US tariffs appear likely to dampen Australian GDP growth over the next few years, but the magnitude is anyone’s guess.

The quantum and implementation timing of tariffs is in flux, and any mitigating monetary or fiscal response is difficult to predict. As such, economic uncertainty reigns.

Why this matters for media companies

Advertising accounts for 60%-90% of the revenue of ANZ media groups under our coverage. The two key drivers of advertising spending are consumer sentiment and corporate confidence, and the current jittery macroeconomic environment is conducive to neither.

Take metropolitan TV advertising. It suffers acute downturns in times of turmoil. It is set to drop 10% a year on average from fiscal 2023-25 due to weak sentiment and structural pressures. It fell 14% in the 2020 pandemic, 9% in the 2009 credit crisis, and many times in between whenever the economy shivered.

Critically, we see a lower probability of a marked recovery from any tariff-induced headwinds. Allocation of marketing budgets to traditional advertising is susceptible to a permanent step-down when the tariff dust clears, given stiff competition from new media.

Fair Value cuts for ASX media names

We cut our fair value estimates by 5% to AUD 2.70 for Nine Entertainment (ASX: NEC), 19% to AUD 0.30 for Seven West Media (ASX: SWM), and 10% to AUD 0.90 for Southern Cross (ASX: SXL)—all no-moat-rated. This reflects reductions to our prior advertising revenue recovery assumptions.

For no-moat oOh media (ASX: OML), the cut in our fair value estimate is modest, by 5% to AUD 1.55. Outdoor advertising doesn’t suffer from the same structural headwinds hitting traditional TV, radio, and newspapers. Indeed, the market has grown at an 11% CAGR since 2022, defying the wider advertising market.

Still value to be found

Shares in Nine, Seven, and Southern Cross remain below their revised intrinsic values. Trading at an average 3 times our midcycle EBITDA forecasts, expectations are already in the dumps. Any signs of revenue stabilization or positive progress on cost-outs are likely to resurrect the shares.

For Nine Entertainment, we estimate traditional advertising accounts for around 50% of group revenue, excluding Domain, in which Nine holds a 60% stake. Cuts to recovery assumptions in this category, encompassing mostly linear TV advertising but also newspaper and radio, result in an average 5% reduction to our group EBITDA forecasts.

For Seven West Media, we estimate traditional advertising accounts for around 80% of group revenue, mostly in TV advertising. The negative leverage of this traditional advertising revenue to the uncertain macroeconomic backdrop necessitates an average 16% percentage reduction to our group earnings projections.

For Southern Cross Media, we estimate traditional advertising accounts for almost 90% of group revenue, even without the now-divested regional TV operations. Cuts to recovery assumptions for this revenue result in an average 12% reduction to our group EBITDA forecasts.

Cost reductions are in full swing for all these three media companies. Unfortunately, more may be needed to combat the likely revenue damage from precarious marketer confidence and consumer sentiment.

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Terms used in this article

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