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Having enjoyed the fruits of a sector-wide revival over an extended period, investors in the media sector have been spooked in recent weeks by the mixed messages that have been sent out by many different sections of this highly rated arena.

It’s a mixed message – from radio to publishing

There seems to be much trouble afoot in the radio sphere, as many of its big names have suffered from advertising revenue slumps and a fall-off in audience figures – allegedly due to a resurgent and ever-popular BBC.

Over among the listed publishers, it is another mixed picture with the likes of Highbury House breaking itself up in the face of its considerable debts and Future, previously something of a market darling (and a buyer of a number of Highbury’s titles) offering a ‘cautious’ outlook. With television companies hardly blazing and some internet ventures holding their breath, the much mooted recovery is looking very fragile.

Yet there is still a lot of optimism around. For instance, Martin Sorrell’s WPP – the bellwether stock par excellence – recently announced that revenues in the first five months of this year were running six per cent ahead. Meanwhile, according to the Advertising Association, the advertising sector will grow at 4.5 per cent this year, a commendable performance after the five per cent growth of 2004.

Marketing services still strong

One area that still seems to be going great guns is marketing services, the communications sub-sector which utilises a broad means of ‘below-the-line’ distribution channels to get clients’ messages across to consumers and businesses. Growth in this area is outperforming the wider advertising market (the Direct Marketing Association is expecting solid growth in 2005). And among the smaller listed players, this expansion is running in tandem with a flurry of corporate activity as a raft of growing companies set about consolidating what is still a tremendously fragmented market.

For instance, marketing services-focused shell Twenty has just launched on OFEX and will head for AIM once it (hopefully) concludes certain deals in this fragmented sector. Led by Ian Lancaster – co-founder of Virgin Cars, the first consumer branded online car store – Twenty is looking for marketing data and intelligence outfits that promote ‘one-to-one’ marketing solutions.

‘Above-the-line and mass media remains pretty challenging,’ says Lancaster. ‘Spend is declining, so everyone is struggling to find ways to reach consumers, and the number of channels is proliferating. Clients also want more measurable results from the money they spend, and that is where we are concentrating, on companies that have clever ways of doing things with data.'

Lancaster’s ambition is to build a diversified group able to offer a range of marketing communication functions to customers, who will be UK-based to begin with and more international over time.

Delling deserves a re-rating

Over on AIM, many marketing counters are thriving, among them Delling, which beat forecasts with maiden finals to December. Losses were £2.77 million, less than the £3.5 million forecast by broker Seymour Pierce, on a higher than expected turnover of £2.17 million. Floated at 14p last year, the Nordic-focused venture has an edge in the growing market for outsourcing marketing material production, where it creates cost advantages for marketing departments.

Following a spate of acquisitions, analyst Alan Matthews of Seymour Pierce, is forecasting a swing to profits of £1.45 million on £10.5 million sales this year putting the group on a forward p/e of 11.75. Delling demands a re-rating.

Cello and Media Square motor on

Other AIM players of note are Media Square and Cello. Deal-hungry Media Square is now one of the fastest growing UK marketing concerns having doubled in size with last year’s £21.7 million takeover of Coutts Holdings. Forecasts in the market this year suggest it will hit profits of £4.6 million of sales of £42. Back in 2001 it had sales of £2.29 million and losses of £2.45 million.

Cello, fronted by Kevin Steeds, looks equally interesting, having made a decent start since launching onto AIM with a £15 million funding at 100p. This group deals in market research, brand advertising, direct marketing and database management, interests it has built up through a flurry of acquisitions, Steeds recently teased investors with news of an agreement, in principle, to acquire a further bunch of businesses.

Cello has a strong balance sheet – net cash of £6.4 million as at December 2004 – and all its businesses are profitable and generating cash. Analysts envisage profits of £3.5 million from sales of £46.5 million this year, giving a forward p/e of 13. That looks very undemanding.

For those who like more speculative action, NWD is a turnaround penny share outfit worth a look. The group’s 2004 numbers reflected tricky trading, restructuring and acquisitions, as well as a fundraising to restore balance sheet fortitude. But chief executive Stephen Stroud is turning this small ship around, and NWD has traded profitably in 2005. The current share price could reward the brave ahead of the upcoming interims.

Creston to excel

One of the most lauded players in the sector is Don Elgie’s Creston, which continues to out-perform. The group recently delivered a fourth consecutive set of record results for the year to March, with pre-tax profits powering up 68 per cent to £3.5 million on a 22 per cent rise in turnover to £35.9 million.

A proportion of this growth was derived from acquisitions. Last September, Creston bought qualitative market research outfit CML for £7.4 million, a deal followed by the major £39.2 million March acquisition of DLKW, a revered London-based advertising and communications group. Though DLKW resides in the cyclical advertising arena, its strong record and swathe of esteemed clients meant it fit Elgie’s stringent acquisition criteria.

Elgie has ambitions to make an international push in the current year, particularly in the USA. For March ‘06, investors might expect profits of £6.7 million and earnings of 13.4p, putting Creston on a forward multiple of only 11.8 times.