Company Overview – Seven West Media was formed via West Australian Newspaper 2011 acquisition of Seven media group, joining a Western Australian newspaper business with the leading capital city free to air television network to deliver a platform to cross sell to advertisers. Earnings are derived from television (61%), newspapers (26%), magazines (8%) and online (5%). Key brands include Seven television network, The West Australian, Pacific Magazines and Yahoo 7. Newspapers and television earnings are cyclical which drives share price volatility.

Analysis – Seven West Media has a strong stable of media assets with leading positions in its key markets. However earnings are currently facing threats from the structural shift towards digital media and a cyclical downturn in advertising spend. The company also has high debt levels as a result of the acquisition of Seven Media. However earnings are potentially at cyclical lows and could rebound strongly if there is a sustained recovery in advertising markets. Investor fear revolves around uncertainty in the duration and extent of the ongoing contraction in media expenditure, making Seven West Media undervalued. The migration of advertising revenue online is a real threat to newspapers and television. Despite this The West Australian News continues to grow circulation with the mining sector driving demand for regional and metro news and classifieds. Seven remains the most popular Australian television channel enabling it to extract the largest share of advertising expenditure. Channel seven has been the clear ratings leader for many years with its commercial network competitors struggling to gain momentum, with channel Nine and Ten a distant second and third.

SWM, AUD Millions		2013	2012	2011	2010	2009
Period End Date		29-Jun-2013	30-Jun-2012	25-Jun-2011	30-Jun-2010	30-Jun-2009
Total Revenue		1,866.5	1,937.1	725.7	408.7	418.6
Gross Profit		983.0	1,073.0	482.3	301.0	344.0
Total Operating Expense		1,752.8	1,463.7	508.1	255.1	275.5
Operating Income		113.6	473.4	217.6	153.6	143.1
Net Income Before Taxes		11.2	325.2	173.5	134.1	122.1

Free to air television remains a closed market with regulation limiting entry for competitors to transmit. This walled market once enjoyed by a few media proprietors has now been eroded as consumers increasing opt to view content from online channels. We expect seven to follow development offshore and seek to monetize its content through partnership deals and the development of subscriber based applications aimed at online TV platforms from Apple, Google and Microsoft. The speed at which consumers adopt to these new platforms and the associated lost revenue from the traditional free to air  remains increasingly uncertain and explains why investors require a large discount to perceived value before investing in what are commonly termed old media companies.

SWM	Industry Median	2013	2012	2011	2010	2009
Profitability
Gross Margin	65.3%	57.5%	59.8%	70.4%	76.8%	83.3%
EBITDA Margin	26.3%	32.0%	33.8%	41.4%	41.6%	41.4%
Operating Margin	21.6%	6.1%	24.4%	30.0%	37.6%	34.2%
Earning Power
Pretax ROA	13.4%	0.2%	6.4%	6.3%	30.2%	26.3%
Pretax ROE	19.4%	0.4%	12.7%	13.1%	135.2%	152.4%
Liquidity
Quick Ratio	1.39	1.22	0.96	0.78	1.87	1.21
Current Ratio	1.64	1.48	1.23	1.00	2.22	1.42
Leverage
Assets/Equity	1.68	1.86	2.13	2.25	3.38	6.60
Debt/Equity	0.16	0.57	0.81	0.91	2.00	4.69

Seven West media increased first half fiscal 2014 net profit after tax or NPAT to AUD 150.1 million while group revenue declined by 1.1% to AUD 975.8 million. The television division which contributes 70% of group revenue delivered a disappointing result in our view notching up only 2.65 growth for the half. We had expected rising consumer confidence and an improvement in retail conditions  would have flowed more strongly into the television advertising expenditure. The company expects low to mid-single  digit  growth for the remainder of the fiscal year. We view this softness in expenditure indicating industry weakness as advertisers put more resources towards the online sources. Despite this pessimistic outlook we expect the margins to remain stable as the company shifts from more expensive U.S content to a greater percentage of higher margin  content produced in house which is currently 50% of the total content pool. We believe seven West Media can extract higher margins from the local content while retaining a highly engaged and consolidated audience.



 

Dividend
Yield	6.22	FY
	8.61	5yr Av
Announcement Date	Ex. Date	Pay Date	Record Date	Dividend Type	Amount(Gross)	Amount(Net)
18-Feb-2014	07-Mar-2014	01-Apr-2014	14-Mar-2014	Interim	0.085714	0.06
22-Aug-2013	02-Sep-2013	11-Oct-2013	06-Sep-2013	Final	0.085714	0.06
20-Feb-2013	08-Mar-2013	02-Apr-2013	15-Mar-2013	Interim	0.085714	0.06
22-Aug-2012	03-Sep-2012	12-Oct-2012	07-Sep-2012	Final	0.085714	0.06

 
Seven’s television network has delivered its fourteenth consecutive half of ratings leadership, attracting 40% of all viewers. We expect this performance to continue into the second half, with the recent release of television drama “INXS”, ensuring Seven West Media has retained its weekly mantle as the most viewed channel despite the Winter Olympics coverage aired by rival Ten. Despite ratings success , industry advertising revenue remains subdued and we view the ability to generate successful local content as a core capability to generate acceptable returns.


SWM Daily Chart

The ease of accessing a range of U.S content online lowers the inherent value of agreements currently in place with the U.S production companies. Seven West Media produces 50% of its own content. Television production is a hit and miss business but seven west media has managed to be successful in promoting content created in house. This was demonstrated with the ratings success of “My Kitchen Rules” despite similar shows aired on competitor channels. We expect Seven West Media can renegotiate lowers US content arrangements while also becoming more reliant on lower cost internally generated content. This content opens the opportunity to control distribution and offers exclusive advertising opportunities to enhance returns on Seven’s investment.

The newspaper division reported an 8% decline in first half fiscal 2014 revenue and a 20% fall in earnings before interest and tax or EBIT. The rapid fall in EBIT demonstrates the inherent operating leverage of a newspaper business. Economic weakness in Western Australia delivered a contraction in display and classified advertising. Despite this weakness, operating margins are still relatively high at 38% and demonstrates the initiatives implemented to restructure and reduce costs. With 80% of western Australians viewing a Seven West Media newspaper weekly, we expect Seven West Media can extract strong returns from these newspaper brands , either online or through print , when economic conditions improve.

The board remains focused on reducing debt. Successful refinancing sees debt fall by AUD 100 million, resulting in AUD 1.4 billion of revolving bank facilities with an initial repayment date at October 2017. The payout ratio remains at 50% with the board announcing a first half fully franked dividend of AUD 0.06 per share. We view Seven West Media as one of the best positioned media companies in Australia. The production and ownership of content is becoming increasingly valuable globally, particularly in the context of escalating rights costs. Seven network produces over 50% of its TV content which differentiates it from its peers. This is particularly important at a time when the popularity of the local content is overtaking that from offshore. Seven West Media’s exposure to multiple media provides another unique competitive advantage. The WA newspaper and TV newsrooms are expected to merge in the near term, which should provide cost efficiencies and revenue opportunities from increased collaboration and cross promotion. We will be putting BUY on the stock at the current price of $1.975.

---

Disclaimer
Kalkine provides general advice on securities. Kalkine does not provide advice that takes into account your, or anybody else’s investment objectives, financial situation or needs. We strongly suggest that you should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. Employees and/or associates of Kalkine Pty Ltd may hold one or more of the stocks reviewed on this website. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.