It is depressing how much “editorial” is disguised advertising these days. From paid content to in-broadcast promotions, more content is sponsored in this challenging media environment.
Newspapers are devoting space to special reports designed to lure advertisers or other “sponsored content”. Many websites include advertiser-supplied content, preferably labelled so that readers can tell the difference between journalism and content marketing.
Some TV news bulletins have more advertising within the program than ever. An online stockbroking firm, for example, pays to deliver the nightly finance report and promote the firm. The regular traffic bulletin is outsourced to an advertising firm.
Who can blame media companies for seeking different revenue sources as traditional advertising dries up? Or advertisers for wanting different marketing formats that help brands stand out? Right or wrong, the line between advertising and editorial continues to blur.
GTN Limited benefits from this trend. The Sydney-based company provides traffic and other information-reporting services for radio and TV networks. Chances are you’ve heard one of its traffic reports on a radio news bulletin and the advertising that accompanies it.
It’s a clever advertising platform. GTN solves a problem for radio and TV networks that do not want to pay for costly helicopters to cover a city’s traffic jams. And for advertisers that want to reach a mass market of consumers through short, sharp messages.
As GTN signs up more media outlets in Australia, Canada, the United Kingdom, the United States and Brazil, it creates a barrier to entry for rivals. Advertisers that want their message on a radio or TV news bulletin, but don’t want to pay for a traditional spot, have to deal with GTN.
The market was aware of GTN’s potential when it listed on ASX through a $187-million Initial Public Offering (IPO) in June 2016. The $1.90 issued shares doubled within five months of listing, such was the interest in GTN’s market position and offshore growth prospects.
As often happens with hot IPOs, reality set in a year after listing. GTN fell from $3.91 in November 2016 to $2.02 in June 2017. There was no fundamental news to justify such a fall; GTN had simply run too fast amid the hype, and looked pricey.
The February 2017 release of shares subject to voluntary escrow (meaning early investors could sell) and the US$15-million acquisition of Radiate Media in the US might have spooked investors. The sell-off in high-priced small-cap stocks in the fourth quarter of 2016 also weighed on the company.
GTN has started to recover from those lows. The stock leapt to $2.45 this month after a promising FY17 earnings result that justified the market’s early interest.
Adjusted underlying earnings (EBITDA) for FY17 of $28.9 million beat the prospectus forecast by 7 per cent. After-tax net profit of $12.3 million was 26 per cent up on prospectus. It’s always a good sign when IPOs beat their prospectus forecast in a sustainable fashion.
For me, the key slide in GTN’s results presentation is its global advertising platform (slide five). The company’s Australian, Canadian, Brazilian and UK businesses each exceeded prospectus forecasts in local currency terms (the UK was down after adjusting for Brexit-related currency impacts). The US business contributed $35.1 million in revenue in seven months.
Australia accounted for just under half of GTN’s FY17 revenue. That proportion will fall as its US operation grows – the US is the world’s largest radio advertising market – and as the South American operation expands quickly off a low base.
GTN looks like an exception in a long list of Australian small-cap companies that have failed with aggressive international expansion strategies. The US acquisition – the key to GTN’s next sharemarket re-rating – has started well and met the company’s expectations.
I like that GTN is growing revenue in a soft advertising market. That suggests a resilient business model and a service that is not confronting high client resistance. Advertisers clearly see the benefit in short sponsorship messages within radio and TV broadcasts.
GTN’s main challenge is to recruit and train enough sales managers in offshore markets to capitalise on the opportunity. The company is so far progressing well on this front.
The US acquisition changes the reward/risk profile of GTN in FY18. Investors will want to see more evidence of traction in the US as GTN’s investment there ramps up. This market has low tolerance for small caps that kill their momentum with failed offshore expansion.
But it’s hard to fault GTN’s progress. The company is slightly outperforming investor expectations in a weak advertising market and against unfavourable currency movements. Consistent progress across its international divisions is a good sign.
Longer term, expect radio and TV bulletins to outsource more information services to specialist providers such as GTN. Greater interest in traffic bulletins, and associated ratings, is likely as cities become more congested and residents battle daily gridlock.
A handful of broking firms that cover GTN have an average price target of $3.78.
I’m not as bullish, but expect GTN to head towards $3 in the next 12 months as the market becomes more comfortable with the company’s US progress. There might be some resistance around $2.85 based on GTN’s limited share-price history.
On balance, GTN looks like one of this market’s higher-quality emerging companies with genuine offshore potential. As a small-cap stock, it suits experienced investors comfortable with higher risk.
Chart 1: GTNSource: The Bull
• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at September 6, 2017.