Why SWM is worth more than $1.50 per share, page-4

(continued…)

Revenue and Cost Summary for FY24

In total it looks like approximately $749m of revenue in 1H FY24, $696m of revenue in 2H FY24 plus revenue share growth across the year amounting to an estimated $52.5m if SWM achieves a 40% revenue share.

We know that Management guidance is for costs to be between $1.23-$1.24 billion (which includes $25m of the $60m cost cutting target set out at the FY23 AGM). So taking the mid-point of $1.235b in costs seems a reasonable estimate for FY24.

In addition, during FY24 there is still the last of the Code7+ investment and Onerous Contract amounts of approx. $20m and $42m respectively.

FY25 Revenue Estimate

Taking FY24 as a starting point there is approx. $1,497m of revenue plus the following additional revenue in FY25

1. SWMs linear tv revenue has fallen by >$165m during this current ad market recession. If during FY25 the linear tv market reboundsonly slightly by 4-5% then this will pessimistically still result in an additional $40m+ of linear tv revenue. I consider that the linear tv market rebound will likely be much stronger during FY25/FY26 however there is no pointpricing blue sky thinking into the estimates.

2. IF BVOD revenue growth during FY25 stays at a very modest annual growth rate of 25% that is still below the PWC 32% CAGR 5 Year Forecast and the historical CAGR of 40% achieved between CY19-CY22 (page 9 and page 11 of the May 2023 Macquarie Conference Presentation https://clients3.weblink.com.au/pdf/SWM/02661331.pdf ) and SWM achieves a 40% BVOD revenue share then this means an additional $53m+ of BVOD revenue in FY25 without including the extra BVOD revenue from Digital Sports Rights for AFL and Cricket. Please note that the forecast as to 40% BVOD revenue share is once again tremendouslypessimistic as the actual target set by managementis 45%and 7plus has achieved an average 41% share over the prior 3 years without having the two biggest digital sports rights in Australia which are AFL and Cricket (page 10 of theMay 2023 Macquarie Conference Presentation).

3. An additional $12m in tax offsets from the new producer offset tax change which enables Home and Away to now be eligible for tax deductible production costs from July 2024. This is a massive deal for SWMs free cashflow and the competitiveness of Home and Away for global audiences. Assuminga season of Home and Away costs $40m to produce then this producers offset tax change is set to increase after taxearnings by approx. $12m in FY25. https://www.adnews.com.au/news/seven-welcomes-producer-offset-tax-change

4. An additional $2m+ of revenue from the new TVSN Shopping Channel which launches in July 2024. https://www.adnews.com.au/news/seven-signs-exclusive-with-shopping-channel-tvsn

5. Additional revenue of approx. $26m from the Code7+ (Phoenix) Investment. Phoenix is a Total TV trading system that revolutionises the way Seven advertising is sold and makes SWM a real contender in the $6.5b total TV advertising market. https://www.mediaweek.com.au/meet-phoenix-sevens-total-tv-trading-system/ The FY23 Annual Report states thatthe payback period on the approx. $40m Code7+ investment is less than 18 monthsmeaning an extra $26m in revenue can be expected.

6. Digital Sports Rights (AFL and Cricket) from October 2024. https://www.adnews.com.au/news/seven-upfront-afl-and-cricket-coming-to-7plus-in-2024

Estimates from Media Buyers are for these rights to boost the overall BVOD ad market by at least 15% meaning an additional $75m+ of revenue for SWM -SWM Management itself has guided to another 4 Billion minutes of BVOD content consumption from just the AFL and Cricket digital rights. When you include the additional costs for both the Cricket and AFL Rights this still means an additional net $21m+ of BVOD revenue.

The SWM reported metric of ‘Cashflowbefore temporary items and capital items’ (Page 10 of 2023 Full Year Results- Investor Presentation https://sevenwestmedia.com.au/assets/pdfs/3-Presentation-of-Year-End-Results.pdf7)- shows what massive levels of free cash flow the business produces when it isn’t burdened with onerous contracts. Noting that the last onerous contract ends in less than 5 months’ time, many share market participants will be surprised at the huge amount of free cash flow the business starts to produce.

7. Dividend income from the recent asx:A1N investment. If we presume that ARN media continues its existing dividend payout ratio of approx 73% and we ignore the beneficial impacts from the improving radio ad market or the double digit earnings accretion expected from the A1N/SXL merger ,SWM will earn approx $4.2m in fully franked dividends in FY25 from its 19.9% shareholding in A1N.

When you look forward a matter of months,it is clear to see the absolute surge in revenue and free cash flow that is aboutto arrive for the business.

SWM has demonstrated its exceptional discipline whenit comes to cost control (Since FY20 SWM’s cost base has grown at less than 1.5%per annum during an inflation crisis which is an absolutely brilliant achievement-https://clients3.weblink.com.au/pdf/SWM/02737713.pdf ) hence much of this upcoming FY25 revenuewill fall straight to the bottom line. It is also worth pointing out thatanother $35m of cost out is still yet to occur and will bring the FY25 costbase to $1.224b (which includes yearly 2% cost inflation but does not include othercost investments SWM may decide to make).

One thing is absolutely certain, a muchhigher SWM share price is just around the corner.

Iwill next write about the massive digital transformation the business has gonethrough and what’snext for shareholders who are buying the massively undervalued SWM shares beforethey skyrocket in price closer to their intrinsic value of >$1.50 a share.