(part 2- SWM is a transformed digital growth company priced like a ‘cigar butt’ investment) SWM is now a media business that has formed new digital foundations across all of its key areas.
When I talk about the transformation at SWM, what I am actually talking about is the transformation of the SWM business model.
The fact is that listed businesses which transform their business model also transform the multiple that their stock trades at. It is an accepted principle that businesses with strong digital business models trade at much higher multiples than legacy ''cigar butt'/ value type stocks.
IN SIMPLE TERMS THE NEW BUSINESS MODEL OF SWM IS ONE WHICH WILL IN DUE COURSE TRADE AT A MUCH HIGHER EARNINGS MULTIPLE. WHEN YOU FACTOR IN THAT SWM HAS $155M OF NPAT AT MID CYCLE EARNINGS THIS IS A VERY BIG DEAL
1. NEWS- SWM has long held a NEWS business that has some of the most dominant news brands in Australia (7NEWS, The West Australian) • Over the last decade there has been a shift to news consumption via social media and internet search engines. These platforms now act as the gatekeepers of internet traffic which is looking for NEWS.
• What is the economic effect on the SWM business model from this transformation? – The News Media Bargaining Code has resulted in SWM gaining >$30m p.a in contracted, recurring revenue from Google.
• This revenue is guaranteed by law (meaning Google/ Facebook/ Tiktok have to make these deals with SWM or be penalised under the News Media Bargaining Incentive) and there is nearly no additional expense required to earn it.
Lets look at some possible scenarios involving digital disruption to the way people consume news. 1. More people going to Youtube for their news? 2. Younger audiences not picking up the physical newspaper and instead watching Tiktok? 3. Audiences spending more time on Facebook News feeds instead of news websites? Great!!! All of these above scenarios drive growth and profits to 7news and the West Australian thanks to the News Media Bargaining Code and Incentive.
Seriously I think people are missing this very important point -SWM has effectively hitched its wagon to the powerful digital platforms instead of competing against them. The News Media Bargaining Code and Incentive acts as a royalty on the consumption growth of these digital platforms while ensuring that the position of SWM in news cannot be dislodged by new disruptive market forces.
The end result is an expected >$50m per annum in permanent revenue that SWM earns just from the News Media Bargaining Incentive. (This includes $30m per annum from Google under the current deal and an estimated $20m+ p.a from Meta and Tiktok once these new negotiations are finalised.)
If this ‘royalty’ which is earned by SWM because of the News Media Bargaining Incentive was spun off in the same way that Deterra Royalties (ASXRR) was spun off as a separately listed royalty, I would expect for it trade at a multiple of at least 10x revenue. Considering that this 'royalty' is guaranteed by law, has no additional costs to incur the revenue and is tied to the growth of some of the largest and most profitable digital platforms in the world it is a very valuable asset indeed. Considering that this ‘royalty’ has an independent market value of at least $500m, you can start to understand why it is so very silly to price SWM at a market cap of $240m! The market will eventually figure this out but not before some people get very, very rich in the process!
SWM Price at posting:
15.5¢ Sentiment: Buy Disclosure: Held
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RR) was spun off as a separately listed royalty, I would expect for it trade at a multiple of at least 10x revenue. Considering that this 'royalty' is guaranteed by law, has no additional costs to incur the revenue and is tied to the growth of some of the largest and most profitable digital platforms in the world it is a very valuable asset indeed.
(20min delay)