Ongoing revenue pressure, but in line with estimates: Seven West Media Ltd (ASX: SWM) reported a revenue decrease of 4.7% to $1,774.7 million for fiscal year of 2015. The group’s core TV segment revenues (which accounts 72% of the overall revenues) fell by 2% yoy to $1,279.2 million during the year. Newspapers segment (representing 15% of SWM’s revenues) also fell by 10.4% yoy to $260.9 million in FY15. Magazines and Other Business revenues tumbled 7.3% and 50.4% respectively on a year over year basis. Subsequently Seven West’s profit after tax (excluding significant items) fell by 11.5% yoy to $209.1 million and reported a loss after tax of $1,887.4 million including significant items. This decrease was mainly due to $2,096.5 million of significant items (net of tax) incurred due to impairment of Television goodwill and licenses impacted by the declining advertising revenues for its TV segment. On the other hand, SWM’s cost control efforts generated a 2.4% yoy decrease in operating costs. But, the EBIT plunged 12.7% yoy to $356.3 million during FY15. Seven West’s operating cashflows (before interest and tax) also reduced to $349 million in FY15, from $416.1 million in FY14. Accordingly, the management also reduced the final dividends to 4 cents per share fully franked, from 6 cents per share in FY14.


Fiscal year of 2015 highlights (Source: Company Reports)

Efforts to boost balance sheet: Seven West recently approved the conversion of 2,500 convertible preference shares (CPS) held by Seven Group Holdings, converting 265.75 million of ordinary shares at $1.28 per share. The group raised over $310.7 million cash through this entitlement offer. Accordingly, Seven west decreased its net debt by 36.7% or $425.6 million, while the debt leverage ratio reduced to 1.8x EBITDA, as compared to 2.5x EBITDA during the earlier fiscal year. However, the net assets declined by $1,702.2 million impacted by the impairment of television licenses and goodwill.
 
Recent AFL broadcast rights deal to add some support: Seven West entered into a new 6-year deal with the Australian Football League (AFL) for the 2017 to 2022 seasons. The group is estimated to pay around $1 billion for this deal. Seven West got four live games a week and the AFL Finals Series. This deal would add some support to Seven West’s solid efforts to maintain its market leadership in the television advertising revenue share. The group represented over 40.4% of the overall TV advertising market during the first six months of the 2015 financial year and over 40% of the overall TV advertising revenue for FY14 and FY15. The group’s TV ratings were also way ahead of its immediate competitors from 2011.
 

Leading FTA TV advertising market share (Source: Company Reports)

Diversifying business to offset FTA market pressure: Seven West Media is also focusing on online as well as other communications. The group’s Yahoo7 (partnership with Plus7) has over 3.1 million Daily Active Users, wherein its Mobile audiences rose by 31%. More than 130 million video streams were served during the fiscal year, which is an improvement by 15%. Yahoo7 native advertising witnessed solid growth of 300% during the second half as compared to the first half the year.  Yahoo7 also teamed up with advertising partners for local commercialization of Tumblr. Meanwhile, SWM’s Presto SVOD service growth (launched during third quarter of 2015) is also on track. The group is also making new distribution agreements with third party platforms and entered into media partnership with Racing Victoria on Racing.com. SWM improved its digital video revenue by 66% and witnessed a 17% growth in content sales. The group also improved its magazines advertising share to 31.5% during FY15


Fiscal year of 2015 highlights (Source: Company Reports)

Stock Outlook: Seven West Media stock plunged over 23.2% in just last four weeks (Aug 5-Sep 4) partly owed to its poor fiscal year of 2015 performance. The stock plunged more than 48.5% year to date (as at Sep 4). However, the group expects a better outlook for the next fiscal year from the growth coming through its newspapers, magazines and digital business. The group’s focus on live-streaming, performance from Yahoo7 and digital businesses of The West Australian and Pacific Magazines might support its revenues to some extent. Seven west estimates to decrease its operating costs further, and expects its underlying EBIT to decrease by 5% to 10% as compared to FY15. Seven west also has an attractive dividend yield of 13.5%. We believe that investors need to leverage the recent correction as a buying opportunity, and accordingly give a “BUY” recommendation on the stock at the current price of $0.69
 
 

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