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Stock Of The Day - Seven West Media (BUY)

At current prices the market appears to be attributing zero value to SWM's print and Yahoo!7 assets. SWM holds a strong market position in FTA TV, however its newspaper and magazine assets are in decline in line with structural trends. Ad markets remain short but look positioned to recover after a 5% fall in Apr-Dec 2014 (SMI Metro-FTA-TV) especially with price wars looming in key market segments (Telco, Retail, Insurance). Ratings remain buoyant with SWM winning all key demographics CYTD, the first time since 2011. Exclusive sport content (Olympics 2016-2020, Commonwealth games 2018) will also provide a platform in future years to launch new content. Higher content (AFL) costs remain a concern but SWM is somewhat shielded by producing more content in-house.
 

TV, Digital & Publishing (Source - Company Reports)

Results for the half-year ended 27 December 2014
 
Highlights for the half year included the maintenance of the leadership position, the delivery of milestones for digital transformation and the securing of long-term rights to sports. Among the financial highlights were profit after tax of $ 137.5 million (excluding significant items and down by 8.4% over the previous year) and a loss after tax of $ 993.6 million (including significant items) while strict control on operating costs resulted in a reduction of 1.3% over the previous year. The write-off of $ 1.148 billion of significant items pre-tax was primarily due to goodwill impairment. The underlying EBIT of $ 226.9 million declined 9.3% over the previous year while the underlying EBITDA margin was 26.6%. Operating cash flows before interest and tax came to $ 252 million the net debt position improved and the interim dividend declared on a fully franked basis was 6 cents per share.


EBITDA + Group Costs (Source - Company Reports)

Performance/Outlook
 
In comparison to the market, revenues performed strongly and, despite the 0.3% decline in the overall advertising market between July and December 2014, the group outperformed the overall market by and large. TV Metro declined by 1.5% compared to 3% for the market as a whole, newspapers by 12.5% compared to 12.4% as a whole and magazines by 3% compared to 9.5% as a whole. The outlook for FY 2015 for the advertising market is a small decline in TV, a continuation of the current trend in newspapers and an improving trend in respect of magazines.
 
Television has maintained its leadership position with a market share for the half-year of 40.4% whereas there is continuing growth in respect of advertising market share for Digital and Magazines. The guidance for cost growth has been reaffirmed at 1% for FY 2015 and the company remains confident that the full-year underlying growth in profit will be within the current market estimates. Based on the current situation, the board of directors expects to maintain the dividend at $ .12 per share for the full year.


Operating divisions overview
 
Television
 
This was the 16th consecutive half-year of leadership in revenues and ratings. The 40.8% share of revenue in CY 2014 saw increased revenue shares in every market and demonstrated that the audience for broadcast television in Australia continues to be strong. Seven is the leader in franchises for drama and reality shows and AFL Grand Final showed 4% audience growth over the previous year. Audiences for NFL on 7 mate were up by 28%. Rights for Wimbledon have been extended to 2020 and the Olympic strategy is currently being executed. The deal with ESPN extends the male demographic reach and targets tapping new revenue streams.


Metro FTA Advertising Revenue (Source - Company Reports)

Seven Productions is producing content which is a strong driver of growth. It delivered 11 of the top 20 programs in Australia and reported a growth of 15% in content sales over the previous year. Key elements of sales included Home and Away and My Kitchen Rules. There is strong demand for content from New Zealand and investment in Drama by way of hours produced grew by 6.1% while the momentum for7Wonder and 7Beyond continues.
 
Digital
 
This division has the objective of anytime, anywhere, any device. The SVOD service Presto was launched in a joint venture with Foxtel offering premium domestic and international content with significant support by way of promotion. The uses of the existing technology platform and the CRM have enabled the company to create a cost-effective entry strategy. Hybrid television is on the market in the form of Freeview Plus and tennis Digital rights are being monetised. The FTA broadcast audience has grown by 2% over the previous year and there are 4.1 million streams. The Red Fusion data program has been commercialised and all the early stage investments have been completed.


Group EBITDA + Net Debt (Source - Company Reports)

Yahoo! 7
 
The revenue share is growing by more than 5% in comparison to its peers in publishing and revenues from VOD are up by 89% because of strong demand from audiences, advertisers and platforms. The penetration of Plus 7 is growing with 1.5 million downloads and extended distribution is now available on 10 platforms. The company is leveraging the technology from Yahoo to create new revenue streams and mobile audiences have grown by 35%. Increased engagement is being driven by the increase in traffic on social media sites.
 
Newspapers
 
 The co-location of 7Perth and the newsroom of The West is on track to go live in the second half of 2015. Western Australia's top news source for Print and Online reaches 3 out of 4 people in Western Australia every month. The advertising market has been negatively affected by the challenging economic environment but the Newsgate CMS platform has been launched and is beginning to show improved operational efficiencies. An integrated sales initiative targeting a larger share of customer wallets has been launched and cost control measures are likely to yield more savings in the second half of 2015.
 
Magazines
 
The total audience across all platforms has grown by 30% over the previous year and the decline in advertising has slowed down and the trend is improving. Social and Native are the drivers of digital revenue growth which is over three times the market growth. Advertising market share has improved and category leadership has been maintained. Because of the soft market, circulation strategy is being reviewed but the integration of TV and Magazine has continued to yield positive results. New revenue streams are being developed to take advantage of the passion points of the audience and the cost program is expected to deliver further results in the second half of 2015.


SWM Daily Chart (Source - Thomson Reuters) 

The company has reaffirmed its guidance for FY 2015 and expects an underlying net profit after tax of between $ 205 million and $ 215 million. The rating performance has been strong showing the largest gap to its closest competitor since 2011. We believe that the fundamentals continue to be strong and the fact that the share prices is below the issue price of $ 2.05 when the company listed in December 2013 represents a good buying opportunity. We put a BUY recommendation on the stock at the current price of $1.035.