Seven West Media (ASX: SWM)

Added to IG Group with total position of 4500 and average price of 477.69GBX

Initiated position of 11000 shares in CMC Markets (LON: CMCX) with average price of 107.94 GBX

Initiated position of 30,000 shares in Seven West Media with average price of $0.793AUD

As noted in the previous post, I am periodically adding to my position in IGG. Despite the current price of 531GBX, I am still seeing great value in IGG.  In a similar vein, I see value in CMCX as well.  CMCX’s investment thesis is the same as IGG – great FCF, low P/E and high dividend yield.  I believe that the market has vastly over-reacted to the looming FCA regulation of the CFDs market and shares should trend higher in the next few months until the FCA update in March 2017.

Now to the main event – Seven West Media (SWM).  SWM is a media business based in Australia  with its main business being free to air (FTA) TV.  SWM has had  a turbulent year with its earnings downgrade for FY2017 due to spending for the Olympics and AFL broadcast and the sex scandal involving its CEO, Tim Worner.

Let’s not kid ourselves, FTA TV is definitely in a decline which is reflected in FTA networks’ share price.  SWM’s share price has declined from over $15 in 2007 to its current price of $0.84.  FTA TV also face other headwinds such as the potential watering down of the anti-siphoning laws in Australia.  For those of you living under a rock in Australia, anti-siphoning laws prevent subscription-based media e.g. Foxtel and Netflix to acquire monopolistic rights to certain sporting events and thereby granting FTA networks a first refusal to these events. However, the central question as always is whether the steep decline warranted?

SWM has a market capitalisation of 1.3B and a trailing P/E ratio of 7. SWM’s 2016 financial reports show a NPAT of 184M.  Just how much of this is sustainable with the onslaught of pay TV and potential weakening of the anti-siphoning list?  PwC has forecasted that FTA advertising to decline 1% until 2020 and the effect of any watering down of anti-siphoning list will be dependent on the final list.  In order to have a sufficient margin of safety, let’s assume that the SWM’s advertising profit shrinks by 50% and the death of all SWM’s other business e.g. newspaper and magazines.  Using a weighted average of segment profit in Note 1.1B against 2016 NPAT reported, it still leaves us with a NPAT of 84M and a P/E ratio of appropriately 15x.  Is 15x a demanding in light of lofty valuations today?  – I don’t think so.  Granted, this is an imprecise valuation of SWM but it shows that SWM is vastly undervalued with a little common sense thinking.

Another potential catalyst is the venture capital arm of SWM.  SWM invests in promising start-ups e.g. 15% of Airtasker which they see benefits in synergy.  Granted, that there will be numerous duds but investing in start-ups is sort of like playing roulette – the downside is limited but the payoff is exponential.

A sticking point for me is the amount of debt SWM carries on its books.  As at June 2016, it has 710M of net debt which is about 57% of equity and all of the debt is due on October 2018.  However, I don’t see any issues with SWM repaying or refinancing their debt under their current profit profile even under the dire scenario of 50% collapse in advertising business which I detailed above.

I will be looking to add to my position in SWM periodically below $0.9AUD.  I foresee SWM’s share price to trend higher slowly unless the CEO can’t keep it in its pants again.  In any case, it would be a great opportunity to add to my position if that happens.