Analysts at investment bank Morgan Stanley say Australia is in an advertising recession.
Morgan Stanley, after discussions with industry contacts, has cut adspend estimates for calendar year 2019 to flat growth of about +0.4%, down from earlier forecasts of 2.2%.
"We think the Australian ad market is currently in the midst of a shallow advertising recession," write analysts Andrew McLeod, Elise Kennedy and Joseph Michael in a note to clients.
"The last negative ad year was after the GFC in CY2009, when total adspend ... declined by an estimated 8% for the full twelve months.
"Since then, there were nine consecutive years of positive year on year growth in total adspend from CY2009-18. But that unbroken trend has come to an end."
The analysts are advising clients to be underweight most traditional media on the ASX -- television, radio and print. The one standout is Nine which has significant digital investments, including Stan and Domain.
Traditional media stocks, which are structurally challenged from digital competitors, now face cyclical headwinds from a slowing advertising market, they say.
Morgan Stanley’s estimate of 0.4% growth for 2019 is more pessimistic than Zenith’s latest forecast of 2.8%.
Natasha Pelly, Senior Investment Analyst, Zenith: "Our estimate recognises the severity of Metro TV declines in Q4 CY18 and that the likelihood of two years of heavy decline is slim. However, the main difference is the expected level of growth in digital media. Though we appreciate the pace of growth has slowed, we still maintain +7.4% growth is highly plausible, particularly given the recent arrival and expansion of new social platforms like TikTok and Pinterest.”
This month's round of financial result announcements has seen a string of Australian media companies talk of a "challenging", "soft" or "weak" advertising market.
Out of home player oOh!media, which has been a beacon of growth in the industry, posted a profit downgrade following a sharp and unexpected fall in bookings and a "significant decline in overall media advertising spend".
Seven West Media posted a loss and talked of a "softer advertising market", Nine "a tough ad market" and Southern Cross said "local advertising slowed". And today WPP AUNZ posted a $253.55 million loss for the half year to June.
Morgan Stanley estimates the total ad market is down 4% to 6% in the year to the end of June this year. Its forecast for calendar year 2020 is for 1.2% growth to $16.8 billion, and 2.5% in the following year.
"At the half way mark of the year, all media platforms are pacing below our original growth expectations, as set out at the start of this year," the analysts say.
Morgan Stanley raised the prospect of an advertising recession in December 2018 and again in January this year.
"It was a non-consensus view at the time but, based on the latest datapoints, it looks to be effectively playing out," they say.
According to SMI (Standard Media Index) data, measuring media agency business, there have been seen 11 negative months in a row.
"So if economists define two consecutive quarters of negative growth as a recession … well, we're technically experiencing one in the world of advertising/marketing right now," the analysts write.
"To be clear, thus far, it's not a major double digit negative ad recession such as experienced after the GFC (2009) or dot-com crash (2001), but a recession nonetheless."
The analysts do see some improvement later in the year but the third quarter will be negative.
SMI preliminary data for July shows continuing weakness: Metro TV -11.4%, Metro Radio -9.1%, Outdoor -16.5%.
The analysts say the current market reflects continuing caution in retail, auto and banks/insurance adspend, recent weak macro economic data and continuing cautious ad industry/media buyer feedback.
The companies Morgan Stanley has rated as Underweight are: HT&E Limited, News Corp, Prime Media, Sky Network in NZ, Seven West Media, and Southern Cross Media.
"This reflects both negative structural changes and cyclical revenue/earnings risks," says the analysts.
The only traditional media company Morgan Stanley rates as Overweight is Nine Entertainment. This media company also hurts from a softer advertising market but, say the analysts, could benefit from a potential lift in digital asset values including Stan and Domain.
Here's how Morgan Stanley sees advertising:
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