27 November 2012 Asia Pacific/Australia Equity Research Macro Australian ESG/SRI Research Analysts SOCIALLY RESPONSIBLE INVESTING Sandra McCullagh 61 2 8205 4729 [email protected] ESG in the Media Sector Samantha Carleton 61 2 8205 4148 ■ Media ESG view: Our Media team has initiated coverage of the media and [email protected] Internet stocks with a comprehensive report of key issues facing the Media Lucas Goode and Internet Sectors in 2013. This report summarises the ESG issues raised 61 2 8205 4012 [email protected] in the detailed report, Australian Media and Internet Sector – Outlook 2013. ■ Few independent Boards: Not surprisingly, governance issues are the major ESG concern in this sector. Only three companies (FXJ, SGN and SXL) have a truly majority independent board with an independent chairman. ■ Remuneration lean in digital media: The divide between the remuneration for digital media stocks (CRZ, REA, TME) and traditional media stocks is clear, with lean base pays in the new media sector. We expect this will exert pressure on pay increases in the new media sector rather than pay cuts in traditional media. SEK has already moved to remove STI and almost double the CEO’s base pay to put it more in line with traditional media base pays. ■ Hurdles likely ‘out of the money’: Our analysis of the hurdles set for LTIs and our earnings forecasts reveals some anomalies. We believe APN, FXJ, SWM and TEN have EPS growth targets for the CEO’s LTI scheme (~4%- 10%) that are significantly “out of the money”. We note in most cases the CEO has more at risk with STI targets than long term targets. When we combine a review of the strategies for these companies(usually focussed of cost reduction and one year plans) we believe the emphasis and incentives are skewed to the short term rather than the long term. ■ ESG impact on target prices: Due to Governance concerns, we have factored in downsides to our target price for NWS of -10%, for SWM, TEN and REA of 5%, for APN, FXJ, PRT, TME of 3% and for SGN 2%. Figure 1: Media coverage Target ESG Analyst view Price downside MSCI IVA on rating Company (AUD) included Analyst rating rating direction APN.AX APN News & Media 0.23 -3.0% UNDERPERFORM BBB Negative CRZ.AX carsales.com.au 8.80 0.0% OUTPERFORM B Positive FXJ.AX Fairfax Media 0.40 -3.0% UNDERPERFORM BBB Positive NWS.AX News Corporation 28.24 -10.0% NEUTRAL CCC Neutral PRT.AX Prime Media Group 0.86 -3.0% NEUTRAL REA.AX REA Group 19.76 -5.0% NEUTRAL SEK.AX Seek 6.93 0.0% UNDERPERFORM A Positive SGN.AX STW Communications Group 1.24 -2.0% OUTPERFORM SWM.AX Seven West Media Ltd 1.80 -5.0% OUTPERFORM BB Neutral SXL.AX Southern Cross Media Group 1.00 0.0% UNDERPERFORM BB Neutral TEN.AX Ten Network Holdings 0.33 -5.0% NEUTRAL A Neutral TME.AX Trade Me Group Ltd 4.71 -3.0% NEUTRAL Source: MSCI IVA ratings, Company data, Credit Suisse estimates DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATIONTM Client-Driven Solutions, Insights, and Access 27 November 2012 ESG issues in media & Internet ■ Media stocks impacted by Governance issues: The Australian Media sector has historically and appears set to continue to be impacted by powerful and wealthy individuals who exert influence over the operation of the companies they have substantial interests in. ■ NWS, SWM, TEN: NWS is the most obvious example of this, while SWM has been heavily involved in corporate activity in recent years in part due to the influence of its major shareholder. We also have governance concerns around TEN regarding the influence of its Chairman and major shareholder. Valuation impact for Australian media companies ■ We have included a 10% downside ESG impact to valuation for NWS. NWS has been faced with significant governance issues; most recently the phone hacking controversy and the failed takeover of BSkyB. The considerable influence that Rupert Murdoch and the Murdoch family exert over the company through its dual class share structure raises the risk of further governance issues in the future as well as inhibiting the rights of minority shareholders. The Murdoch family holds 12% of outstanding shares yet 38% of voting rights for NWS. ■ We have included a 5% downside ESG impact to our valuation for SWM. The lack of independence on the Board and influence of Chairman and major shareholder Kerry Stokes increases the risk to minority shareholders and their interests. Stokes has a 68% interest in SVW and SVW has a 34% interest in SWM. ■ We have included a 5% ESG impact to our valuation for TEN. Chairman and substantial shareholder Lachlan Murdoch has previously shown his willingness to exert his influence over the company by taking over as Interim CEO prior to the commencement of James Warburton’s employment. Additionally, less than half of TEN’s Board is independent, lessening the likelihood of the Board resisting attempts to influence the company by major shareholders. Lachlan Murdoch has a 9% interest in TEN, James Packer 9%, Gina Rinehart 10% and Bruce Gordon 10%. ■ We have included a 5% ESG impact to our valuation for REA. NWS owns 61% of REA and has effective Board control, resulting in a low free float and reduced liquidity in addition to higher risks to minority shareholders. ■ We have included a 3% ESG impact to our valuation for FXJ. We have included a 3% ESG impact to our valuation for FXJ. Gina Rinehart has been vocal in her opposition to parts of the company’s strategic direction and the company’s Board composition. Increased influence of a major shareholder may also pose problems in relation to editorial independence. Gina Rinehart has a 15% interest in FXJ. ■ We have included a 3% ESG impact to our valuation for TME. The board is not fully independent and there is a risk that minority shareholders' wishes could be ignored by majority shareholder FXJ. FXJ owns 51% of TME. ■ We have included a 3% ESG impact to our valuation for APN. The appointment of an Independent Chairman has reduced governance risk; however, APN does not have a majority of independent Directors and major shareholder INM retains considerable influence over the company. INM has a 38% interest in APN. ■ We have included a 3% ESG impact to our valuation for PRT. Paul Ramsay is Chairman and major shareholder with a 30% stake in PRT. While we have seen no indication that Paul Ramsay will try to exert undue influence on the company, there is a lack of independence on the Board. Australian ESG/SRI 2 27 November 2012 Figure 2: ESG impact on target prices in Media and Internet stocks Target ESG ESG Price downside Market impact Company (AUD) included cap ($mn) ($mn) Comments APN.AX APN News & Media 0.23 -3.0% 212 - 7 Independent Chairman has reduced governance risk, however APN does not have a majority of independent Directors and major shareholder INM retains considerable influence over the company. CRZ.AX carsales.com.au 8.80 0.0% 1,785 - We do not foresee any ESG risks on the horizon for CRZ. FXJ.AX Fairfax Media 0.40 -3.0% 1,094 - 34 Gina Rinehart has been vocal in her opposition to parts of the company’s strategic direction and the company’s Board composition. Increased influence of a major shareholder may also pose problems in relation to editorial independence. NWS.AX News Corporation 28.24 -10.0% 57,194 - 6,355 NWS has been faced with significant governance issues; most recently the phone hacking controversy and the failed takeover of BSkyB. The considerable influence that Rupert Murdoch and the Murdoch family exert over the company through its dual class share structure raises the risk of further governance issues in the future as well as inhibiting the rights of minority shareholders. PRT.AX Prime Media Group 0.86 -3.0% 297 - 9 While we have seen no indication that Chairman and major shareholder Paul Ramsay will try to exert undue influence on the compay, the lack of independence on the Board is a cause for concern. REA.AX REA Group 19.76 -5.0% 2,430 - 128 NWS owns over half the shares in REA and has effective Board control, resulting in a low free float and reduced liquidity in addition to higher risks to minority shareholders. SEK.AX Seek 6.93 0.0% 2,275 - SEK's increasing expansion into offshore markets could expose it to higher ESG risk in the future. However given that the vast majority of value in our DCF-derived Target Price is attributable to its Australian employment business we do not currently factor any ESG risk into our Target Price. SGN.AX STW Communications Group 1.24 -2.0% 425 - 9 While WPP to date has not looked to exert undue influence on the company, as SGN expands internationally it is possible that its interests may conflict with those of WPP. Additionally, given that the company is increasingly investing in South East Asia where ESG risks may be more prevalent and harder to measure, this is something that we will be keeping our eye on.