Securing Premium Sports Rights And AI Partnership With Databricks Will Boost Future Audience Engagement

Key Takeaways

• Strategic investments in premium sports rights and digital content are driving audience growth and higher advertising revenue, targeting a valuable demographic.
  
• Effective cost management and new technologies aim to optimize revenue, improve net margins, and enhance audience engagement, boosting overall operational efficiency.
  
• The company faces revenue challenges from declining TV ad revenue and increased costs, weakening profitability and restraining future growth potential amidst debt burdens.

Catalysts

Engages in the free to air television broadcasting and digital streaming in Australia and internationally.

• Seven West Media's content strategy, including securing rights to premium sports like Cricket and AFL on 7plus, is expected to drive growth in audience engagement and advertising revenue, particularly in the high-value 18 to 54 demographic. This has positive implications for future revenue and potentially higher ad rates, impacting overall earnings.
  
• The company's cost discipline and cost-out programs have been effective, with a decrease of $20 million to $30 million expected for FY '25 compared to FY '24. Continued cost management should improve net margins by offsetting inflationary pressures and result in more efficient operations.
  
• Implementation of new technologies such as the AI partnership with Databricks and the Phoenix trading system is set to optimize revenue through dynamic ad loads and improved audience engagement. This could lead to enhanced advertising revenue and improved net margins by maximizing the yield on every advertising spot.
  
• Strategic investments in digital platforms and original digital-first content are aimed at capturing a larger share of the digital advertising market. The success of 7plus in increasing its audience and corresponding revenue indicates that digital growth will drive future earnings.
  
• The use of strong partnerships and alliances (e.g., with Disney, Paramount) to enhance their content library could attract new audiences and advertisers, supporting wider market appeal and growth in BVOD revenue, which should contribute to both top-line growth and improved earnings stability.

Seven West Media Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seven West Media's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 5.2% in 3 years time.
• Analysts expect earnings to reach A$70.4 million (and earnings per share of A$0.04) by about March 2028, up from A$8.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.8x on those 2028 earnings, down from 28.0x today. This future PE is lower than the current PE for the AU Media industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.31%, as per the Simply Wall St company report.

Seven West Media Future Earnings Per Share Growth

Risks

• Declining total TV advertising revenue by 6%, with the ad market also soft, indicates potential challenges in sustaining revenue growth. Despite some gains in market share, a continued decline could pressure overall earnings.
  
• The company is experiencing higher depreciation and amortization expenses due to asset changes, which negatively impact net margins and overall profitability.
  
• Significant items expenses have increased, including a $14 million write-down in investment values, which suggests vulnerabilities that could affect the company’s earnings and net profit.
  
• The end of revenue from the Meta agreement presents a risk of reduced income, while uncertainties about future government regulations on gambling advertising could constrain revenue streams further.
  
• Despite efforts in cost reduction, higher finance costs reflect increased debt burdens, which may impact net earnings and restrict the company’s ability to reinvest in growth initiatives.

Valuation

• The analysts have a consensus price target of A$0.198 for Seven West Media based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.37, and the most bearish reporting a price target of just A$0.13.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.4 billion, earnings will come to A$70.4 million, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 9.3%.
• Given the current share price of A$0.16, the analyst price target of A$0.2 is 21.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.