Seven West Media has never been short of bravado about its primacy in free-to-air commercial television. But the expansion of the TV market to incorporate BVOD finally makes SWM’s posturing a claim worth paying attention to. BVOD has indeed grown the total TV market for both SWM and NEC, with future revenues offsetting the natural decline of the linear channels.
SWM’s trading update said that the FTA TV ad market had grown at 6.7% in 3Q22 and should increase 4 5% in 4Q22f, implying FY22f growth of 8-9%.
This has prompted SWM to increase its FY22f EBITDA guidance to $335-340 million, including $10 million contribution from Prime. As an indicator of the current market strength, SWM’s FY22f EBITDA guidance in November 2021 was $278-286 million, then upgraded this at the interim result in February to $315-325 million.
Meanwhile, total market revenue growth in BVOD (broadcast video on demand – 7plus) is set to increase to ~$900 million by CY25 from $322 million in CY21, according to PWC.
SWM sees a natural progression for its BVOD platform to include subscription (SVOD) and transactional businesses. The basis for SWM’s optimism is that the total TV market including metro and regional linear TV plus BVOD now totals $3.76 billion of revenue in which SWM claims a 40% market share. For context, the metro and regional TV market ten years ago was worth $3.45 billion, according to CEASA data.
Much has changed since then, most importantly, the growth in BVOD as well as SWM’s own financial state of affairs. For too long, the company was carrying excessive debt, but this has now been turned around to a position where net debt to EBITDA is below the target range of 1.0-1.5x.
The company has signaled it will announce a capital management strategy in August which could include raising the final dividend for FY22f to 8cps. This level could be maintained as the annual rate implying a sustainable dividend yield of 12.5%. This is well ahead of consensus forecasts at the moment.
We think the capital management strategy will lean towards paying dividends rather than a share buyback.
This is because SWM’s major shareholder (Seven Group) already owns 41% and would likely prefer cash returns than a greater stake in the company.
Investment view
With the assistance of a strengthening advertising market, and an extended period of fiscal rectitude on SWM’s part, the company is now in a position to leverage its earnings into the growing BVOD market.
The total TV market is at a structural turning point where it can be maintained or even grow as new BVOD revenue offsets the natural decline in linear TV.
We do not believe this dynamic is fully reflected in the share prices of either SWM or NEC. While we retain our Buy recommendation on SWM, our sector preference is NEC (also a Buy).
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 retained our Buy recommendation.
