EUR 850.00 For Business Accounts Only

Morningstar | Sunrise for Seven

We lift our fair value estimate on Seven West Media by 6% to AUD 0.70 per share. This is the first upgrade in recent memory, reflecting not only the 3% beat on fiscal 2018 EBIT (down 10% to AUD 236 million versus our AUD 229 million forecast), but also the strong earnings guidance. Indeed, management's projected fiscal 2019 EBIT growth of 5% to 10% has led to an average 10% increase to our medium-term operating earnings forecasts, providing the foundation for our intrinsic assessment uplift.

The expected return to profit growth in fiscal 2019, after six straight years of decline, is underpinned by a confluence of factors. The recovery in the TV advertising market (up 2.5% in fiscal 2018, 3.8% in the June-half) is likely to continue in fiscal 2019, by 2.0% on our forecast. This will coincide with Seven's resurgent TV ratings which achieved a record 41.6% commercial share in the June-half, driving our forecast 39.3% share of the TV advertising market for Seven in fiscal 2019 (up from 38.1% in fiscal 2018). All this will be augmented by continuing benefits of the current cost-out program, one that resulted in an AUD 21 million saving in fiscal 2018 and is projected for a further AUD 10 to 20 million in fiscal 2019.

Still, we are not convinced the strength of no-moat-rated Seven's near-term outlook justifies the doubling of its stock price since April this year. The 52% premium at which the shares are trading relative to our AUD 0.70 fair value estimate appears to incorporate anticipation of corporate activity, amidst consolidation currently under way post the recent media reform. Management did little to quell such thinking, trumpeting its desire to deepen a relationship with entities such as News Corporation--a sure-fire way to keep the mergers and acquisitions proponents occupied. We reiterate that our intrinsic assessment is based on Seven as a stand-alone entity, and is predicated on our view of Seven's sustainable, midcycle TV revenue share and margins.

We project midcycle metropolitan TV advertising revenue share for Seven to be 37.5% longer term, with sustainable margin pegged at 16.0%. This is below the 22.7% average EBIT margin achieved over the past eight years, reflecting the continuing impact of structural pressures on the industry from digital and mobile insurgents, as well as the likely re-emergence of cost pressures to slow audience losses to these disruptors.

Seven's fiscal 2018 normalised net profit after tax, or NPAT, reduced 15% to AUD 143 million. Including one-off impairment charges, redundancy costs, partly offset by gains on asset sales, reported net profit was AUD 135 million. Dividends remain suspended, as restoring balance sheet health continues to take priority. Good progress was made on that front, with debt falling by AUD 76 million in the June-half to AUD 635 million and net debt/EBITDA down to 2.3 times (from 2.4 times a year ago). We see management's target leverage of below 2.0 times in fiscal 2019 as achievable, with our forecast showing 1.9 times.

Divisionally, TV EBIT fell 14% to AUD 216 million, slightly below our AUD 220 million estimate. This was driven by the well-documented ratings struggles which led to a fall in TV market revenue share to 38.1%, from 40.2% a year ago. However, strong recovery was evident in the second half, with ratings share reaching an all-time industry record of 41.6% (from 39.4% a year ago). While this was boosted by both the Winter Olympics and Commonwealth Games telecasts, Seven fully leveraged the promotional platforms that these events provided, kickstarting the ratings recovery. In fact, excluding the Commonwealth Games, Seven ratings share still averaged around 40%, setting a strong foundation for monetisation in fiscal 2019. The schedule will be further boosted by the recently-signed cricket rights, furnishing Seven with a premium all-year-round sports content (summer cricket, winter Australian Football League).

Newspaper EBIT fell 19% to AUD 21 million, above our AUD 19 million forecast, driven mostly by better-than-expected cost reduction. Magazine EBIT jumped to AUD 10 million, from AUD 4 million a year ago. This was the first increase in recent memory, mainly aided by significant cost savings from recent restructuring.