Major shareholder Kerry Stokes is well known for his early job as a TV aerial repairman. His current CEO James Warburton has done a good job of fixing the aerial on Seven West Media with the balance sheet in order, and operationally heading the company in the right (digital) direction.
SWM reported FY22 underlying net profit of $200.8 million, 60% ahead of last year on a 21.3% increase in revenue. Group EBITDA of $342 million was 35% up on last year and slightly ahead of guidance. Underpinning the result was a 9% lift in metropolitan TV advertising revenue, 6% growth in regional and a 47% lift in BVOD. Seven Digital is becoming more material to the group with EBITDA contribution of $139 million representing 40% of group earnings.
The acquisition of Prime Media in December 2021 has mopped up a long overdue part of SWM’s operations by bringing the regional audience business in-house. It now enables SWM to take a much better proposition to all its customers now that the audience reach is 91% of Australians without any geographic demarcation.
The audience is also lapping up the digital experience with huge growth in streaming (BVOD). Appointment TV viewing is dead. SWM’s 7Plus platform has caught up with audience behaviour to provide content in viewers’ terms. In response, some 12.5 million users are now registered on the platform. The advertisers have followed suit so that ad revenue from online catch-up and live streaming reached $369.4 million in FY22.
The balance sheet has reached a new low of 0.7x net debt to EBITDA, below the target range of 1.0-1.5x. The 10% share buyback announced will bring leverage back within the range, if it is completed.
As ever, content is crucial and a renewed AFL contract is in the wings, according to press reports. SWM has been an AFL broadcaster forever, it seems, and the new deal could top $500 million per season in total. As usual, Foxtel is said to be bidding alongside SWM so the carve up of games and coverage will be revealed in due course.
SWM is guiding reported group costs to be $1.20-1.22 billion in FY23f, and we think the linear TV advertising market will decline this year in the absence of the Olympics, Federal Election and COVID impacts that boosted ad revenue in FY22. This will be partially offset by a continuing increase in BVOD ad revenue.
Investment view
Although we see a softer TV ad market in FY23f, the operational and financial changes in SWM have set the business on a path to longer term earnings growth. The more its digital initiatives grow, the more it will offset the structural decline in linear TV and newspapers.
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.
