1. UK Advertising Sector Market Landscape

The advertising sector is a global industry that includes public relations, marketing companies, media services and advertising agencies. The global ad spend is expected to decline by around 11% year on year to USD 552 billion in 2020, excluding the political campaign ad spend. The advertising spend will fall due to cut in the advertisement budget by automobile, retail and travel & tourism sector. Media owners will witness a fall in revenue of about USD 63 billion, whereas at the same time online video is the only format whose growth estimate is positive and it is expected to lead growth in 2021. As per warc, the ad investment is expected to increase by around 6.7% in 2021. The Covid-19 had a significant impact on the UK economy, which also impacted the advertising revenue. In Q1 2020, the total ad spends increased by 2.9% year on year to reach £6.4 billion. On the other side, the ad spend fell by 33.8% year on year in Q2 2020 following the impact of covid-19. The ad spends in 2021 is expected to grow by around 14.4% year on year. 

Key Trends in the Advertising Sector

• Reflection & Re-evaluation – The advertising sector has been hard hit by the pandemic, and the industry would take a step to re-evaluate their strategies. The lower spending by the consumers and changing ways to cater the clients have set cautious optimism, and thus, many companies will reassess their course of action and the risks related to it.
• Programmatic Advertising Delivered Through Artificial Intelligence – This will be useful in automating the ad purchases ,and it will help brands to target even more specific audiences. As the medium to reach the customers is increasing, it is becoming difficult to manage, and thus platforms using AI will solve this problem as they use targeting signals and real-time adaptation for individual ads or campaigns via any given channel.
• Video Marketing – This is not something new, but with the propulsion of smartphones and the internet, it is expected to be one of the biggest advertising platforms in 2021. The innovation in video marketing is evolving and going live & streaming online is one such example. The customers are becoming less receptive to long commercials, and thus businesses are exploring advertisements through this type. The platforms such as Tik Tok and Instagram Reels are already very popular in this domain.

Risk Exposures to the Advertising Sector

• Covid-19 Pandemic – It has adversely affected the sector, and it will continue to affect the business, revenue and prospects. Apart from the loss of new business, it has also impacted the existing business following which the margins of the industry have declined.
• Retention of Clients – The industry is highly competitive, and client retention is of utmost importance. The industry is undergoing change, and thus, loss of client or reduction in client spending can have a material impact on the business and the margins.
• Changing Culture and Market Conditions – If the industry fails to attract, develop and retain key creative commercial and management talent, it could lose business. In the long-term, it needs to enhance the skills of its people and also needs to constantly innovate.

Benchmark Index Performance

Based on the six-month performance, the FTSE All-Share Media index has generated a positive return of around +9.77% and has outperformed the FTSE 100 with a price return of nearly +4.97%. However, it has underperformed against FTSE 250 index and FTSE AIM All-Share index with a price return of around +18.20%, and +30.38%, respectively.

Fig 2: Six Months Benchmark Index Performance

 (Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Advertising Sector Outlook

The UK government has taken various efforts to boost the consumer spending following which the outlook for 2020 was improved by 1.1% from the previous decline of -16.7% to -15.6%. The second wave of coronavirus and the increasing level of unemployment is likely to weigh down on the ad spend in 2020. However, the ad spend is expected to bounce back in 2021, and it is expected to grow by 14.4%. The ad spends in 2021 would not be sufficient to cover up the losses made in 2020. The Christmas advertising is expected to boost the ad spend in Q4 20, but still, it is estimated to be down by around 10.5% year on year that would be close to £724 million less as compared to the same period last year.

On the onset of the pandemic, the segment such as cinema halls suffered the most as they were immediately shut down, whereas the other segments lost with the falling consumer contact during the lockdown. The digital media advertising was the winner among the other segments. The lockdown stressed on the advertising sector as the businesses refrained from spending.

The recovery of the sector is not expected to be linear, and the different segments of the industry will bounce back at a varied speed. The advertising tax credit and the skilled programme will support the jobs and the sector, and the government needs to work in collaboration with the industry.

The cinema segment ad spend likely to grow by 138.3% as the theatres reopen and the postponed films are released. The other media segments, such as home and magazine brands, are expected to grow by 57.1% and 18.8%, respectively year on year. The online format of the regional news brands is supporting the business, and it is estimated to grow by 16.2% year on year in 2021. The advertising industry is not expected to cover up the losses made in 2020 before 2022 as the rising unemployment, exit from the European Union and erratic lockdown measures would affect the recovery.

2. Investment analysis and stocks under discussion (PSON, ITV, FOUR and NFC)

After gaining insights into the advertising sector, we would look at the business model of four players listed on the London Stock Exchange.

A. Pearson PLC (LON: PSON)

(Recommendation: Buy, Potential Upside: 8.37%, Market Capitalization: GBP 5.14 billion)

Pearson is a UK based company having its focus in the areas of educational publishing and assessment services. The Company caters to the needs of B2B and B2C clients covering schools, colleges, corporations and students. Pearson is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~8.37% over the closing price of GBX 671.80 (as on 5 January 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

B. ITV PLC (LON: ITV)

(Recommendation: Hold, Potential Upside: 9.54%, Market Capitalization: GBP 4.30 billion)

ITV is a UK-based company which is an integrated producer broadcaster (IPB), and it is engaged towards the creation and distribution of content on multiple platforms across the globe. ITV is listed on the FTSE-250 index. 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~9.54% over the closing price of GBX 105.60 (as on 5 January 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

C. 4imprint Group PLC (LON: FOUR)

(Recommendation: Speculative Buy, Potential Upside: 20.56%, Market Capitalization: GBP 696.09 million)

4imprint Group is a UK based media company which is engaged in the business of promotion of products using digital marketing techniques having its operations in Ireland, UK and North America. The Company is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~20.56% over the closing price of GBX 2,470.00 (as on 5 January 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

D. Next Fifteen Communications Group PLC (LON: NFC)

(Recommendation: Hold, Potential Upside: 7.87%, Market Capitalization: GBP 518.54 million)

Next Fifteen Communications Group is a UK based company which is engaged in the communications business. The Company encapsulates several business segments like pubic relation (PR), marketing, consumer technology, market research, public affairs etc. The Company is listed on the FTSE AIM UK 50 Index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~7.87% over the closing price of GBX 568.00 (as on 5 January 2021).

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy/Speculative Buy" recommendation is also valid for the current price as covered in the report as on 6 January 2021.

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