The media sector has been a difficult place to invest in over the past five years. As the chart below shows, companies like Fairfax Media Limited (ASX: FXJ), Seven West Media Ltd (ASX: SWM), APN News and Media Limited (ASX:APN) and Ten Network Holdings Limited (ASX: TEN) have substantially underperformed the S&P/ASX 200 (ASX:XJO) (Index:^AXJO) over that time.
Source: Google Finance
Although the valuations for many of these companies may look attractive at the moment, there are still many challenges facing the traditional media sector.
Fairfax, for example, is still struggling to grow its revenues in the face of increased competition from digital and non-traditional news providers. In its latest market update, Fairfax reported overall group revenue growth of less than 1%. Investors have also been warned to expect costs to increase at it tries to take advantage of growth opportunities.
Although the Domain listing business is growing strongly, total publishing revenues are down 7% and it doesn't appear this trend will be reversed anytime soon as more people get their news from online sources. Fairfax was slow to adopt digital technology and has been struggling to compete with news outlets that provide fast and free content.
The Domain business has been rejuvenated over the past year and it is now estimated to be worth about half of Faifax's total enterprise value. While the results have been pleasing so far, management should expect a competitive response from market dominator REA Group Limited (ASX: REA).
Although traditional media companies may be facing significant headwinds, there are two companies that I think will be able to prosper in the new digital media industry.
iSentia Group Ltd (ASX: ISD) is the clear market leader in the fast growing media monitoring and intelligence-gathering industy in Asia. It provides a broad range of media services and analytical data to over 5,000 clients including some of the world's best known brands.
iSentia operates a business model that is light on capital, high in cash generation and diversified among a range of sectors. It also has developed competitive advantages through significant scale and proprietary technology that will make it hard for new entrants to enter the market.
The major issue facing investors is the opportunity to buy shares at an attractive valuation. The shares have rallied strongly after the release of excellent half year results and are currently trading on a price-to-earnings (P/E) ratio of around 25. Management have outlined further opportunities for growth and the market has priced iSentia accordingly. While I wouldn't be prepared to buy shares at the current valuation, if the share price falls below $3.00, I would be inclined to take that as a buying opportunity.
The second company that I think also has a bright future is oOh!Media Ltd (ASX: OML). It has been listed for just over six months but has already gained over 34% in that time.
oOh!Media is Australia's leading out of home media company and provides advertisers the opportunity to connect with consumers while they are out and about. The out of home media sector has been growing strongly and has been increasing its share of the total advertising market spend.
Rather than focusing on traditional advertising outlets like television and newspapers, oOh!Media reaches consumers through four distinct areas – road and billboards, retail shopping, airports and social environments like pubs, clubs and universities. It is also developing interactive advertising that creates a more engaging experience for consumers and better outcomes for advertisers.
Pleasingly for shareholders, oOh!Media's first result as a public company exceeded its prospectus forecast and management has also recently re-confirmed it is on track to deliver against 2015 financial forecasts. Adjusted EPS is forecast to be 14.8 cents and at the current share price results in a P/E ratio of around 17. This seems reasonable value considering the growth opportunities available to oOh!Media as the leader in a market that is predicted to further increase its share of advertising revenues.
The major issue facing investors wanting to buy shares in oOh!Media is the lack of liquidity. Volumes are generally low and as a result, the share price can be quite volatile. If the company gets more exposure from the general market, this stock could definitely continue to be an out-performer in the media sector.
Are you looking for two small caps that have even better growth potential than iSentia and oOhMedia!?
