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Morningstar | A Weak Innings from Seven, Follow-On Required on Cost-Out

We cut our fair value estimate on Seven West Media by 3% to AUD 0.68 per share. This follows the no-moat-rated group's weaker-than-expected fiscal 2019 first-half result across the board.

Benefits of a 200-basis point lift in TV revenue share to 38.4% during the half were effectively wiped out by the 5% fall in the wider metropolitan TV advertising market. Adjusted for the extra trading week in the prior period, this led to a flat underlying TV EBIT of AUD 142 million, a subdued outcome in the context of a stellar, cricket-fuelled ratings period (primetime ratings share up 170 basis points). The combined 23% slump in print media EBIT to AUD 13 million added to the woes, with the magazine profits back on the downhill slope.

It is little wonder fiscal 2019 EBIT guidance was shaved to 0% to 5%, from 5% to 10% previously. And its delivery critically hinges on achieving cost reduction of AUD 30 to 40 million, some AUD 10 million more than the previous target.

We have reduced our forward operating earnings forecasts by an average of 3%, with fiscal 2019 EBIT estimate now pegged at AUD 236 million. While at the low end of the revised guidance range, the practice of conservative forecasting relative to management projection has served us well in the past and we believe will continue to do so in the future.

Despite the forecast reduction and the fall in the fair value estimate, shares in Seven remain 24% below our intrinsic assessment. Trading at 5.5 times our fiscal 2019 EPS estimate and 5.2 times EBITDA, we believe both the cyclical and structural headwinds are more than reflected in the current stock price. What is not reflected is the still solid free cash generation (AUD 47 million in the first half, up from AUD 16 million a year ago) and the improving balance sheet. Indeed, net debt/EBITDA is on track to fall to 2.0 times on our estimates by the end of fiscal 2019, with management sticking to a sub-2 times target.

Compositionally, more than two thirds of our AUD 15 million group EBIT estimate downgrade for fiscal 2019 stemmed from cuts to newspaper and magazine forecasts. This was after a horror first half, where newspapers EBIT fell 17% to AUD 9 million and magazine EBIT crashed 35% to AUD 4 million. With the combined earnings from these two units now accounting for less than 10% of the group total, we are beginning to ponder whether all the management resources and time being spent in restructuring these print media assets are worth the effort.

TV EBIT fell 4% to AUD 142 million in the first half. However, adjusted for the extra week in the prior period (around AUD 6 million impact), like-for-like TV EBIT was largely flat. We cut our fiscal 2019 TV EBIT forecast by 2% to AUD 225 million, up 4% year on year, driven by monetisation of recent ratings gains and benefits of the cost-out program flowing through.

As for the upgraded cost-out guidance, the AUD 30 to 40 million target is a big increase from the original AUD 10 to 20 million target set merely six months ago, and subsequently increased to AUD 20 to 30 million three months ago. While we are giving management the benefit of the doubt in achieving the midpoint of the new cost reduction target, close attention needs to be paid on whether this sudden cost cut really is all efficiency-driven or will begin to impact on content (and thus future revenue) generation.

In terms of result details, fiscal 2019 first-half reported net profit after tax, or NPAT, fell 14% year on year to AUD 86 million. Excluding one-offs, underlying NPAT was down 8% to AUD 92 million. This was the result of an 8% fall in underlying EBIT to AUD 147 million in the half, with group revenue down 2% to AUD 798 million. Dividends remain suspended, with the board's priority being balance sheet restoration. Net debt/EBITDA ended the first half at 2.3 times, but we forecast this will fall to 2.0 times by the end of fiscal 2019, aided by earnings stabilisation and better cash flow management.