The market has a habit of making simplistic distinctions. For example, old media is bad, new media is good. Sometimes the distinction works, but in doing so the market can miss opportunities as established companies transition to the digital economy.

Consider Fairfax Media. The market rightly obsessed about Fairfax’s exposure to newspapers and the loss of advertising revenue to Google and Facebook.  The bears argued Fairfax, in an industry in deep structural decline and facing cyclical headwinds, was terminal.

Every stock has its price. Rational observers saw the value being created in Fairfax’s property advertising operation, Domain, expected to be spun off as an ASX-listed company. Or, more recently, the emerging value in the joint-venture streaming service, Stan.

I admit to some bias towards Fairfax, having written for, or edited, its various investment publications on and off over two decades. Fairfax gave me my start as a cadet journalist almost 30 years when I helped write a gossip column on Sydney horse racing.

Sentiment aside, I see untapped value in Fairfax. Spin-offs on ASX have a history of producing solid gains and performing better than Initial Public Offerings, in aggregate. The best demergers make clear strategic sense and that is true of Domain’s separation from Fairfax.

Nine Entertainment Co. Holding also looks interesting at the current price. The bears gave up on free-to-air TV providers as Australians switched to streaming services in droves. Watching TV on demand, free of advertising (or being able to fast-forward through ads) is as disruptive as it gets for media.

Nine has many challenges. A CBS-controlled Ten Network Holdings would be a more formidable competitor to Nine and Seven West Media. Ten would be better placed to retain existing rights to ratings successes, such as Big Bash cricket, and bid for marquee events.

Nine still has Test and one-day cricket, and rugby league. And the massive TV hits, The Voice and Australian Ninja Warrior. This trend back towards large-scale “shared” TV events, such as The Voice on Sunday nights or Ninja Warrior, is reminding advertisers that only free-to-air TV can expose brands to millions of viewers in one hit through high-profile events.

At $1.37, Nine trades on a forecast Price Earnings (PE) multiple of 9.9 times and is expected to yield 7.3%, fully franked. Cash flow is solid and the balance sheet is strong, giving Nine scope to reinvest in premium content and transition faster to the digital economy.

Analyst price targets range from $1.74 to $1.93, although the consensus sample is too small to rely on. Morningstar’s $1.50 valuation, not in the consensus forecast, looks about right.  The potential for modest capital growth and decent yield should provide a double-digit total return over 12 months for experienced investors who are comfortable with higher risk.

QMS Media

Media floats from the past few years show the potential of traditional media in the digital economy. Consider out-of-home advertising, such as billboards. That looks about as old media as it gets: boring billboards on a roadside or shopping centre or airport.

Then look at the performance of oOHMedia! And APN Outdoor Group – two stocks I have written favourably on for The Switzer Super Report in the past two years. oOH has rallied from a $1.93 issue price in 2014 to $4.49. APN Outdoor is up from a $2.55 issue price that year to $4.37, despite the competition regulator rejecting its proposed merger with oOH.

Out-of-home advertising continues to increase its share of the total advertising market. Electronic billboards provide opportunities for advertisers to tailor content and they lift ad rotations and yields for billboard providers. The ability to scan a billboard ad at a bus shelter via a smartphone and access information neatly captures the intersection of old and new media.

Population growth and increasing city densification and urbanisation further strengthen the case for out-of-home advertising. As more people are stuck in cars for longer because of traffic congestion, outdoor advertising, particularly the digital kind, appeals.

The smaller QMS Media stands out. I first wrote favourably about QMS for this report in December 2015 at $1.19 a share. After hitting a 52-week high of $1.28, QMS has drifted to $1.06 despite meeting FY17 guidance and delivering a record result.

Revenue rose 51% to $168.6 million in FY17 and underlying earnings rose 40% to $37.5 million. QMS installed another 30 digital screens, bringing the total to 75 in Australia and New Zealand, ahead of schedule. But the shares edged lower in a choppy market.

I rate QMS’s strategy and performance. The company is rapidly expanding its digital footprint; is well placed in New Zealand, which lags Australia in out-of-home advertising; and its sport offering has tremendous potential as advertisers look to engage fans at large events.

Broking price targets range from $1.25 to $1.40 (again, the sample is limited). Excellent small-cap fund managers, such as Pengana Emerging Companies Fund, own QMS. I can see the appeal as digital billboard advertising continues to grow steadily this decade and next.

Chart 1: QMS

Source: ASX

GTN

Sydney-based GTN provides traffic and other information-reporting services for radio and TV networks. You have probably heard one of its traffic reports on a radio or TV news bulletin and the accompanying advertising for a gym chain or other company.

GTN solves a problem for radio and TV networks that do not want to pay for costly helicopters to provide daily traffic reports. And for advertisers that want to reach a mass market of consumers through short, sharp messages.

GTN listed on ASX through a $187-million float in June 2016. The $1.90 issued shares soared to $3.91 as market hype got ahead of reality. Then GTN slumped to a 52-week low of $2.02 before recovering to $2.77, thanks to a good earnings result that reaffirmed market confidence.

Adjusted underlying earnings (EBITDA) for FY17 of $28.9 million beat the prospectus forecast by 7%. After-tax net profit of $12.3 million was 2% up on the prospectus.

GTN appeals on four fronts. First, the business model is highly defendable. As GTN signs up more media outlets in Australia, Canada, the United Kingdom, the United States and Brazil, it creates a barrier to entry for rivals through its network.

Second, GTN is growing revenue in a soft advertising market. That suggests a resilient service that is not confronting high client resistance. Advertisers see the benefit in sponsorship messages within radio and TV traffic-report broadcasts.

Third, GTN is expanding rapidly overseas. Yes, many Australian companies have come unstuck with aggressive international expansion, but GTN has barely put a foot wrong so far.

The company’s Australian, Canadian, Brazilian and UK businesses each exceeded prospectus forecasts in local currency terms (the UK was down after adjusting for Brexit-related currency impacts). The US business contributed $35.1 million in revenue in seven months.

Australia now accounts for just under half of GTN’s FY17 revenue – a proportion that will fall as its US operation grows (the US is the world’s largest radio-advertising market) and as the South American operation expands quickly off a low base.  GTN is rapidly expanding its sales force to increase its offshore capabilities and capitalise on the opportunity.

Fourth, expect more media companies to outsource certain information services over coming years, to reduce production costs. TV and radio bulletins already have outsourced traffic-bulletins and stockmarket reports (to some big online brokers). How long until other information services are outsourced to third-party providers who sell advertising?

A handful of broking firms that cover GTN have an average price target of $3.82. I’m not as bullish, but expect it to head past $3 in the next 12 months as the market becomes more comfortable with the company’s US progress.

The well-run GTN looks like one of this market’s higher-quality emerging companies with genuine offshore potential.  As a small-cap stock, it suits experienced investors.

Source: ASX

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