Why SWM is worth more than $1.50 per share

Due warning: long and boring analytical post

In an effort to understand why SWM is worth more than $1.50 a share I thought I would put together some very rough, back of the envelope financial estimates that help to explain the massive tidal wave of revenue and free cash flow that is about to lift the business and along with it the share price. Kurt Burnette from Seven recently spoke to Adnews (quote and article below) about how the tv ad market is already beginning to significantly improve in Jan-March 2024. For whatever reason the sharemarket at the moment seems to be blissfully unaware of the obvious signals that the tv ad market is improving and starting its 2+year revenue recovery on the way to all new highs.

In the same way that the Covid-19 pandemic ad market recovery spiked the share price from 6 cents at its all time low to >70 cents a share, I think this massive wave of incoming revenue will do the same. CEO James Warburton in his recent interview with Mediaweek had this to say about where Seven is currently positioned.

Regarding the outlook for Seven, Warburton noted the media sector is currently midway through an ad cycle. “The Seven business is in great shape and when the ad market comes back Seven will absolutely fly. We are already performing very well, we are just not getting the reward for it yet in revenue terms or share market appreciation.”https://www.mediaweek.com.au/mediaweeks-a-to-z-of-2023-j-is-for-james-warburton-as-he-announces-seven-exit/

Now it goes without saying that these below figures will be incorrect and imprecise simply because they are forward looking and the purpose of the below is not to accurately forecast the FY24 results but rather to see whether the share price currently being paid on market is undervalued significantly. Put simply it is often better to be approximately right rather than precisely wrong when estimating.

Ok so lets start off with the Revenue and Revenue Share for FY23

· 1H FY23 had revenue of $815m and a 39.3% Total TV Revenue Share
· 2H FY23 had revenue of $673m and a 39.1% Total TV Revenue Share in Q4 and an estimated 36.3% Total TV Revenue share in Q3.

1H FY24 Revenue and Revenue Share

Guidance was given at the FY23 AGM that underlying revenue was tracking at the same FY23 Market Trend which was down 8% on a Total TV basis.

So if we assume the worst case scenario that revenue at WAN has also fallen at a similar rate to the Total TV Market and we also assume that revenue at other business units with annuity style earnings (Seven Studios- Home and Away distribution sales , Google News Media Bargaining contract income etc) have suffered the same significant 8% drop (both of these are extremely pessimistic assumptions.) then revenue could be estimated at approx $749m for 1H FY24 + the Total TV Revenue Share Increase during the half compared to the prior Financial Year. We know from the FY23 AGM announcement that SWM has gained significant revenue share of 42.2% in Q1 FY24 and based on just the 7Bravo content alone (which wasn't on air in Q2 FY23 and has at least a 1.8% audience share) Q2 FY24 could easily achieve a 40%+ Total TV revenue share.

2H FY24 Revenue and Revenue Share

The Chief Revenue Officer Kurt Burnette spoke to adnews.com.au about how he was seeing a significant improvement from the October-December quarter into January-March with a stronger outlook for both linear TV and BVOD. https://www.adnews.com.au/news/seven-on-the-power-of-digital-phoenix-and-testing-new-formats-in-2024

Specifically he said “January-March can often be short booking months, but the numbers against the same time last year are well ahead, suggesting a high-demand start to the year, particularly in terms of Seven’s sport, news and Australian Idol,” he told AdNews.

“In fact, sport and live news continue to be a key pillar for most brands and are in high demand. April-June is looking very strong with, for example, very positive upfront commitments in Dream Home and AFL, as well as 7plus and its NBC Universal content.”

If we are to pessimistically assume that Linear TV only rebounds 3% in 2H FY24 and the BVOD Market only grows at the same rate it currently is of say 12% (low-mid teens BVOD market revenue Growth reported on page 10 of the ASX:NEC FY23 AGM Presentation) then linear tv revenue will grow by approximately $15m and BVOD revenue by approximately $8m in the 2H FY24.

For the full year Management is still targeting 40%+ Revenue Share (Compared to 38.5% Revenue Share for FY23). If the Total TV Market is currently worth approximately $3.5 billion (including regional, metro and BVOD) then 1.5% of increased revenue share is worth approx. $52.5m in additional revenue this FY if the 40% Revenue Share target is achieved.

When you look at the Revenue Share SWM has achieved so far in FY24 (Q1 42.2% Q2 Estimated 41.1%) and just how well the new 7Bravo content is performing it seems a reasonable target for management to achieve 40% revenue share in FY24.

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