Greg Fraser July 25, 2012
What's new? Like all advertising-based companies, Seven West Media's revenue and earnings have gone south and don't look like turning around soon. What to do about a mid-season loss of form?
The company's balance sheet has been carrying a little too much debt after the acquisition of West Australian Newspapers in 2011, and was looking a little out of condition. The team manager decided that although the Seven Network had racked up a few good wins this season, an injection of equity was required to silence the murmuring from the spectator banks.
The $440 million raised will repay some of the company's debt and put it on a better footing. The dividend strategy has also been altered and although it has been heavily cut to 50 per cent of net profit after tax (from June next year), it has not left the company devoid of yield appeal. If anything, it is now more conservative and therefore more sustainable.
Seven West's two biggest supporters, Seven Group (33.2 per cent) and KKR (11.8 per cent), have stumped up their share of the new money. A new head coach has been introduced and although he comes from a different code, Don Voelte lacks nothing in fire and brimstone. In fact, he's been watching over Seven West Media from the directors' box for the past four years, so is not unfamiliar with the game.
Debt levels will reduce to about $1.44 billion, lowering the annual interest burden to about $110 million. That will take pressure off the operating earnings of the company, which have been squeezed by a big drop in revenue across its television, newspaper and magazine assets.
Outlook Seven West Media updated its guidance for the 2012 financial year, indicating that operating earnings would be about $473 million, which is slightly above the previous guidance range of $460 million to $470 million.
The biggest advertisers in the country are retailers, banks, car manufacturers, phone companies and governments. But they have all been spending less on advertising as consumers have tightened their purse strings since the global financial crisis scared them out of the shops.
Household disposable income and consumer confidence are therefore the two ingredients that need to achieve a sustainable upturn before the advertising drought breaks.
When it does, companies such as Seven West Media have substantial operating leverage to take advantage of that change and should benefit handsomely. But there are no rain clouds amassing on the horizon.
Price Seven West Media's share price has struggled during this advertising downturn. Since the beginning of the year, the price has declined by 50 per cent but its peers have suffered similar setbacks. The Ten Network, for example, is down 37 per cent so far this year.
Worth buying? The Seven Network, The West Australian newspaper and magazines such as Better Homes and Gardens and New Idea are excellent media businesses in their own right.
Removing the balance-sheet stress as a factor for investors to worry over is a positive step.
The time is not yet right to buy its shares, though. That will depend on a big improvement in the advertising market before Seven West Media can begin to climb the ladder again.
Greg Fraser is an analyst at Fat Prophets sharemarket research.