Fund managers shifting money away from new media stocks such as Seek, Carsales.com and REA Group with rapid share growth pushing valuations too high

March 21, 2014 Leave a comment

Stay away from new media stocks, say fund managers

March 17, 2014 – 2:14PM

Max Mason

Fund managers are shifting money away from new media stocks such as Seek, Carsales.com and REA Group with rapid share growth pushing valuations too high for comfort.

Seek, Carsales.com and REA Group are all trading on one-year forward price-to-earnings ratios that are double, or more, than that of the benchmark S&P/ASX200.

”The new media stocks are trading multiples that we haven’t seen for many years, if ever,” Wilson Asset Management chief investment officer Chris Stott said. ”We think this is a reflection of the lack of growth in the Australian market.”

While the local market is trading on a forward earnings multiple of 14.9x, REA, Seek and Carsales are trading at 42.58x, 33.79x and 28.4x future projected earnings.

Fund managers see little room for further gains until earnings begin to justify these multiples.

These new media companies have strong business models and growth potential but are looking overvalued.

”The multiples that the new media stocks are trading on are pretty racy,” Tyndall portfolio manager Michael Maughan said. ”It would appear that their domestic businesses are reasonably mature, and especially in the case of Seek, quite cyclical.”

Rapid rise

The rapid price-to-earnings expansion has occurred over the last 12 months, with shares in REA, Carsales and Seek all surging higher. REA has jumped 87 per cent, Carsales has risen 25 per cent and Seek has pushed up 65 per cent.

”Many of these companies certainly appear to be priced for perfection and therefore if they disappoint they have a long way to fall,” Pengana fund manager Rhett Kessler said. ”Then again, if you’re patient and you wait three to four years and if they deliver on everything they’ve anticipated then they’ll look cheap again.”

Importantly, these companies are generating growing profits in a sector which has underperformed in recent years, which makes them appealing to investors.

Comparatively, traditional media companies are trading on relatively low multiples. Nine Entertainment is trading on a forward PE of 15x, while Seven West Media is down at 9.36x and Fairfax Media is trading on a forward earnings mutiple of 16.5x.

Dwindling advertising revenue has plagued traditional media in recent years, which has been slow to adapt to the growing influence of the internet. Shares prices and profits have fallen quickly. But restructuring and cost-cutting seem to be providing some light at the end of the tunnel.

”Traditional media has been priced as though the businesses are not going to exist in five years time. The thing we’d remind people of is there is nothing wrong with the demand for those products,” Auscap Asset Management portfolio manager Tim Carleton said.

Filed under Macro Trends, TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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