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1. Investment case
In the wake of the evident downturn in the economic outlook in Spain
(particularly in terms of household spending), our view and valuation of these
three quoted TV companies has to be revised. This is even more necessary given
their recent negative market performance. From previous highs, A3TV has
fallen by –63.2% and TL5 by –38.8%, compared with a decline of –25.4% in the
DJ Stoxx Media and of –12.7% in the Ibex35.The economic outlook and
audience fragmentation are both responsible for this performance.
Following announcement of the 1Q employment figures our economic team in
Spain revised its forecast for household spending, the variable having the
greatest correlation with advertising expenditure: +2.1% in 2008E and +1.8% in
2009E, from 2.8% in 2007 and the average over 2002–2007 of 3.6%. This
obliges us to adjust our estimates for the advertising market downwards:
+2.5% in 2008E and –3.0% in 2009E. In this scenario we maintain the
weighting of television in the media mix: 43.6% of total adv expenditure.
On top of the economic woes, the industry is also affected by the ongoing effect
of audience fragmentation. The three general audience channels (A3TV, TL5
and TVE1) dropped 8.3 percentage points between 2005 and 2007, ending last
year with a combined audience share of 54.9%. Between now and 2010 we
expect them to lose another 5.4 points to control just half (49.5%) of the TV
audience at the start of that year. In this scenario we expect Telecinco to
maintain the leading position, while for Antena 3 we predict that the worst phase
of loss of audience is now over. On the plus side, we think that Cuatro has a
clear opportunity to move up the audience ratings.
In this scenario of obvious pressure on revenues for both A3TV and TL5, the
key factor for both companies will be their ability to manage costs. Of the two
Telecinco has the more flexible cost structure. In addition, it is the market
leader, allowing it greater flexibility in adjusting its prices.
We have reduced our estimates and valuations for all three companies. In
Antena 3 (T.P. of EUR 9.00), we predict an EPS08 of EUR 0.82E (previously
EUR 1.02) and an EPS09 of EUR 0.68E (previously EUR 1.07). In the case of
Sogecable (T.P. of EUR 31.20), we expect an EPS08 of EUR 0.70E (previously
EUR 0.98) and an EPS09 of EUR 1.29 (formerly EUR 1.44). Lastly, in the case
of Telecinco (T.P. of EUR 16.50), we predict an EPS08 of EUR 1.26
(previously EUR 1.40) and an EPS09 of EUR 1.06E (formerly EUR 1.42).
The above scenario of estimates and valuations prompts us to raise our rating of
Antena 3 from Reduce to Hold, given that at these prices we see no rationale for
being short on the stock. The driver to be long on A3TV rests on the expected
recovery in its afternoon audience. In the case of Sogecable the lower upside
persuades us to reduce our rating from Buy to Hold. With respect to Prisa’s bid
for the company, although we do not expect Telefónica to accept it, our
recommendation for minority shareholders is accept the bid. Turning lastly to
Telecinco, we stand by our Buy rating as this stock remains our favourite on
three grounds: 1) market leadership; 2) greater cost flexibility; and 3) valuation
attractiveness (TL5 as a TV channel is cheaper than Antena 3). However,
regardless of these individual ratings, given the economic outlook our rating for
the Spanish TV sector as a whole is Underweight.
In the short term we note that A3TV is due to pay a dividend of EUR 0.40 per
share and announce its 1Q results on 24 April. On 7 May TL5 will pay a
dividend of EUR 1.30 per share and present its results the day after, 8 May. All
three companies will be affected by the early Easter and audience fragmentation,
so we predict weak 1Q08 results from both TL5 (EBITDA -4.7%E) and,
particularly, A3TV (EBITDA –16.4%E). As for SGC, the significant news
centres on the end of the subscription period of the Prisa bid: 9 May.
Contents
1. Investment case 3
2. Valuation 4
2.1. The discount vs the European industry still stands 4
2.2. Telecinco’s network is trading in line with Antena 3’s network 5
2.3. Sensitivity to different economic scenarios 5
3. The trough of the advertising cycle is upon us. How deep will it prove
to be? 7
3.1. We expect the trend of the media mix to remain firm 8
4. Continuing fragmentation and deeper focus on costs 10
4.1. Fragmentation continues 10
4.2. Costs are the key 11
5. Fragmentation will still be a factor in the 1Q08 results 12
6. The companies 13
Antena 3 13
Sogecable 17
Telecinco 21
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