Australia | Nov 03 2006
By Greg Peel
No one was much prepared to believe it before, but it appears Network Seven (SEV) really has knocked off Publishing & Broadcasting’s (PBL) Nine Network to cement its spot as Australia’s leading free-to-air television broadcaster.
For decades Seven had tried to knock off smug incumbent Nine, who promoted itself year upon year as “Still Number One”. Seven’s plan of attack had lacked any form of imagination, choosing rather to wait and see what Nine did, then finding another show of a similar nature to run against it. Whether it was current affairs, comedy, reality or doco, Seven merely mimicked Nine without success, supplemented only by shows that had been successful two years earlier on the ABC. (To the extent that one wag commented that the next show to crop up on Seven would be “What’s on the ABC”).
Then early last year someone had a brainstorm. What about something different? It must have caused much consternation in the boardroom as a plan as radical as this had never been tried before in anyone’s memory.
So Seven gave us Desperate Housewives and Lost. It retained some of its earlier strategy however, in ripping off the ABC’s Strictly Dancing to produce Dancing with the Stars. Suddenly the boot was on the other foot, and Nine was playing copycat. Seven had proved for years that copycat doesn’t work.
Early success with its new format caught the attention of analysts, who started to view Seven more positively, but cautiously. It could still all be a flash in the pan, and Kerry Packer would likely sort things out in time.
Pervading the analysts’ cautious view was the fact that FTA TV was dying out anyway, with advertisers turning away to embrace new broadcast technologies. So any ratings inroads Seven was to make would only be in a declining market.
PBL saw this, so rather than taking the fight right to Seven they appointed Eddie Everywhere in charge to oversee the final decline. FN Arena has long predicted Jamie would sell Nine as soon as his father left the building, and so it came to pass. Jamie has sold out half the network to concentrate on casinos, and Eddie has no place in the new structure. Vale Eddie.
Seven forged on, building confidence from its growing ratings success. While it may have been moving towards the position of king of a crumbling castle, analysts still had to acknowledge that expected government media reforms would make Seven a target nonetheless, and thus its share price would be supported.
Seven still has problems. Together with the Ten Network (TEN), it has paid what many thought was a ridiculous sum to acquire the rights to the AFL. It is paramount to Seven’s revenues that AFL continues to grow in national popularity. It is paramount to ratings that the Sydney Swans continue to be finals contenders. It is indicative of the high priced paid that the spin-off package offered to Foxtel has been laughed out of the room.
Seven also has a court case hanging over its head. While Kerry Stokes’ attempt to see right win over wrong in the squeeze-out of C7 from pay-TV might be fine on principle, it has worried analysts all year that a positive outcome was not clear cut and that the legal expenses might be crippling.
Part of the good news emanating from yesterdays AGM was that Seven already expected a reduction in court costs. It’s not out of the water, but things are looking better. More importantly, the reduction added to Seven’s projections that, combined with growing revenue share, the network would post EBIT gains in the first half of 2007 of some 40-45% over the first half 2006.
This figure proved a wake-up call for brokers. With all that’s happened to Nine, and with Ten languishing in the ratings as it continues to flog its reality dead horses, analysts have come to realise that Seven really has cemented the number one position, and it looks like staying that way for some time.
This has prompted a round of revenue share revisions from brokers. Whereas analysts were previously assuming revenue share of around 30-35%, this figure has been adjusted across the board to around 35.5%. This doesn’t seem like much, but then you have to understand revenue share.
Macquarie calculates that each percentage point of revenue share adds $24.7m (or about 10%) to EBIT.
Flowing from the universal revenue share increases were earnings increases in a range of 4-23% over the next two years. This in turn sparked a range of target price jumps. While the average target in the FNA database has moved from $10.39 to $10.87, the most notable shift was from Deutsche Bank, which increased its target from $8.90 to $11.00.
Deutsche has been won over. Prior to yesterday, the analysts maintained the belief that Seven was throwing good money after bad by spending in a frenzy in order to conquer Nine while advertising revenues slipped away. Deutsche still sees risks, but it now suggests Seven is the cheapest stock in the Australian media landscape. It backed up its change of heart by shifting from a long established Hold rating to Buy.
Macquarie (Outperform) absorbed yesterday’s announcement and believes Seven is still set for further outperformance. This despite a share price recently buoyed by takeover speculation. Macquarie is joined by SB Citigroup, UBS, ABN Amro and, of course, Deutsche Bank with Buy ratings.
Interestingly, Deutsche did not wrap up without one little offhand comment – that Stokes’ foray into west Australian Newspapers (WAN) does open up a reverse consideration of “acquisition risk”.
Two brokers still bogged down in the declining television landscape story are Merrill Lynch and JP Morgan, both retaining Neutral. They cannot advocate Buy ratings in the face of the inevitable, and despite increasing earnings forecasts along with everyone else, continue to highlight aforementioned risks.
Counting in the experts who did not report today, Seven stands at an FNA 5/5/0 B/H/S ratio. A quick glance at the screen shows the share price has given up some of yesterday’s gains this morning, although not materially. Chances are we’ll have to sit it out now as we await the formal change of media rules next year, and as television goes into its summer ratings hiatus.