Seven West Media’s swagger is back as advertising conditions improve, digital revenues reach a ‘personal best’ and an earnings upgrade puts the company on the podium. But the Olympics contract has been sanctioned for interfering with cashflow.
Offsetting the structural decline of linear television has been an arduous journey for the commercial TV networks. Digital platforms are the answer and have finally begun to materially contribute to revenue and earnings. SWM’s digital EBITDA increased 144% to $76 million and now represents 35% of group operating earnings.
The total TV advertising market is now ‘robust’ according to SWM with metropolitan TV up 13% and regional gaining 7.2%. SWM’s audience share reached 40.3% in metro markets helping total TV revenue to grow 30% in 1H22. Within that, free-to-air TV increased 25%, boosted by the Olympics, and digital revenue doubled to $97 million. Ex the Olympics, SWM’s audience share should slip back to around 36-38% from FY23f onwards.
The continuing strong growth of BVOD (broadcast video on demand – 7plus) is a key positive for the company as it gains traction with viewers and advertisers and becomes more mainstream than niche. This is high quality, sustainable structural growth that can meaningfully offset the pressure on linear TV. In aggregate, we think total TV revenue will be flat to slightly up over the long term.
On the blooper reel, operating cashflow was well below group EBITDA ($215.5 million) due to a $75 million onerous contract provision of which $50 million was attributable to the Olympics contract.
SWM has now completed its acquisition of Prime Media Group which enlarges its TV reach across Australia. This is an outcome from the overdue end to the ridiculous ‘reach’ rules that separated metro and regional TV businesses.
SWM says its digital media business is on track to deliver FY22 revenue of more than $130 million which will be around 40% of group revenue. The 1H22 result also included first time payments for its news content on digital platforms – another long overdue industry change.
The company upgraded its FY22 EBITDA guidance back in November 2021 ($278-286m) but has further nudged up the guidance to $315-325 million including a $10 million contribution from Prime Media.
Investment view
SWM is cheap on a PE ratio under 6x FY22f eps based on consensus forecasts which ascribes little credit for the improving long term outlook.
We think BVOD can be a beneficiary of the change in privacy settings by major digital platforms such as Apple iOS and Google Chrome. The impact of these changes was brutally demonstrated by Facebook’s recent admission that it could lose US$10 billion of revenue this year as it becomes harder for advertisers to track consumers on third party sales.
SWM has improved its balance sheet (net debt <1x FY22 EBITDA, target range 1.0-1.5x) and is now reviewing its capital management options. This could mean a resumption of dividends beginning with 2H22. The company has also achieved better control of its cost base, notwithstanding higher AFL rights costs and new costs from Prime.
All these changes have improved the investibility of SWM, but our sector preference is Nine Entertainment (NEC).
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.
