Publishers will recover first, say City analysts

Analysts have warned that the next 12 months will be a difficult period for journalists – with budget cuts and job losses – but some believe an end to the downturn could be in sight towards the end of 2009.

Alex de Groote, an analyst at Panmure Gordon, said media companies were typically the first to feel the effects of an economic slump – and were the first to recover when confidence came back.

‘The prognosis for revenues in 2009 is the worst it’s been since 2002,’he said.

‘Media companies are budgeting very cautiously for next year. When they say costs [will be cut], it’ll be headcount-related.”

Richard Hitchcock, a media analyst at Numis Securities, said the City was genuinely concerned that a number of publishers risked breaking their banking agreements if advertising revenues continued to fall.

‘The market has been worried that if we have a sustained advertising downturn and a series of profit downgrades, would they then start to come close to breaching their banking covenants?’he asked.

‘I don’t think any of them face any immediate, acute pressures but you could envisage a scenario when they would.”

He said that although staff costs were one of the most likely areas to be cut, print distribution was also a financial burden.

‘They have all got very tight cost bases so there’s only so much they can do in terms of restructuring,’he said.

‘We’re at the low point of the cycle. No one knows where the bottom will be but I would have thought they will recover over the next year or so.”

Coupled with the cyclical downturn in the economy is a wider, structural issue – the migration of print advertising to the web. And the City predicts that will mean newspaper publishers will have to accept reduced profit margins in the long run.

‘You’ve been hopelessly slow at adapting to the internet and so your margins are going to come under pressure,’de Groote said.

‘I’ve been in meetings with [regional newspaper executives] where they’ve publicly said that they’re not worried about [classified website] Gumtree. How naive is that?”

Hitchcock added that although online revenue was growing, it was not enough to plug the gap in the balance sheet that has resulted from declining ad revenues.

‘It’s difficult to replace circulation revenue because people won’t pay for online content. Yes, it’s growing quickly but not fast enough to offset the decline we are seeing.’

Trinity Mirror and Johnston Press are already showing signs of an improvement in their share price, indicating that the worst might have passed.

‘The only good thing is that we’re not in denial any more,’de Groote said. ‘It’s been much worse.”

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