Presentation on Stock Pitch

CCRCarslawCapitalResearch

The University of SydneyLaurence Baudert

Luke McAlpinLuke McAlpin Daniel Schimek

S W t M di Li it d (ASX SWM)Seven West Media Limited (ASX: SWM)29 April 2014

Recommendation: SELLRecommendation: SELLTarget Price: $1.70Last Close: $1.92Market Cap: $1.92bn

Our investment thesis for SWM revolves around five key messages


five key messages

1 Consensus advertising revenue forecasts are overly bullish, given SWMs cyclical 1 g y , g yand structural issues and its diminishing participation in growth that does exist

Newspaper margins are historically market leading, but it is only a matter of time2 Newspaper margins are historically market leading, but it is only a matter of time before the WA based paper follows the same path as Fairfax, and the US

In Television the competitive landscape is no longer benign with both TEN and

2

In Television, the competitive landscape is no longer benign, with both TEN and NEC recapitalised and possessing renewed management teams

Market has not recognised increasing costs of programming going forward with

3

Market has not recognised increasing costs of programming going forward, with AFL TV rights renegotiation to prove a massive catalyst at the end of CY14

Financial valuation confirms our thesis: fair valuation of $1 70 represents an 11 5%

4

Financial valuation confirms our thesis: fair valuation of $1.70 represents an 11.5% discount to last close of $1.92 (as at 28 April 2014)5

2

SWM has outperformed other traditional media companies but has the furthest to fall


companies, but has the furthest to fall

SWM has underperformed the ASX300 considerably over the YTDAll four segments areAll four segments are driven by advertising revenue

FY13 Revenue

$2.20

$2.40

(16.9%)FY13 Revenue

$1.80

$2.00

Jan-14 Feb-14 Mar-14 Apr-14

(16.9%)

Currently trading in line with LT averages Despite a bad FY13, does not look cheap

SWM ASX300 (rebased)

Metric (A$m) FY11 FY12 FY1311.0x

12.0x

Revenue 726 1,937 1,867

EBITDA 267 515 465

NPAT 115 227 (70)

S ( )7.0x

8.0x

9.0x

10.0x

11.0x

C t 7 2

Average: 7.9x

EPS 19c 35c (7c)

Net debt / EBITDA 7.3x 3.6x 2.7x

ROE 8.7% 8.8% (2.5%)4.0x

5.0x

6.0x

2009 2010 2011 2012 2013 2014

Current: 7.2x

3

Source: Capital IQ, company filings, ASX

The markets expectations of AdEx are bullish and SWM is no longer well placed to capture it

CCRCarslawCapitalResearch1 SWM is no longer well placed to capture it

AdEx is shifting away from traditional media350

Q3 20141% 0%1HFY12 2HFY12 1HFY13 2HFY13 1HFY14

with market (FTA viewership) in decline

150

200

250

300

d

E

x

(

A

$

m

)

Q3 2014

11% (4%)

(3%)

(2%)

(1%)

Average: (3 8%)

0

50

100

150

A

d

(13%)

(25%)

(5%)

(8%)

(7%)

(6%)

(5%)Average: (3.8%)

TV ad spend (Q3 FY14): Seven up 4.6%

Television Papers Digital Radio Magazines

40%

45% SevenNine

and NEC starting to capture more AdEx (YTD) Trends in advertising

pcp, Nine up 11.2% pcp

Digital (online) real winner up 9.6%, with time shifted viewing and audience fragmentation eroding the reach of television

20%

25%

30%

35%

M

a

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k

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t

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h

a

r

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NineTen

television

Low Australian Corporate revenue growth promotes cost cutting; typically in advertising0%

5%

10%

15%

16-39 18-49 25-54 GB+Child

M

4

Source: OzTAM (6:00-10:30pm), CEASA

The decline of the Newspapers division is only a matter of time

CCRCarslawCapitalResearch2 matter of time

EBITDA margins traditionally market leading, but will follow the decline of print media

Low circulation

L30%

40%

50%

Low revenue

Poorer content 0%

10%

20%

1HFY10 2HFY10 1HFY11 2HFY11 1HFY12 2HFY12 1HFY13 2HFY13 1HFY14 2HFY14 1HFY15 2HFY15 1HFY16

Low circulationWe note the similarities to Fairfax and the death spiral caused by AdEx losses

1HFY10 2HFY10 1HFY11 2HFY11 1HFY12 2HFY12 1HFY13 2HFY13 1HFY14 2HFY14 1HFY15 2HFY15 1HFY16

30%

120

140 FY13

(14%)

15%

20%

25%

I

T

D

A

m

a

r

g

i

n

60

80

100

120

A

$

m

FY14

(5%)

0%

5%

10%

FY10 FY11 FY12 FY13

E

B

I

0

20

40

Advertising Circulation

(5%)

5

Source: Company filings, CCR estimates

FY10 FY11 FY12 FY13 Advertising Circulation

Television landscape to provide reinvigorated competition going forward

CCRCarslawCapitalResearch3 competition going forward

There is an historical 40% cap on market share NEC and TEN are ready45%

Improvement of Seven and Nine at expense of Ten

Channel Ten has experienced hard times now recapitalised and with new CEO 30%

35%

40%Historical peak: 40%

Hamish McLennan, targeting older age bracket, sports and cannibalisation of Ten by Eleven

Channel Nine will fight for current share15%

20%

25%C

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3

SWM governance a well known issue

SWM was originated on the initiative of Kerry Stokes after buying into and taking

Seven has declined, whilst Nine has grown

C C C C C C C C C C C C C C C C C C C

Seven Nine Ten

40%

45% 2013

2014 Kerry Stokes after buying into and taking effective control of WAN

Treatment of WAN minority shareholders was controversial

20%

25%

30%

35%2014

Query whether Stokes focus is on increasing the wealth of all shareholders, particularly going into a competitive environment

0%

5%

10%

15%

Seven Nine Ten

6

Source: Company filings, OzTAM

Seven Nine Ten

Cost of programming, particularly for sport, will rise due to hyper-competitive bidding

CCRCarslawCapitalResearch4 due to hyper-competitive bidding

Why?Increasing attraction of live sports to the FTAs

Wi h i hif i i d di100%AFL TV rights With time shift viewing and audience fragmentation, live sports is the last source of a large, predictable audience

Cross promotion of internal material just as important as external advertising during40%

60%

80%

100%AFL TV rights renegotation to act as a negative price catalyst

important as external advertising during sport broadcasts

Competitors all place bids to prevent other providers from gaining cheap rights0%

20%

40%

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FTA TV cost of AFL TV rights historically

AFL could become ~15% SWM OPEX C C C C C C C C C C

Sports Foreign Australian News

250 2017E-2021E:Average $192m pa

100

150

200

A

$

m

1997-2001:Average $33m pa




+123%

+0%

+100%

0

50

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Y

9

7

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Source: Company filings, CCR estimates

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Our financial analysis confirms that SWM is fully priced and trades materially above fundamental value

CCRCarslawCapitalResearch5 priced and trades materially above fundamental value

Target price: $1.70Our target price of

- 52 week trading range of $1.88 to $2.60 with last close of $1.92

$1.88 $2.60 52w trading range

Our target price of $1.70 (EV $2.95bn) is derived by triangulating between DCF and multiples valuation

- DCF based on CCR forecasts, assuming 50% increase in AFL

multiples valuation methodologies

assuming 50% increase in AFL TV rights cost

- Range based on WACC of 12-14% and TGR of 2.5%

$1.34 $1.74DCF

- Historically trades at a premium to peers, which will not persist

- Multiples range based on a trading range of 6.0-7.0x FY14F

$1.48 $1.94 Trading comps

g gEBITDA

$1.00 $1.30 $1.60 $1.90 $2.20 $2.50 $2.80 Share price (A$)

8

Note: Based on FY14F EBITDA of $455m


S W t M di R d ti SELLSeven West Media Recommendation: SELL

1. Market AdEx forecasts are overly bullish

2. Newspapers division simply behind the curve

3. TV landscape presents reinvigorated competition

4. TV costs to increase substantially, esp. AFL

5. Overvalued and overpricedp

9


A diAppendices

10

DCF analysis provides a valuation of $1.60 for SWM based on a WACC of 12 8%


SWM, based on a WACC of 12.8%

WACC calculationsY/E 30 June 2014F(a) 2015F 2016F 2017F 2018F

Terminal value(b)

EBIT (1 - T) 292 222 256 259 265Plus D&A 37 37 37 37 38Less capex (23) (23) (23) (23) (23)Less in working capital 19 25 1 9 10Free cash flows 326 261 271 282 290 2 869

Risk free rate(a) 5.5%

Market risk premium 6.5%

Equity beta(b) 1.6

Cost of equity 15.5%Free cash flows 326 261 271 282 290 2,869NPV at 13% WACC and 2.5% TGR 2,847Less net debt 1,251Equity value 1,596Shares outstanding 997Share price $1 60

Cost of debt (pre-tax)(c) 9.5%

Cost of debt (post-tax) 6.7%

Leverage target 30%

WACC 12.8%

Sensitivity WACC and TGR to share price

Share price $1.60

WACC

(a) Based on long-term through the cycle (TTC) view on the Australian government bond rate

(b) Bloomberg(c) Based on long-term TTC

view on the Australian b d 400

T

G

R

12.0% 12.5% 12.8% 13.5% 14.0%

2.00% $1.65 $1.59 $1.51 $1.37 $1.27

2.25% $1.69 $1.64 $1.56 $1.41 $1.30

government bond rate + 400 basis point margin

Source: Bloomberg, CCR analysis

T 2.50% $1.74 $1.69 $1.60 $1.45 $1.34

2.75% $1.80 $1.74 $1.65 $1.49 $1.38

3.00% $1.85 $1.79 $1.70 $1.53 $1.41

11

Comparable company analysis provides a valuation of $1 86 using a discounted EV/EBITDA multiple


of $1.86, using a discounted EV/EBITDA multiple

FY14F NTM EV / EBITDA (x)Median multiple 6.8x

Enterprise value $3.1bn

Net debt $1.3bn

Equity value $1.8bn7 2x

8.2x7.6x8.0x

10.0x

Shares outstanding 1.0bn

Share price $1.86

Source: Bloomberg, company filings, CCR analysis

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5.9x6.0x

Median: 6.8x

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Source: Capital IQ, company filings

There is strong precedent to suggest a 100%+ increase in AFL TV rights costs will occur


increase in AFL TV rights costs will occur

Cost of cricket FTA TV rights over time

80

100

120

140

m 2000 2006


2014E-2018E:Average $110m pa

+144%

0

20

40

60

0 1 2 3 4 5 6 7 8 9 0 1 2 3

E E E E E

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$

m 2000-2006:Average $21m pa

+114%

Cost of NRL FTA TV rights over time

250 2013E-2017E:Average $205m pa

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Documents

Presentation on Stock Pitch