Potential Implications for Seven and Nine if Ten Catches The Eye of CBS

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Equity Bottom-Up

No-moat-rated Seven West Media's claim that its fiscal 2017 EBIT decline of 18% met management's 20% fall guidance was cute. Excluding the AUD 35 million from the TV licence fee cut, a government largesse bestowed after guidance was given, the fall in EBIT to AUD 226 million was 29%. This was shy of our below-consensus forecast of a 25% decline, driven by a disappointing TV result, compounded by continuing challenges besetting the print operations.However, we retain our AUD 0.73 fair value estimate, with Seven shares trading at a 5% premium to our intrinsic assessment. The fiscal 2018 outlook for the TV advertising market is weak (we forecast it to be down another 2.0% after the 3.7% fall in fiscal 2017). Still, the TV licence fee relief and an elevated focus on cost cuts are likely to limit the negative impact, although our forecast 9% decline in fiscal 2018 underlying EBIT is still below management's guidance for a 5% fall.Having said that, we have reduced our DPS forecasts by around AUD 0.01 a year, given the rise in net debt/EBITDA to 2.4 times, up from 1.9 times. While there is still headroom to the 4.0 times covenant limit, breathing space must be maintained, given the ongoing restructuring and cost base re-engineering necessary in response to persistent structural headwinds. One merely needs to look at the AUD 1 billion in pretax impairment and restructuring charges booked in fiscal 2017 to appreciate the damage from the wider industry challenges.We will also be keeping a close eye on the group's reactions if the proposed relaxation of media ownership laws passes the senate. In a bid to combat the structural challenges, Seven may seek to expand, so as to increase its audience across different media (newspapers, radio), deepen advertiser relationships, and extract synergies. The initiatives may boost near-term earnings but will further increase exposure to the beleaguered traditional media space.Analyst: Brian Han

No-moat-rated Seven West Media's claim that its fiscal 2017 EBIT decline of 18% met management's 20% fall guidance was cute. Excluding the AUD 35 million from the TV licence fee cut, a government largesse bestowed after guidance was given, the fall in EBIT to AUD 226 million was 29%. This was shy of our below-consensus forecast of a 25% decline, driven by a disappointing TV result, compounded by continuing challenges besetting the print operations.However, we retain our AUD 0.73 fair value estimate, with Seven shares trading at a 5% premium to our intrinsic assessment. The fiscal 2018 outlook for the TV advertising market is weak (we forecast it to be down another 2.0% after the 3.7% fall in fiscal 2017). Still, the TV licence fee relief and an elevated focus on cost cuts are likely to limit the negative impact, although our forecast 9% decline in fiscal 2018 underlying EBIT is still below management's guidance for a 5% fall.Having said that, we have reduced our DPS forecasts by around AUD 0.01 a year, given the rise in net debt/EBITDA to 2.4 times, up from 1.9 times. While there is still headroom to the 4.0 times covenant limit, breathing space must be maintained, given the ongoing restructuring and cost base re-engineering necessary in response to persistent structural headwinds. One merely needs to look at the AUD 1 billion in pretax impairment and restructuring charges booked in fiscal 2017 to appreciate the damage from the wider industry challenges.We will also be keeping a close eye on the group's reactions if the proposed relaxation of media ownership laws passes the senate. In a bid to combat the structural challenges, Seven may seek to expand, so as to increase its audience across different media (newspapers, radio), deepen advertiser relationships, and extract synergies. The initiatives may boost near-term earnings but will further increase exposure to the beleaguered traditional media space.Analyst: Brian Han

Licence Fee Cut Fails to Mask Seven Media's Weak Fiscal 2017 Result