The long road ahead for Seven West Media

Emerald Financial Rating: Medium-term Sell
Price at time of publication: $0.42

The Australian media ranks have once again had their feathers rustled earlier in the year following the resignation of Seven West Media CEO Tim Worner just five days before he had been due to deliver the Groups FY19 financial results. With the timing of such a move likely foreshadowing the outcome, it quickly prompted Seven West Media (ASX: SWM) to install former executive James Warburton into the role. Less than three months into the role, Warburton has already offloaded a number of the Company’s flagship assets with the view of restructuring the business, gearing it towards younger demographics. 

Could Warburton’s arrival kick off a change in fortunes for the struggling conglomerate which has consistently seen a drop off in profits year after year? 

The CEO change

The resignation of Tim Worner should come as no real surprise to shareholders considering his leadership was plagued by legal stoush with scorned former assistant Amber Harrison which, for the Company, unfortunately, played out in the public eye. 

Though his tenure, Worner played his part in Seven West Media winning the AFL broadcast rights and launching Racing.com but despite his efforts – the share price never had a chance, with the Company’s EBIT falling from $318m in FY16, to $261m in FY17, $235m in FY18 and most recently $212m in FY19.

A familiar name amongst media executives, Warburton returns to Seven having previously been dubbed ‘Mr Ambitious’. The rising star was promptly poached by network rival Ten in 2011 to lead the struggling broadcast competitor. Unable to get into the role due to legal issues around non-compete clauses under his contract with Seven, Warburton bided his time on the sidelines before officially taking up the role with the intent of consolidating Ten’s role in the market amongst younger audiences, only for his tenure end 13 months later. Whilst some would suggest Warburton was destined to fail from Day 1 due to the sorry affairs at Ten Entertainment at the time, he quickly landed on his feet to take up the CEO role at V8 Supercars which was followed by a return to media, heading up APN Outdoor where he oversaw the company’s eventual takeover by JCDecaux for $1.1 billion in 2018. 

Following that success, a return to Seven was always on the cards where one month into his tenure, Warburton has already signalled his intent to restructure the business towards its profit centres, which traditional mediums were no longer contributing to. 

The sale of radio and print media assets

In the space of 8 days and just two months into his tenure as CEO, Warburton announced the divestment of Pacific Magazines to Bauer Media for $40 million and radio asset Redwave Media to Southern Cross Austereo for $28 million. 

The sale of Pacific Magazines should have come as no surprise with the natural decline within print media leading FY19 revenues for Pacific to fall to $315.2m, an 8.2% loss from the previous year. Combined with their WAN print media business, publishing delivered Seven West Media with $23m EBIT, a 25.1% decline on FY18. 

With the Pacific Brands portfolio containing key brands Marie Claire, Better Homes and Gardens, New Idea, Who and Australian Health, the sale is very much in line with Warburton’s desire to target younger audiences whose consumption is predominantly via online mediums. 

Proceeds from the sale of each business will be used by Seven West Media to pay down debt but signal Warburton’s clear intent to improve the Group’s balance sheet which was reported in FY19 to have net assets of $103.1 million against the debt of $564.4m. 

This ratio is significantly less favourable than competitor Nine Entertainment (ASX: NEC) which reports net assets of $2.58b against $512m debt.

Is this the start of a Seven West Media turnaround? 

The balance sheet overhang will continue to loom large on top of the current management team which is why continued cost-cutting is forecast, with the view of consolidation amongst profit centres which have genuine room for growth. 

This cost-cutting has been going on for quite some time but Seven’s move in the digital space via the sale of their stake in Yahoo Australia in 2018, which was branded as Yahoo7 and subsequent launch of 7news.com.au has been a good one and brought them in line with competitors.

Whilst the revenue generated by Seven was down 2.9% to $1,227m, the shift towards Seven Digital’s BVOD (Broadcast Video-on-Demand) business is likely to be the highest growth area for Seven with audiences flocking towards streaming services and convenience consumption. This resulted in advertising revenues from online catch-up and TV streaming up 32% to $124 million. 

Seven Studios continued its strong financial performance with Seven further leveraging content produced via a partnership with streaming providers Netflix and Facebook, as well as launching Seven Studios UK. In-house reality content continues to be the key financial backbone of the studio, however, claims in their annual report that “Instant Hotel, The Casketeers, Back With The Ex and Yummy Mummies, which have all debuted globally to widespread acclaim,” are contentious. 

With the Company forecasting FY20 EBIT to come in between $190-200m, roughly a 5% decline, the strategic turnaround will not come immediately in Warburton’s first 12 months which assures shareholders he will hold the position much longer than he did at network rival Ten as Seven West Media continues its attempts to rectify the balance sheet.

Should further asset divestment take place, Seven West Media’s New Ventures Portfolio looms as a potential selloff target having increased by 24% to a valuation of $95m in FY19. Within the portfolio is a 15% stake in peer-to-peer service sharing platform Airtasker purchased in 2016, which delivered earnings of $120m in FY19, and a minority stake in online healthcare platform HealthEngine.com.au. 

Emerald Financial Rating: Medium-term Sell
Price at time of publication: $0.42