(due warning: long and boringanalytical post)
So we've established in my earlier post that you can currently buy the SWM business for a cheaper enterprise value than during the Covid-19 lows despite the business no longer having any balance sheet concerns. Now the question is at 24.5 cents per share what are you reallybuying and why is it worth more than $1.50 per share?
Brief History Recap of SWM Since 2019
When James Warburton took over as CEO in August 2019 SWM had underlying NPAT of approx $129.3m (8.6cps) during FY19. The business had $564m of net debt and was burdened with legacy onerous contract provisions for Cricket and the Olympics. Seven Digital which included 7news.com.au and 7Plus earned only $15.1m of EBIT in FY19. The SWM business as a whole was burdened with a bloated cost structure, excess levels of middle management and had lost its dominance in the Total TV ratings. The business and in particular its news segment had lost millions in advertising revenue to digital businesses such as Google and Facebook which had upended the way News content was distributed. There was very little investment in the emerging digital business units of SWM and SWM had not yet sought to acquire its profitable regional affiliate Prime Media.
The transformation kicked off in August 2019 and boy did it start quickly! Mere weeks after Warburton became CEO the value accretive deals started rolling in and this blistering pace of improvement at Seven has not slowed down since. Its important to note that as a shareholder of SWM your capital is constantly working harder than just about any other ASX listed company-As noted in page 5 of the SWM 2023 Annual Report the strategic objective amongst others is to ''Drive an efficient business in order to bemore effective''- when you look at the history of SWM's Management decisions since Warburton became CEO its quite easy to see that they are serious about delivering shareholder value.
Non-Core Business assets such as Redwave (WA Radio broadcaster sold to Southern Cross Austereo for $28m or 8x EV/EBITDA https://www.marketindex.com.au/asx/sxl/announcements/southern-cross-austereo-to-acquire-redwave-media-3A526656 ) Pacific Magazines (Magazine Publisher sold to Bauer Media for $40m or 4.9x EV/EBITDA disallowed/business/companies/seven-west-media-offloads-pacific-magazines-to-bauer-for-40m-20191021-p532kf.html) ,the Osborne Park WA Head office (sold on a sale and leaseback arrangement for $75m with $4.3m per annum rent due for the 15 year lease term with 3% annual rent reviews) https://www.commo.com.au/news/2020/05/13/seven-west-media-headquarters-sold-primewest-75-million/1589358400 and Airtasker (Sold into an IPO at 65 cents for approx $45m of net proceeds with Airtasker now trading on market for less than 28 cents per share) https://www.copyright link/street-talk/seven-west-clears-out-of-airtasker-ipo-at-65c-a-share-20210131-p56y8u were all sold for prices well in excess of what the market price of SWM implied that they were worth. Other Assets such as TX Australia (the tv signals broadcasting asset which is jointly owned by Nine and Seven) and Seven Studios (the content producer of Home and Away , MKR and Better Homes and Gardens) were put up for sale but in acting sensibly Management did not sell these assets when the price offered by buyers was not value accretive for SWM shareholders.
Considering that the SWM business currentlytrades at less than 1.4 times FY23 EBITDA these sales of non-core and effectively non growth assets of the SWM group were fantastic deals that massively helped to improve the SWM balance sheet. To demonstrate how cheap SWM shares currentlyare , if you take the lowest sale multiple of this group of assets being thePacific Magazines sale at 4.9x EV/EBITDA and apply it to SWM's FY23 earningsthe SWM business would immediately trade north of 72 cents per share. By comparison Pacific Magazines at the time of sale had an extremely skinny and shrinking EBITDA Margin of approx 6.3% which is less than 1/3 of SWMs FY23 EBITDA Margin of approx 18.8% and the Pacific Magazines business was structurally in decline without any substantial digital growth options unlike SWM.
People often forget that the current CEO was one that trained under the tutelage of the late David Leckie (one of Australias great television executives at both Channel 9 and 7 who was responsible for the ratings dominance of 7 during his tenure) and as a CEO he is finely attuned to operating with a private equity mindset as shown by his successful corporate turnaround at V8 Supercars.
During the last 4+ years James Warburton and the entire Seven Executive Team have completely transformed the SWM business.In respect of the onerous contracts with Cricket Australia Seven undertook the difficult and often frustrating task of calling upon Cricket Australia to improve the quality of their scheduling and game quality.https://www.copyright link/companies/media-and-marketing/seven-to-escalate-rights-war-with-cricket-australia-20201001-p560wu This involved years of meetings and dispute resolution in an effort to get Cricket Australia to deliver the high quality of games that Seven was contracted to pay for.Ultimately the efforts of SWM Management were vindicated quite publicly with even a notable acknowledgement by the Financial Review of what an exceptional deal SWM had secured in their most recent broadcast rights deal from 2024 until 2031 https://www.copyright link/rear-window/cricket-australia-clean-bowled-yet-again-20230201-p5ch8b . The new broadcast agreement which begins in October 2024 means that yearly onerous contract provisions of approx $38m disappear completely and for the first time SWM gains the digital broadcast rights of Cricket for 7Plus ( I will expand on the game changing nature of these digital rights shortly however sufficed to say this is a massive boost towards Sevens ratings and revenue). (Continued...)
There is much more factual information and analysis that I will post in due course about SWM including my view on why it is worth more than $1.50 a share as right now Iam certain that SWM exists as a fundamentally undervalued and massively mispricedsecurity .
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