The outlook for the TV advertising market is weak. Seven West Media expects the total TV market to decline by mid-to-high single digits in 2H23f. Until ad market conditions improve, the sector will be out of favour with investors. We reduce our recommendation to Hold.
SWM reported 1H23 EBITDA of $205m, helped by An extra week of trading at WA Newspapers. TV EBITDA was down -4.6%, as expected, although the Olympics distorted all the metrics from last year making comparisons less informative. The total TV advertising market fell -4.5% in 1H23 with the linear market worse at -6.4%. BVOD was +5.4% (+15% excluding the Olympics) but this has slowed from previous high levels.
SWM said its share of the total TV market was 39.3% in the half year period and this should remain stable in 2H23f. SWM’s overall share has been boosted by the high market share enjoyed in the regional markets previously claimed by Prime TV, now owned by SWM.
SWM has repositioned its important sporting rights portfolio with AFL and cricket codes locked in for lengthy stays at Seven. The contracts include the digital rights. With rival network Nine retaining NRL broadcast rights, plus the Australia Open Tennis and now the Olympics, the laggard Network Ten is left without a promotional platform. Ten’s market position continues to look tenuous – pun intended.
Cash flow at SWM is looking strong and although a dividend is not currently being declared, the possibility of a reinstatement seems real. SWM will logically wait until market conditions improve.
Investment View
Advertising expenditure ebbs and flows with the economy, so the total TV ad market is captive to that cycle. But the structural shift from linear TV to BVOD is now well understood and irreversible.
The aggregate outcome for SWM is a bright future, particularly now that the company has overcome the seemingly intractable debt pile it was carrying. While the ad cycle is in abeyance, investors will look elsewhere, but the opportunity awaits for patient and attentive investors.
The stock looks cheap on most measurements of value. A PE ratio of just 4x, and an EV/EBITDA multiple at 3.7x FY23 consensus earnings forecasts. There is no dividend yield at the moment, but the future is promising.
We have reduced our recommendation to Hold from Buy, purely to recognise the lack of an earnings catalyst in the near term. Evidence of a more vibrant advertising market is required for this to change.
Risks To Investment View
The Australian advertising market is prone to volatility so any material change to the economy would impact revenues and earnings. The industry is highly competitive, particularly over content, so losing premium content would affect audience share and revenue.
Recommendation
We have reduced our recommendation to Hold from Buy.
