Kagiso Media delivered a strong performance amid the toughest operating environment in almost two decades. While the group continued to make progress with the deployment of its strategy to diversify revenue streams, it also reported an increase of 8% in headline earnings per share to 136,8 cents. The increase was underpinned by the resilience of the broadcasting assets. Once again, the group's strategy of diversifying its revenue streams delivered benefits in the face of the economic downturn which has impacted the entire economy since the credit crisis in 2008.
Business environment
The operating environment remained tight throughout the financial year although it started showing signs of improving from January 2010. While all operations traded under more challenging conditions, the group benefited from diversification across its portfolio of assets.
The advertising industry has been under pressure due to the recession and depressed consumer spending. Radio advertising spend grew by 2,4% compared to a growth rate of 8,4% for the media industry. Radio's share of total advertising spend contracted to 12,4%. The biggest beneficiary of 2010 FIFA World CupTM advertising was television. In line with expectations, radio benefited from 'overflow' spending in the months leading up to the event. The digital market continued to grow quickly, albeit off a relatively low base. According to the Online Publishers Association (OPA), online advertising spend increased by 31,4% in 2009. The trend in advertising spending towards television and online platforms validates Kagiso Media's strategy to increase its exposure to these markets.
The increasing availability of bandwidth in South Africa has accelerated growth in content and online traffic. This has direct benefits for Kagiso Media's specialist digital media assets, and the group's Broadcasting, Information and Other as well as its Content segments are positioned to benefit from the trend. As bandwidth becomes ubiquitous and costs decline, so demand for digital services and content is expected to continue increasing, thus positioning the segment for future growth and expansion.
The Information and Other segment enjoyed strong demand for its research, compliance and risk solutions as a result of the increasingly complex compliance requirements of its customers.
The 2010 financial year was tough for television producers in South Africa as the 2010 FIFA World CupTM disrupted regular scheduling. Across the industry the rate of commissioning new productions and renewing existing programmes slowed as a result of the combined impact of the economic downturn and delays in decision-making.
Financial highlights
Kagiso Media reported revenue for the period from continuing operations of R906,3m, an increase of 6%. Operating profit improved 4% to R303,5m as group-wide cost management initiatives protected the margin. The group also benefited from the full-year contribution of Urban Brew Studios and Gloo Digital which were acquired in 2009.
The group was pleased with the performance of the Broadcasting segment which maintained its operating margin within management's target range and reported a stable operating profit of R235,6m. The operating profit of the Information and Other segment increased by 15% to R68,2m as the winding down of the Kagiso Exhibitions and Events business led to a positive operating profit swing. The recently established New Media segment delivered sound profit growth to R9,7m but the Content segment, comprising Urban Brew Studios reported a 3% decline in operating profit to R25,0m which was in line with the challenging markets in which it operates.
Cash generated from operations increased to R340,4m which confirms the ability of group companies to convert profits into cash and indicates high quality earnings generation across Kagiso Media's assets.
The group reported cash at 30 June 2010 of R274,2m. The R100,8m increase in cash is mainly attributable to the strong operating performance. Proceeds from the disposal of the outdoor business amounted to a cash inflow of R35,1m. In the year under review, dividends of R83,0m were paid.
The net asset value per share increased by 23% for the year to 462 cents.
Operational highlights
Broadcasting
The Broadcasting segment showed a marginal improvement in revenue and stable operating profit despite the challenging economic climate. Cognisance was taken early on in the financial year that the tight economic environment would persist well into 2010. As a consequence, the segment implemented wide-ranging cost management initiatives which delivered substantial cost savings without impacting the quality of service.
The Broadcasting segment's radio stations performed well in a tough market with East Coast Radio growing its core target market audiences by 13% while Jacaranda 94.2 maintained market category audiences. In contrast to the declining "time spent listening" (TSL) experienced across the industry, the morning shows of the Broadcasting segment's owned radio stations continue to perform well. Under the management of the Broadcasting media convergence team, the audience of the radio stations' websites are growing and these assets are profitable in their own right.
Kaya FM's overall listenership over seven days increased while OFM showed a marginal improvement. The Morning Breakfast Show of Heart 104.9 increased its audience by more than 14%. The audience of iGagasi 99.5 remained stable at 1,8 million.
Information and Other
The Information and Other segment was restructured during the year to comprise of Kagiso Media's 50% stake in LexisNexis South Africa, the remaining assets of Kagiso Exhibitions and Events and Mobile Alliance.
LexisNexis encountered difficult trading conditions across all of its operations, leading to flat revenue for the year and an operating profit decline of 12%, largely due to a provision of R6,5m for the West African debt. LexisNexis' strategies to resume its growth trajectory include the continued migration of customers to online research solutions. The segment now houses the remaining assets of Kagiso Exhibitions and Events. Mobile Alliance's strong performance in the first half of the year was extended on account of a windfall contract to supply outdoor screens at public viewing areas for 10 matches during the 2010 FIFA World CupTM.
New Media
Established as a separate segment during the year, the New Media segment comprises Kagiso Media's digital media assets which are focused on services and publishing. This divisionalisation is a clear demonstration of the group's strategic focus on developing its online business offering.
Acceleration Media and Gloo Digital Media both delivered strong results which were ahead of expectations for the year and continued to position themselves for future growth. Towards the financial year-end the group concluded an agreement with Microsoft to manage the South African MSN portal, leading to the creation of Kagiso.MSN. It is positioned to contribute strong revenue and profit growth to the group in future.
Content
Urban Brew Studios delivered a solid full-year operating performance against the backdrop of challenging domestic and international markets for production studios. Its internal focus on cost management dampened the impact of these tight markets. It strengthened its track record of delivering popular productions at low cost while at the same time continuing to recognise and treat with respect, the value of local content and talent.
Strategy
While three years ago, the performance of Kagiso Media was highly dependent on the results of the Broadcasting assets, LexisNexis and its Exhibitions and Events segment, the business model has become more resilient and increasingly less reliant on advertising revenue cycles, although East Coast Radio and Jacaranda FM remain significant contributors to the business. The addition of the television content platform, online capability and disinvestment from non-core activities has led to a more resilient business model with reduced cyclicality of earnings.
The objective of the evolving strategy remains the considered deepening of media convergence capability across the group to grow its performance in the longer term. The acquisitions of Acceleration Media in 2008 and Gloo Digital Design in 2009 were significant building blocks along this strategic journey. In 2010, the group took another important step along the journey with its partnership with MSN. This agreement was the result of extensive negotiations which spanned more than a year. Kagiso Media will provide the engine for the portal as well as relevant content reflecting the South African context. Revenue streams will be derived from advertising, as the portal attracts an increasing audience.
Accordingly, Kagiso Media is making solid progress with the implementation of its strategy of moving beyond radio towards integrated information and communication services and content across different platforms which include radio, television and online.
During the year, Kagiso Media bolstered its corporate support structure with the appointment of finance and human resource directors. The role of the finance director has been expanded to include strategic business development while the establishment of the human resource function demonstrates that the group recognises the importance of nurturing and building its pool of skills, especially in the fast changing media environment. These core functions are critical for delivery on the strategy.
Prospects
Although the rate of economic recovery remains uncertain, the group nevertheless sees signs of improving trading conditions. Advertising spend appears to be normalising although abnormally high rates of unemployment could impact negatively on the rate of recovery.
While a recovery will advantage the performance of Kagiso Media as a whole, the Broadcasting segment is most affected by cyclicality in advertising spend.
In the Information and Other segment, the group anticipates a tough trading year as this sector generally lags economic recovery.
New Media remains well positioned to show good growth albeit off a low base. However start-up investments, such as those associated with the MSN deal concluded in June 2010, are anticipated to be profit dilutive in the first year. Management is confident that MSN will contribute positively from 2012.
Good programming schedules in the Content segment suggest improved returns for the forthcoming year, however the pace of final contract awards is still of concern.
In order to support the performance of the group in the event of a delayed economic recovery, and in line with good business practice, cost management will remain a high priority in the year ahead.
Kagiso Media will also continue to invest in the development of its skills and new technologies to keep pace with the changing market in order to ensure its long-term economic sustainability.
Murphy Morobe
Chief executive officer
