The headwinds affecting Australia’s Free to Air Television are strengthening
Name the Company which has been Australia’s number one player in its field for ten consecutive years, has recorded $2.54 billion of “Significant Losses” in the past four financial years and will likely see its Earnings Before Interest and Tax (EBIT) (excluding Significant Items) decline by 45 per cent over the five years to June 2017?
| Year to June | EBIT ($m) | Significant Items ($m) |
| 2012 | 473.4 | – |
| 2013 | 422.0 | (294.9) |
| 2014 | 408.2 | (87.0) |
| 2015 | 356.3 | (2122.8) |
| 2016 | 318.1 | (32.9) |
| 2017 (Estimate)* | 262.5 (-45% over five years; and down 15-20% year on year) |
* Impacted by the combination of softer market conditions and increased content costs from the Olympics and AFL, underlying Group EBIT is expected to be down 15-20 per cent (to $254.5m – $270.5m, with a mid-point of $262.5m) in the year to June 2017.
You’ve guessed it. Seven West Media, Australia’s best managed free to air television company is being buffeted by the headwinds of media disintermediation, a subject the team at Montgomery has written about many times in the past.
While I believe the management team at Seven West Media are doing a good job relative to its listed competitors, if the boat has a serious leak (the environment), it doesn’t matter how good an oarsman you are.
Montaka has a “short position” in Seven West Media.
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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
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Tom Buckley
:
Roger, in response to Simon’s comment and your answer to that;
I long ago gave up trying to imitate the entry and exit of stocks that you and others provide to your investors and followers.
Investing into value driven funds like Montgomery give the average ‘Joe’ like me the benefit of investing in a fund that I believe to be the best strategy (investing in quality companies below intrinsic value) without having to a) spend copious amounts of time doing research, or b) being highly educated in the area of financial analysis and funds management.
This was very evident in the delicate way that you handled the events surrounding Brexit including stock holdings and also hedging at this time. Whilst you have written extensively on this since (which I find comforting now knowing how this was handled) there is no way that I could have replicated such an outcome with my limited knowledge.
I sincerely hope that all of you at Montgomery continue to produce your blog on your investment thesis, as I am sure that I (and many others) enjoy reading and being kept updated on the work you do for investors within the funds.
Phil
:
David, I thought when shorting stocks the maximum return you can get is 100% (unless using options.) Given you’re getting 20% pa returns on growth stocks, if SevenWest falls 45% in five years doesn’t that mean short positions are less profitable? Thanks.
David Buckland
:
Hi Phil, your point regards earnings declining 45% over five years. Please note the share market frequently anticipates these trends and there have been some wonderful “shorting opportunities” from a share price perspective over a much shorter time frame. For example, in 2012 SWM declined by 70% from $3.66 to $1.06; in the 18 months to mid-2015 the decline was 55% from $2.30 to $1.00; and in recent weeks the decline was 33% from $1.15 to $0.76.
simon
:
thanks Roger
Trying to establish whether to buy more ISD at these levels as it was a compelling story at $4 so should it be even more compelling at $3?
Roger Montgomery
:
Hi Simon,
I am concerned that investors might be relying solely on the comments on blogs to inform their investment decisions. If you’d like us to provide you with the benefit of our expertise, please consider investing in one of our funds. Be very careful relying a blog because the authors are entitled to change their mind at any moment without informing their audience of the change. Here at the insights blog, we do not offer any advice and are under no obligation to provide any updates on past commentary.
Charlie Dalziell
:
To be fair David the TV network has performed significantly better than that. In 2007 Seven Network (the TV business) achieved EBITDA of $338m while 2016 TV EBITDA was $314m (not a great result but probably no worse than Telstra’s). All of the write-downs at the group level have come from the newspapers and magazines where I don’t believe they are market leaders at all.
You could have mentioned SWM’s appalling corporate governance that has seen minority shareholders continuously given the wrong end of the deal by the controlling billionaire.
David Buckland
:
Thanks Charlie – over recent years Seven West Media’s television network has done relatively well and the Company has been held back by their newspapers and magazines etc. The headwind of media disintermediation seems to be strengthening though with the 15-20 per cent EBIT downgrade for F’17 demonstrating programming inflation and struggling advertising revenue.
simon
:
how is the funds long trade on ISD.ASX
isentia going?
Roger Montgomery
:
Hi Simon,
In your question can you clarify, if you are asking whether it is a compelling proposition or not? A falling share price by itself is not a sign that thesis has changed. We manage a portfolio that has significantly outperformed the index since inception, produced annual double-digit returns after all fees and achieved this will an average of close to 20% in the safety of cash? When investing we buy a team of players. Inevitably some players will be temporarily injured and won’t be able to play a few games. Other players will be red-carded and sent off. Some will succumb to off-field temptations and be taken off the team. But despite these factors we have been winning plenty of grand finals and I expect that to continue because we are reasonably adept at picking and creating teams. In essence there appears to be no new information to change our view or that suggests the share price is anything other than a short term blip. Of course as new information comes to light, our view might also change.