JPM European Media Internet 2019 Outlook_watermark

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

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Daniel Kerven	Europe Equity Research
(44-20) 7134-3057	10 December 2018
daniel [e-mail]

Figure 21: Revenue sensitivity to a 1% change in GDP

			2.4%
		2.0%	2.1%
	1.8%		1.7%

1.2%

0.9%

Prof.	Content	Internet	B'dcasters	Ad	Outdoor	Media sector
Publishers	owners			Agencies

Source: J P. Morgan estimates.

Operational gearing and impact on earnings

The sensitivity of revenues is only half the story – as important is the “operational gearing” or the impact of a change of revenue on earnings. This will depend on the incremental margin or “drop through” from revenue changes (the higher the drop through then the higher the operational gearing), the EBIT margin (the lower the margin the higher the gearing” and financial leverage (the higher the leverage the greater the operational gearing).

The chart shows the operational gearing by sub-sector. Provided agencies budget for the right revenue environment, they typically have low operational gearing as staff are the most significant cost and are closely tied to revenues / activity. Broadcasters can defer the usage / amortisation of more expensive programming costs (and then adjust their rights investment / commissioning, production spend in the medium term), advertising revenues is high margin resulting in high operational gearing. We see the highest operational gearing for the outdoor sector (a +1% change in revenues leads to a +8.2% swing on earnings.

Figure 22: Operational gearing by sub-sector (Impact of 1% change in revenues on EPS)

8.2%

	2.9%	3.2%	3.5%	3.7%	3.3%
2.6%

Ad	Prof.	Content	Internet	B'dcasters	Outdoor	Media sector
Agencies	Publishers	owners

Source: J P. Morgan estimates.

“Black Sky” - We stress test our coverage universe for a macro shock - Outdoor has >40% earnings risk in case of a 200bps slowdown in Global GDP.

We stress-test our coverage universe for a -200bps reduction in GDP. We calculate that earnings in the Outdoor space can face a >40% decline in earnings while the decline in other sub sectors would be more moderate (see below).

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