Australia | Feb 21 2013
– Seven West result surprises
– TV is king
– Print remains a concern
– value compelling
By Greg Peel
It must irk Network Ten ((TEN)) that the once proud horse that was the Masterchef franchise now lies prostrate, apparently flogged past death, while rival Seven’s once hastily assembled spoiler My Kitchen Rules has become Australia’s top rating show. It must irk the Nine Network that once Australia’s swimmers began failing in the London pool, most Australians lost interest in the Olympics last year (sailing is not really a great spectator sport), allowing rival Seven to post spoiler ratings above 40% which were never previously dreamed conceivable during an Olympic fortnight.
It must irk both networks that only a decade ago, Nine was Still Number One and Ten, having decided to exclusively target a youth audience, boasted the highest profit margin, while Seven was most at risk of being new media’s first free-to-air television victim. Now it is Ten which remains in a tenuous financial state and Nine which had to be saved.
Successive Australian governments have for decades recognised the importance of having the FTATV networks on side for political purposes, and hence have obliged the industry by providing significant barriers to entry to new media such as pay TV and various internet alternatives/enhancements. Sport non-siphoning laws are one example, while the recent release of new spectra to carry a multitude of FTATV digital channels is another. The smugly complacent networks were slow to adapt to the new media landscape given legislative protection, but have begun to now hastily catch up. Yet at the end of the day, it appears rumours of the impending death of FTATV were misplaced.
Australian families still like to sit down after dinner and watch good old fashioned local dramedy (eg Packed to the Rafters), and, for reasons known only to themselves, whatever the popular reality shows are this season (eg MKR). Pay TV is expensive in this country and inflexible in its packages, and the internet audience is fragmented, hence to reach the masses advertising agents still hold prime time FTATV in high regard. Not that the advertising market in this country is in a particularly healthy state.
Media advertising income has been suffering and will continue to suffer in the near term based on two elements, one cyclical and one structural. The cyclical element is linked to the economy and with Australia’s broad non-mining economy in the doldrums, companies remain reluctant to overspend on advertising. The structural element is linked to the rise of new media which has seen the advertising dollar dispersed into different media forms and strategies. The most obvious example of the structural shift is the success of Australia’s listed online classifieds companies at the expense of old media newspaper companies.
Both elements have weighed on FTATV since the GFC and realistically two of three networks have been very close to death. The economy will one day cycle back up, albeit not tomorrow, to replenish the overall market’s advertising pie. Structurally, Seven West is showing we may have hit the valley floor in terms of audience and spending lost to new media.
Yesterday Seven West Media posted a first half result which exceeded both broker expectations and company guidance. Cost cutting was an important factor, but the real upside surprise came from better than expected Television revenues. If it were not for cost cutting across the board, a disappointing result for Publications (print/online), which saw a 27% fall in year-on-year earnings, would have been even worse. Growth in television revenues were still hampered by ongoing falls in FTATV advertising spend but through its superior ratings, Seven was able to pick up a greater share of the smaller pie.
Hence cyclically, advertising revenues market-wide are still falling. Two factors nevertheless support an argument that structurally, the advertising shift has plateaued. Firstly, Credit Suisse suggests the penetration of pay TV in Australia has now stalled at around 30%. Secondly, BA-Merrill Lynch notes the weak performance of Print was not due to lower circulation revenues, which have in fact held up, but simply due to an 18% fall in ad spend.
Thus we can conclude that, for the time being anyway, Seven’s TV and print offerings are not losing audience/readership. The issue lies squarely with the cyclical downturn in ad spend. On this point management remains realistic, suggesting the trends persist for now with second half percentage TV ad growth expected to be single digit to flat, and newspaper/print market to remain “short, soft and cautious”.
Not really inspiring stuff for the investor. Yet none of the FNArena database brokers changed their ratings following the SWM result and that means seven of eight still rate the stock a Buy. UBS, who is perhaps most concerned about the decline of Print, remains on Hold.
The catch is SWM’s valuation, which has been sufficiently beaten down in the Great Old Media Sell-Off to suggest the bad news on ad spend and new media shift is well priced in. This result included capitulation write-downs in value for magazines ($195m) and Yahoo!7 ($60m), so that pain is out of the way. Seven West is best placed among the old media offerings to leverage off a return to advertising growth, most brokers suggest, and hence discount-to-market mulitples make an investment in SWM “compelling” in more than one broker’s view. Phase One of cost cutting is now complete, with Phase Two underway.
Television now accounts for a solid 72% of Seven West earnings. Ratings, as Matt Preston and his cravat will surely tell you, are a fickle beast. Yesterday’s water cooler sensation can become tomorrow’s flop just as surely as you can say Marco Pierre White. Or say “I know, let’s bring back Big Brother!”
Thus the investor looking to SWM as a longer term play should keep this little point in mind. Or perhaps consider the SWM hybrid listing as an alternative. Traders on the other hand, or at least those with shorter term horizons and greater risk tolerance, might find SWM worth a contrarian look. Albeit the consensus twelve-month price target in the FNArena database of $2.39 is only suggesting around 7% upside.
One last point: Seven West Media ((SWM)) should not be confused with Seven Group Holdings ((SVW)). Seven Group owns the WesTrac resource sector equipment/services provider as well as a stake in Seven West Media.
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