UK Media Industry Landscape

The Media industry is an integral part of any economy. Some of the broader segments in the media industry include movies, TV shows, radio shows, news, music, newspapers, magazines, and books. One of the largest additional segments of this industry is entertainment.  The most prominent players in the industry include Time Warner, Sony, Walt Disney, Nintendo, and Viacom. Other segments include professional, educational, and training media, along with business-to-business communications.

According to recently available data from the industry experts, the global entertainment and media revenue is expected to witness a decline of around 6.0% during FY20 as compared to FY19 after demonstrating a decent growth of about 4.7% in 2019. The advertising sector is expected to show the slowest recovery and would not be able to reach pre-pandemic levels until 2022. Furthermore, the UK entertainment & media industry would be expected to reduce by 6.7% during 2020 due to the economic recession triggered by Covid-19 related lockdowns. Meanwhile, the pandemic had adversely impacted the media industry, still, there were several sub-industries such as over-the-top (OTT), video services, video gaming, music, and podcasts, which capitalize on the opportunities of increased self-isolation and social distancing.

Moreover, the pandemic had also created the possibility of new revenue models and new ways to provide services to the customers. The industry had witnessed recent key developments as the live music, and B2B events have gone virtual, some sports broadcasts became free to air, and many more. In a nutshell, the UK media industry of 2020 is much better positioned to tackle several operational headwinds presented by the Covid-19 pandemic than it was at the beginning of the century. 

Growth catalysts in the Media Sector

(Source: Kalkine Research)

Risk Exposures to the Media Sector

• High Cost of Subscription – The hefty cost of subscription can hamper the growth trajectory, while piracy is already hindering the market growth.
• Covid-19 Pandemic – The social distancing and travel restrictions imposed by the pandemic has led to the cancellation of many events, seminars, exhibitions, product launches and trade shows. It has significantly impacted the media market. The paused filming amid the Covid-19 scenario can affect the production of new content as well.
• 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. 

SWOT Analysis

Benchmark Index Performance

Based on the last ten years performance, the FTSE All-Share Media index has outperformed the FTSE 100 index and FTSE 250 index. Furthermore, the FTSE All-Share Media index generated a return of about 101.88%; however, the FTSE 100 generated a return of around 18.44%, and FTSE 250 produced a return of around 86.75%. 

Figure 1: Ten Year Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

Media Sector Outlook

The media industry is expected to show agility and rebound robustly after the reopening of the UK economy. With reference to PWC’s 2020 Global Entertainment & Media (E&M) Outlook, the E&M revenues in the UK would grow at a CAGR of 2.8% and reach £79.8 billion by 2024. The over-the-top segment thrived during 2020 and captured the audience of cinema and traditional TV. Moreover, the subscription video-on-demand (SVOD) revenue was expected to cross the box office in 2020 and would be estimated to surge at a rapid rate in the next four years. It is expected to reach more than twice the size of the box office by 2024. The increasing consumer spending on internet access will drive the market forward as data consumption is anticipated to grow by 22% year-on-year until 2022. Overall, data consumption would be the key driver of strong growth, and rising usage via smartphone would see the largest jump, especially as 5G would be adopted across the globe.

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

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

A. Pearson PLC (LON: PSON)

(Recommendation: Buy, Potential Upside: 20.91%, Market Capitalization: GBP 6.44 billion)

Pearson PLC (LON: PSON) is an FTSE 100 index listed Company, which provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools. PSON has a total of five business divisions: Virtual Learning, Higher Education, English Language Learning, Workforce Skills, and Assessment & Qualifications.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.91% over the closing price of GBX 852.00 (as of 18 May 2021).

B. 4imprint Group PLC (LON: FOUR)

(Recommendation: Speculative Buy, Potential Upside: 13.48%, Market Capitalization: GBP 712.11 million)

4imprint Group PLC (LON: FOUR) is a Media Company, which is engaged in the business of promoting products using direct marketing techniques in the region of Ireland, the UK, and North America.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 13.48% over the closing price of GBX 2,545.00 (as on 18 May 2021). The next important support level is at GBX 2,316.70.

C. ITV PLC (LON: ITV)

(Recommendation: Hold, Potential Upside: 8.52%, Market Capitalization: GBP 5.19 billion)

ITV PLC (LON: ITV) is an IPB (integrated producer broadcaster) company. The Company's operations are differentiated in two segments: Broadcast & Online and ITV Studios.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 8.52% over the closing price of GBX 129.05 (as on 18 May 2021).

*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 19 May 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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