of the higher oil prices. It recently acquired Siberian Fair to beef up its Russian offering for a total of $12.1 million. This seemed a good price for the exhibition specialist, which generated a pre-tax profit of $3.5 million in 2007 on revenues of $10 million.

ABN Amro analyst Simon Davis upped his target price to 180p from 175p on the back of the acquisition and says he expects more similar deals to be in the pipeline. It is forecast to have £40.9 million of cash at the end of the year and has the firepower for more acquisitions if opportunities arise. It is also expected to benefit from the strength of the euro in the coming year as some 70% of its revenues are invoiced in the currency. ‘The outlook for the Russian/CIS economies remains strong, while ITE has an established market position, with strong barriers to entry,’ says Numis analyst Paul Richards.

Research Now - Online focus paying off

Research Now is one of the growing number of companies that focuses its business on online market research. First-half profits are tipped to rise 87% to £18.5 million, with the company saying that ‘demand for high-quality online fieldwork and panel services is buoyant in all our markets’. It has panels across 28 different countries and offices in 12, with the recent acquisition of OpenVenue giving it a strong position in Canada and a base from which to grow its US operations.

Landsbanki analyst Charles Peacock says that, as one of the larger European online field work companies, it could play a role in consolidation in the sector. ‘In particular it would be attractive to the US players, which are relatively under-represented here,’ he says.

The company is benefiting from the switch to online market research, and is finding that it is gaining an increased amount of business from the larger agencies outsourcing some of their online requirements.

Peacock says large market research companies account for 31% of Research Now’s revenues while small and mid-sized ones bring in half. Although the shares have risen by 18% since the end of April to 317.5p, Peacock believes they still have upside potential and has set a 400p target price.

STOCK FOCUS - STEER CLEAR

Media Square - Tough autumn lingers

The shares of Aim listed advertising, marketing and design group Media Square have already plummeted 54% over the past 12 months to 5.75p after it issued a profits warning in September last year.

Back then it blamed lower spending from a major client in Germany and and a slower than expected rollout of a major contract. New executive chairman Roger Parry took over the helm in June 2007 and carried out a strategic review, restructuring the company into the three divisions, and disposed, closed or merged underperforming businesses.

To its credit, management moved quickly to rebase investor expectations, hence the profits warning, but a more recent update has also said restructuring costs are expected to result in a £5 million exceptional cost.

Analysts had previously been expecting pre-tax profits of around £5.5 million for the year but forecasts are now sitting at losses of around £0.8 million. With this disappointment already factored into the share price the ability to recover will be determined by what kind of guidance is given for the coming year.

There are no signs that the general outlook in its markets has improved, with it warning in its most recent trading statement that: ‘the macro-economic prospects for marketing communications in the UK are challenging, which means the board is cautious for the next twelve months’. Net debt is expected to be £21 million at the end of the year, which, though well within its banking facilities, is not an ideal place to be in in the current climate.

Rightmove - Wrong time

Given the slump in the housing market it is not surprising that shares in property advertising website Rightmove have shed more than 29% in the past three months.

The company argues that the downturn is actually helping it gain market share, with estate agents looking for cheaper, and more wide-reaching ways of advertising than traditional print media can allow, but sentiment has turned against the company as the full impact of the credit crunch and its knock-on effect on the housing market are becoming better known.

Management recently reassured the market that it will reach forecasts for 2008, currently at consensus pre-tax profits of £40.3 million. But it also concedes its retention rate for estate agents has dropped to around 85% from 92%, and that it anticipates the number of agents going out of business in the second quarter will be higher than the first ‘and is unlikely to be outweighed by new joiners.’

Although the current buyback might help underpin share prices, the fact that by its own admission the UK housing market is ‘very poor’ means the shares could fall further on weak sentiment, and are probably best avoided for now.

Real Affinity - No light at the end of the tunnel

Aim tiddler Real Affinity has a share price of just 0.014p and a market cap of £490,000. With a sub-£20 million turnover the company has failed to make a profit for the past three years and has warned things look worse for the current financial year to 31 March 2008 after pre-tax losses widened in the first half.

Plans to reorganise its capital have come to nought and there is nothing to suggest a recovery is on the way. The shares have tanked 69% over the past 12 months and look to be going nowhere other than down further.

The company specialises in direct marketing, and event and conference management, has had blue-chip clients such as Tesco and BP and gained new business wins with AXA and WH Smith in the first half, but has struggled to keep costs down and generate a profit from its businesses. Just because you can buy 6714 shares for the price of a loaf of bread does not mean its a good idea, and, given the rapidly rising food costs, the bread is likely to offer a higher return.

RISING STAR

Getting the people’s vote - Nadhim Zahawi explains why YouGov, which he co-founded, is spot-on

You can’t open a paper without seeing a YouGov survey these days, and on meeting its charismatic chief executive and co-founder Nadhim Zahawi it comes as no surprise that the company has achieved such success.

Its focus on online-driven market research has turned the industry on its head, with the methodology behind YouGov polls turning up consistently more accurate results than their traditional face-to-face and telephone rivals. Just recently Ken Livingston’s team issued a formal complaint against the company after it repeatedly predicted a Boris Johnson mayoral win when other panels were touting Livingstone as the winner. He publicly questioned the validity of an online poll calling YouGov’s results ‘implausible’.

‘The elegance of what happened was that not only were we proved to be spot on but what Ken’s actions have allowed is a debate to take place on the various methodologies,’ Zahawi says. ‘Ken, I guess, did us a favour by giving us the oxygen of publicity.’

Escaping obsession

Traditional methods of data collection via telephone and face-to-face interviews are too obsessed with trying to replicate a random sample, Zahawi says. ‘People self deselect. There is no such thing as a random sample because you will scan your numbers or I will say no because I’m having tea with my kids in the evening, so you are taking yourself out of the pool of respondents,’ he argues.

YouGov’s online method allows people to respond when they like, take a more considered approach to their answer and offers total privacy, without the need to tell a real person an opinion that may be contentious. Zahawi says this generates superior results because only people who want to answer the questions are targeted.

The company, along with the industry has rapidly evolved over the past few years. ‘When we first launched the business, essentially all we were doing was taking a clip board, paper and pen study and interpreting it on to a different technology platform,’ he says, but nowadays being able to focus the questions asked and interpret the results is a key component of the business.

It is now taking its methodology into the boardroom, with its brandindex technology able to track the sentiment of over 1000 brands in several different countries in an instant.

‘If accuracy really matters in politics it matters even more in business,’ he argues saying that multi- million-pound contracts and launches can rest on the quality of data a company is getting about a product. ‘A chief executive’s life today is like a constant campaign, you literally live in constant campaign mode to grow your business, enhance it, deliver a better product and deliver a better brand than everything else around you.’ The key to achieving this, he says, will be chief executives’ abilities to obtain real-time data on what they are selling.

‘We argue that there is no reason why one day, and we hope that day will be delivered by YouGov, that you will get your primary data, like this. Not just on brands but on all other aspects of the world, such as economic data. You should be able to look at economic confidence in every territory, as live data. You should be able to look at Coca Cola versus Pepsi in a region of India for yesterday’s date,’ he says. ‘That’s what we absolutely buy into, and what we are pioneering is that ability to deliver a continuous flow of data on a constant basis.’

Into the US

The company is expanding rapidly and, with its acquisition of Polimetrix in the US, now has the clout to do the same for the US elections as it has done over here. Zahawi says the US business is similar to how the UK business was five years ago, but success in predicting the outcome of the primaries and final election results could propel the company into the US consciousness, paving the way for further growth. ‘Ultimately our dream is to be the infrastructure of opinion, whether it be on political and social issues or market research issues,’ Zahawi says. A tall order indeed, but not an insurmountable one, you feel – with Zahawi at the helm.

30 second YouGov

• Founded in 2001 by Nadhim Zahawi and Stephan Shakespeare, both former London Mayor campaigners for Jeffrey Archer in 2000

• Pioneered market research collection using the internet

• Company is worth £145 million

• Profits predicted to hit almost £9 million this year, up over 50%

• Operations span Europe, the US and Middle East

• Was named among Deloitte’s Technology Fast 50 last year

• Beat Primark to win 2007 Business XL magazine’s Brand of the Year award

CHARTIST

An upper hand gets a grip

Bullish sentiment boosts prospects of a rise in the 350 media index

by Simon Griffin

The FTSE 350 media index peaked at 10,038 in March 2000. The subsequent wider market sell-off translated into a loss of over 78% of the sector’s value to a low of 2,194 in mid-March 2003. As the market in general recovered, the sector rose by 110% to 4,624 in early June last year, marginally outperforming the wider FTSE 100. This largely occurred in the first year of recovery and subsequently the sector generally lagged. Over the past year the index has fallen to 3,289, a decline of 29%.

This has taken the index back to heavily test congestive support near 3,450 and the 50% retracement of the 2003-2007 rise, sited at 3,427. Evident bullish momentum divergence helped these levels and early May saw an upside move through the bear trendline, drawn off the descending peaks in October, November and December and a move above its 50-day average, which has largely capped corrective bear trend upmoves previously.

WPP Group (WPP)

BUY - 634p

TARGET - 738p

STOP LOSS - 600p

The shares of the biggest player (at just under £7.5 billion) in the media agency sub-sector stood at £13.23 in March 2000, before declining to a March 2003 low of 320p. Their more recent peak of 787p in March 2007 represented almost a 30% outperformance against the FTSE 100, with the latter three years dominated by a bull channel pattern giving a guide to technically focused traders. Then last autumn the channel baseline failed to support and the shares weakened to test the parallel channel width extension line with a low of 555p late in January.

Nevertheless the combination of bullish momentum should have given the brave a signal to use the weakness as a buying opportunity. Subsequently we have seen the market bounce off resistance close to 640p with successive generated down moves being less than before. This has translated into what might be interpreted as a complex triple bottom pattern. Now the shares are pressuring resistance from the nearby key 200-day average and the year old bear trend line. Provided the inherent strength can push above 650p, there seems good reason to expect the shares to press on to a re-test of the old channel base line currently at 728p but likely to be nearer to 738p by then.

Research Now (RNOW)

BUY - 318p

TARGET - 585p

STOP LOSS - 283p

An explosive upside breakout above 230p in November 2006 led to the shares more than doubling. Then last July they nearly returned to go after a profits warning. But the shallower bull trendline drawn off May and August 2006 lows has since supported. A bit of a trading range has developed over the past ten months with support near 248p and resistance at 330p.

A descending bear trendline, drawn from the February 2007 high, has also influenced the extent of upmoves. This could be combined with that bull trendline and makes possible a very large symmetrical triangle, a bullish breakout from which we have just seen on super high volume, and it would lead to a view that the shares have could rise to 585p medium term. The cautious will want the shares close above resistance at 338p and the current overbought nature of momentum might yet generate short-term corrections back toward 285p, but with key moving averages crossing positively last week, you might risk missing the boat.

Now there seem good technical reasons to expect the index to attempt a test of the descending 200-day average near 3,800, with the bear trendline from June, July and October, set to influence near 3,870. Above these levels and provided the wider market does not crack, a move to 4,118 would see a test of 61.8% retracement on the June-March sell-off. Only a rotation below 3,430 would remove the bullish sentiment.