CCR

Carslaw
Capital
Research

The University of Sydney

Laurence Baudert
Luke McAlpin
Daniel Schimek

S
Seven
West
W t Media
M di Li
Limited
it d (ASX:
(ASX SWM)
29 April 2014

Recommendation: SELL
Target Price: $1.70
Last Close: $1.92
Market Cap: $1.92bn

Our investment thesis for SWM revolves around

five key messages
messages

CCR

Consensus advertising
g revenue forecasts are overly
y bullish,, g
given SWMs cyclical
y
and structural issues and its diminishing participation in growth that does exist

Newspaper margins are historically market leading, but it is only a matter of time
before the WA based paper follows the same path as Fairfax, and the US

In Television
Television, the competitive landscape is no longer benign
benign, with both TEN and
NEC recapitalised and possessing renewed management teams

Market has not recognised increasing costs of programming going forward

forward, with
AFL TV rights renegotiation to prove a massive catalyst at the end of CY14

Financial valuation confirms our thesis: fair valuation of $1

$1.70
70 represents an 11
11.5%
5%
discount to last close of $1.92 (as at 28 April 2014)

Carslaw
Capital
Research

CCR

SWM has outperformed other traditional media

companies but has the furthest to fall
companies,
fall

Carslaw
Capital
Research

SWM has underperformed the ASX300 considerably over the YTD

All four segments are

driven by advertising
revenue

$2.40

$2.20

(16.9%)

FY13 Revenue
$2.00

$1.80
Jan-14

Feb-14

Mar-14

SWM

ASX300 (rebased)

Currently trading in line with LT averages

Despite a bad FY13, does not look cheap

12.0x
11.0x
10.0x
9.0x

Average: 7.9x

8.0x
7.0x

C
Current:
t 7.2x
72

6.0x
5.0x
4.0x
2009

2010

2011

2012

2013

Apr-14

2014

Metric (A$m)

FY11

FY12

FY13

Revenue

726

1,937

1,867

EBITDA

267

515

465

NPAT

115

227

(70)

EPS
S

19c

35c

( )
(7c)

Net debt / EBITDA

7.3x

3.6x

2.7x

ROE

8.7%

8.8%

(2.5%)

Source: Capital IQ, company filings, ASX

The markets expectations of AdEx are bullish and

SWM is no longer well placed to capture it

AdEx is shifting away from traditional media

350

1%

Ad
dEx (A$m)

300

1HFY12

Q3 2014

0%

Q3 2014

(1%)
(2%)

200

(3%)

2HFY12

(4%)

11%
(25%)

1HFY13

2HFY13

1HFY14

Average: (3.8%)
(3 8%)

(5%)

100

(5%)
(13%)

50

(6%)
(7%)
(8%)

0
Television

Papers

Digital

Radio

Magazines

and NEC starting to capture more AdEx (YTD)

Market share
M

with market (FTA viewership) in decline

250

150

CCR

Carslaw
Capital
Research

45%

Seven

40%

Nine

35%

Ten

30%

Trends in advertising
TV ad spend (Q3 FY14): Seven up 4.6%
pcp, Nine up 11.2% pcp
Digital (online) real winner up 9.6%, with
time shifted viewing and audience
fragmentation eroding the reach of
television

25%
20%
15%
10%

Low Australian Corporate revenue growth

promotes cost cutting; typically in
advertising

5%
0%
16-39

18-49

25-54

GB+Child

Source: OzTAM (6:00-10:30pm), CEASA

The decline of the Newspapers division is only a

matter of time
time

CCR

Carslaw
Capital
Research

EBITDA margins traditionally market leading, but will follow the decline of print media
50%

Low circulation

40%
30%

L
Low
revenue

20%
10%

Poorer content

0%
1HFY10 2HFY10 1HFY11 2HFY11 1HFY12 2HFY12 1HFY13 2HFY13 1HFY14 2HFY14 1HFY15 2HFY15 1HFY16

We note the similarities to Fairfax

and the death spiral caused by AdEx losses

30%

140

25%

120

(14%)

FY13
FY14

100

20%

A$m

EBIITDA margin

Low circulation

15%
10%

80
60

(5%)

40

5%

20

0%

0
FY10

FY11

FY12

FY13

Advertising

Circulation

Source: Company filings, CCR estimates

There is an historical 40% cap on market share

CCR

Carslaw
Capital
Research

NEC and TEN are ready

45%

Improvement of Seven and Nine at expense

of Ten

Historical peak: 40%

40%
35%

Channel Ten has experienced hard times

now recapitalised and with new CEO
Hamish McLennan, targeting older age
bracket, sports and cannibalisation of Ten
by Eleven

30%
25%
20%

Seven

Nine

CY13
C

CY12
C

CY11
C

CY10
C

CY09
C

CY08
C

CY07
C

CY06
C

CY05
C

CY04
C

CY03
C

CY02
C

CY01
C

CY00
C

CY99
C

CY98
C

CY98
C

CY97
C

15%
CY96
C

Television landscape to provide reinvigorated

competition going forward
forward

Channel Nine will fight for current share

Ten

Seven has declined, whilst Nine has grown

45%

SWM governance a well known issue

2013

40%

2014

35%
30%

SWM was originated on the initiative of

Kerry Stokes after buying into and taking
effective control of WAN
Treatment of WAN minority shareholders
was controversial

25%
20%

Query whether Stokes focus is on

increasing the wealth of all shareholders,
particularly going into a competitive
environment

15%
10%
5%
0%
Seven

Nine

Ten

Source: Company filings, OzTAM

Increasing attraction of live sports to the FTAs

100%

Wi
With
h time
i
shift
hif viewing
i i and
d audience
di
fragmentation, live sports is the last source
of a large, predictable audience

80%
60%

Cross promotion of internal material just as

important as external advertising during
sport broadcasts

40%
20%

Competitors all place bids to prevent other

providers from gaining cheap rights

Sports

Foreign

Australian

CY13
C

CY12
C

CY11
C

CY10
C

CY09
C

CY08
C

CY07
C

CY06
C

CY05
C

CY04
C

0%

AFL could become ~15% SWM OPEX

News

FTA TV cost of AFL TV rights historically

250

2017E-2021E:
Average $192m pa

200

100

2012-2016:
Average $96m pa
+100%

2007-2011:
Average $96m pa

150
A$m

2002-2006:
Average $43m pa

1997-2001:
Average $33m pa

+0%

+123%
+26%

50

CY
Y21E

CY
Y20E

CY
Y19E

CY
Y18E

CY
Y17E

CY16
C

CY15
C

CY14
C

CY13
C

CY12
C

CY11
C

CY09
C

CY08
C

CY07
C

CY06
C

CY05
C

CY04
C

CY03
C

CY02
C

CY01
C

CY00
C

CY99
C

CY98
C

0
CY97
C

AFL TV rights
renegotation to act as
a negative price
catalyst

CCR

Carslaw
Capital
Research

Why?

CY10
C

Cost of programming, particularly for sport, will rise

due to hyper-competitive bidding
bidding

Source: Company filings, CCR estimates

Our financial analysis confirms that SWM is fully

priced and trades materially above fundamental value

CCR

Carslaw
Capital
Research

Target price: $1.70

Our target price of

$1.70 (EV $2.95bn)
is derived by
triangulating
between DCF and
multiples valuation
methodologies

52w trading range

DCF

Trading comps

$1.88

$1.34

$2.60

$1.74

$1.48

$1.94

- 52 week trading range of $1.88 to

$2.60 with last close of $1.92

- DCF based on CCR forecasts,

assuming 50% increase in AFL
TV rights cost
- Range based on WACC of 1214% and TGR of 2.5%

- Historically trades at a premium to

peers, which will not persist
- Multiples range based on a
g range
g of 6.0-7.0x FY14F
trading
EBITDA

$1.00 $1.30 $1.60 $1.90 $2.20 $2.50 $2.80

Share price (A$)

Note: Based on FY14F EBITDA of $455m

CCR

Carslaw
Capital
Research

S
Seven
West
W t Media
M di R
Recommendation:
d ti
SELL
1.

Market AdEx forecasts are overly bullish

2.

Newspapers division simply behind the curve

3.

TV landscape presents reinvigorated competition

4.

TV costs to increase substantially, esp. AFL

5.

p
Overvalued and overpriced
9

CCR

Carslaw
Capital
Research

A
Appendices
di

10

CCR

DCF analysis provides a valuation of $1.60 for

SWM based on a WACC of 12
SWM,
12.8%
8%
WACC calculations
Risk free rate(a)
Market risk premium
Equity beta(b)
Cost of equity

Y/E 30 June

5.5%

EBIT (1 - T)

6.5%

Plus D&A

1.6
15.5%

2014F(a)

Less capex

256

259

265

37

37

37

38

(23)

(23)

(23)

(23)

(23)

19

25

10

326

261

271

282

290

NPV at 13% WACC and 2.5% TGR

2,847

Cost of debt (post-tax)

6.7%

Less net debt

1,251

Leverage target

30%

Equity value

1,596

12.8%

Terminal
value(b)

2 869
2,869

997

Share price

$1 60
$1.60

(a)

Sensitivity WACC and TGR to share price

WACC

T
TGR

Based on long-term through

the cycle (TTC) view on the
Australian government bond
rate
(b) Bloomberg
(c) Based on long-term TTC
view on the Australian
government bond
b d rate + 400
basis point margin
Source: Bloomberg, CCR analysis

2018F

222

9.5%

WACC

2017F

37

Cost of debt (pre-tax)(c)

Shares outstanding

2016F

292

Less in working capital

Free cash flows

2015F

Carslaw
Capital
Research

12.0%

12.5%

12.8%

13.5%

14.0%

2.00%

$1.65

$1.59

$1.51

$1.37

$1.27

2.25%

$1.69

$1.64

$1.56

$1.41

$1.30

2.50%

$1.74

$1.69

$1.60

$1.45

$1.34

2.75%

$1.80

$1.74

$1.65

$1.49

$1.38

3.00%

$1.85

$1.79

$1.70

$1.53

$1.41

11

CCR

Comparable company analysis provides a valuation

of $1
$1.86,
86 using a discounted EV/EBITDA multiple

Carslaw
Capital
Research

FY14F NTM EV / EBITDA (x)

$1.8bn

Shares outstanding

1.0bn

Share price

$1.86

Source: Bloomberg, company

filings, CCR analysis

8.2x
8.0x

7.6x

7 2x
7.2x

7.0x

6.7x

6.6x

Median: 6.8x
5.9x

6.0x

4.0x

2.0x

0.0x
Prime Med
dia Group

Equity value

Fairfa
ax Media

$1.3bn

Southern Crosss Media

Net debt

10.0x

McCla
atchy Co.

$3.1bn

Nine Entertainm
ment Co.

Enterprise value

APN News & Me

edia Ltd.

6.8x

Seven We
est Media

Median multiple

Source: Capital IQ, company filings

12

CCR

There is strong precedent to suggest a 100%+

increase in AFL TV rights costs will occur
occur

Carslaw
Capital
Research

Cost of cricket FTA TV rights over time

140

2014E-2018E:
Average $110m pa

120
2007-2013:
Average $45m pa

100

+144%

A$m
m

80
60

2000-2006:
2000
2006
Average $21m pa

+114%

40
20

CY17E
E

CY18E
E

CY16E

CY17E

CY16E
E

CY15E
E

CY14E
E

CY13
3

2
CY12

CY11

CY10
0

CY09
9

CY08
8

CY07
7

CY06
6

CY05
5

CY04
4

CY03
3

2
CY02

CY01

CY00
0

Cost of NRL FTA TV rights over time

250

2013E-2017E:
g $205m p
pa
Average

200
2007-2012:
Average $83m pa

100

1996-2006:
Average $33m pa

+147%

+151%

50

CY15E

CY14E

CY13E

CY12

CY11

CY10

CY09

CY08

CY07

CY06

CY05

CY04

CY03

CY02

CY01

CY00

CY99

0
CY98

A$m

150

13