SWM’s AGM trading update made the following comments.
The financial year 2016 is expected to trade at the bottom end of the minus 5 -10% guidance range that TV market growth has been relatively flat and publishing advertising revenues face ongoing pressures.
Overall, it is not a great time in the media sector. However, the stock looks to have bottomed and is expected to pay a 13.5% gross dividend. The company is trading below our price target of $1 by around 30%.
SWM is inexpensive trading on a PE of 5, although admittedly with a declining earnings and dividend profile. Potential positive catalysts include license fee cuts; content cost renegotiations, and digital monetisation.
Negatives remain including structural pressures facing the overall industry, revenue share risk from a resurgent TEN, and SWM's relatively aggressive gearing profile.
TV generates the bulk (c70%) of SWM revenue and remains the key valuation driver.
Our base case forecasts factor long-term free to air metro TV market growth of 2% pa; with SWM’s long-term revenue share trending back to 38.5% from 40% in 2013.
The risk to our forecasts exists if a resurgent TEN and or Nine materially lowers SWM long-term revenue share, and if fragmentation of viewing leads to lower than expected overall industry growth.
Lowering our TV multiple to 4.5 times, would reduce our valuation to $0.75.
This industry is going through a major disruption due to technology and how we now access our entertainment.
Although not dead, the industry needs to reinvest if they are to stay competitive.
Current pricing and dividends make the company attractive however, I advise caution as it could go either way if management gets it wrong.