Seven set to go up in shareholders' ratings
Sydney Morning Herald
Wednesday February 3, 2010
Television executives have a spring in their step for the first time since the economy slowed in late 2008. But while growth looks to be returning to the beleaguered sector, analysts are yet to rerun the numbers on Seven Network to reflect an improved outlook.When they do, Seven looks set for a valuation bounce as its core media interests, assigned no value by the market in recent times due to high gearing, are re-rated.This would be the first substantial piece of good news that Seven shareholders have enjoyed since November 2006 when Kerry Stokes, the company's executive chairman and major shareholder, picked the top of the private equity boom, selling a majority interest in the company's television, magazine and online businesses to KKR. The deal released cash proceeds of about $3.2 billion to Seven, while the company retained a 47 per cent interest in the media business, now known as Seven Media Group (SMG).In the intervening period Stokes has adopted a scatter gun approach to managing the listed company's war chest. Shareholders have endureda top-of-the-market tilt at West Australian Newspapers, an ill-fated $715 million punt in unspecified listed securities and a $100 million foray into Unwired, a challenged wireless internet operator.After this poor run, research analysts have little more than a watching brief on Seven as the company's (lack of) strategy defies conventional analysis.Most media analysts haven't published a report on the company since August but when they do cover the stock they value it on a sum-of-the-parts basis.This approach applies a market valuation to the group's grab-bag of listed media and other investments, together with a billion-odd dollars in cash. After netting off liabilities, a valuation of about $8 a share results - a solid premium to yesterday's closing price of $6.69.For the last year at least, valuations have assumed Seven's interest in SMG is worthless. This may soon change with market data confirming Seven has continued its run as Australia's best-performing television business through recent tough times, currently claiming about 38 per cent of advertising dollars directed towards the sector.Seven's disclosure is poor yet one media sector source sees SMG's EBITDA exceeding $300 million this year. If improved conditions persist, EBITDA may approach $400 million next year. Earnings at this level would have analysts scrambling to revisit the value of SMG.Applying a nine-times multiple to the top end of estimates for next year suggests an enterprise value about $3.5 billion. After netting off debt of $2.5 billion, equity of about $1 billion remains. Seven Network's share of the pie would be $470 million. This valuation would increase Seven's value by about $2.50 a share, a rare reward for long-suffering shareholders.TOUGH TIMESA green day on the market yesterday brightened investor spirits after three rough weeks. But the cautious tone of two of the market's better known equity strategists suggests that the worst of the current correction may not be over.Both Richard Coppleson, from Goldman Sachs JBWere, and Charlie Aitken, from Southern Cross Equities, arrived back from summer holidays in a sombre mood.Aitken kicked off the year on January 18 with an observationthat other pundits' forecasts of strong index gains this year looked overcooked.According to Aitken, valuations were stretched across the board. He noted that "at today's prices I don't see many stocks I would commit more of my money to, and through time when I baulk personally it's generally been a good sign of an impending correction".Aitken hoped to see a pull-back in the ASX200 index to "between 4400-4500 where I think the risk-reward equation is more in favourof reward".A few days later Aitken published a list of issues facing the market in an effort to drive home the message that insufficient risk was being priced into equities.No fewer than 46 identified risks underpin Aitken's belief that this is a time for a conservative approach. Top of the list is the risk of sovereign default, while troubles in the US housing market, the end of quantitative easing and populist policy risk in an Australian election year all figured prominently. Five of Aitken's risks related to a slowing Chinese economy.Coppleson took a longer summer break than Aitken, returning to the desk this week.His first afternoon market report of the year also featured a list offive issues currently making the markets "very anxious and about as nervous as they have been in a long, long time".Although the two lists are similar, Coppleson brings greater focus to Barack Obama's recent bout of bank bashing and also highlights the effect on sentiment of recent attention given to market bears calling that "the rally would stall, and when it did the falls would be massive and take out last year's March lows".So what's to come? Coppleson concludes that unlike last year, the market this year does not favour a buy-and-hold strategy.Instead, investors should expect lower returns for the year and those with a short-term strategy should regard the market as expensive when the ASX200 is above 5000 but cheap below 4500.Aitken is a little more pessimistic, recently noting that "if January is any guide, and I think it is, simply not losing money this year would be a good outcome".
© 2010 Sydney Morning Herald