Over the next few weeks we will be providing commentary on half yearly results for some of our key holdings. During February companies report their half yearly results for the period ending December 31st while also providing an outlook for the full year results. Companies will typically host a conference call with investors and you'll hear just about every analyst asking management to “provide more colour” to the results in the Q&A section to get as much commentary as possible on why the numbers came out the way they did and what to expect for the next set of results. This week we will discuss the results of MNY and SWM.
Seven West Media (SWM.ASX)
Seven West Media Limited is a national multi-platform media business based in Australia. SWM's media comprises of Seven Television, The West Australian newspaper and associated WA regional newspapers and radio stations. Media companies like SWM have been overlooked by the market even though they are undergoing significant business transformations and generating lots of cash flow.
Late last year SWM completed the acquisition of Prime Media Group, formerly Prime Television Limited, for a cash consideration of $121.9m (they also failed to acquire them in 2019). To fund the deal SWM refinanced their debt facilities, halving their interest costs and extending their maturities. PRT did $170m in sales in FY21 and over $30m in EBITDA. The rationale behind the sale is as follows:
We thought SWM reported a strong result with revenue up +27% and NPAT up +48%. Management also upgraded their FY22 EBITDA guidance to $315m-$325m, marking the second time they have upgraded guidance in the past few months. The key driver behind these results was the growth in digital revenue which was up +176% and made up 35% of the group's revenue. This is projected to make up 40% in FY22. They commented on the integration of their PRT acquisition which has already realised $5m in cost synergies. It is important to note that PRT currently has no digital revenue and, seeing how SWM grew their digital EBITDA from $62m in FY21 to $130m in FY22F, there is potentially a lot of upside there. SWM had tough starts to the calendar year in CY20 and CY21, losing just about all their ratings weeks. However, in CY22 they have won the first four out seven weeks and are taking revenue share away from channels Nine and Ten. SWM currently has a 41.4% revenue share of a $3.8bn market and expect to maintain at least 40%. Seven are currently airing the Winter Olympics, boosting their digital numbers, while they also had the Ashes at the back end of last year.
Whilst SWM reported a strong result we were a bit disappointed that there weren’t any capital management initiatives. They are on a leverage ratio of 0.9, well within their target range of 1-1.5x which means they are planning on returning capital and/or have room to look at more M&A. The board is assessing how they will be returning capital over the next six months and should announce a dividend or buyback in FY22. We think that the reinstatement of dividends is a major catalyst and currently what is holding the share price back. SWM currently has $295m of net debt and, taking their midpoint guidance, they are currently trading at approximately 5x FY22F EBITDA ($320m minus ~$40m of capex). Assuming they do $200m of NPAT for FY22 and they were to payout 30%, that would be a 4 cent dividend. A 5.6% yield at the current share price. Upcoming tailwinds include the return of their number one show, The Voice, as well as the upcoming Federal election. While it is a small piece of the business, Seven West’s Ventures portfolio is up +56% to $87m. This portfolio is part of their ‘media for equity’ strategy where they provide advertising for companies in exchange for equity. Recently they did a deal with Raiz Invest (RZI.ASX) which saw SWM gain a 6.6% stake in the company.
Money3 Corporation Limited is involved in the delivery of secured automotive loans as well as secured and unsecured personal loans. The secured automotive loans relate to the purchase of a vehicle with the vehicle as security for the loan. MNY currently has a loan book of $600m, having grown considerably over the past few years. They operate through three segments:
MNY also provided a strong update for H122 with revenue up +34.5% and the loan book up +45.7% to $690.8m. MNY are on track to reach an $800m loan book for FY22 and are currently originating around $40m of new loans every month. Their EBITDA margins have been higher as result of artificially low bad debts due to a lot of MNY’s clients benefiting from the superannuation drawdown. The team still expects to maintain margins above 50%. MNY also saw the credit quality of their loans rise in the half.
Looking at their other businesses, GoCar and AFS, their NZ-based business GoCar has struggled over the past six months as a result of lockdowns, meaning dealerships were closed. Management noted that in September they were operating at 20% of their usual volume. It will take time to rebuild their pipelines but simply reopening is a huge tailwind. Their AFS business has seen strong originations with its loan book up around +80% since MNY acquired them last year. In terms of further M&A transactions, MNY are looking to broaden their addressable market. It would have to be either product expansion (i.e. personal finance) or another loan book that gives them access to more dealers and a larger overall presence.
Rising rates is a huge concern for financing companies like MNY as their cost of funding will rise accordingly. However, MNY believe that their cost of funding will continue to decline even in a rising rate environment. A significant portion of MNY’s loan book has been funded through equity; MNY were late to the party in terms of establishing debt facilities which means their funding costs are higher than their competitors. With the credit quality of MNY’s loans rising and with the increasing scale of their facilities, MNY expects their funding costs to decrease even as interest rates rise.
MNY are forecasting an NPAT of at least $50m for FY22 which currently places them on a PE of around 14x. MNY are well on track to reach their goal of achieving a $1bn loan book by FY23, this should translate to at least $60m of NPAT, putting them on a forward PE of 11x earnings. All while paying out juicy dividends. The semiconductor shortage remains a tailwind for the industry with second hand car prices at all time highs, increasing the value of MNY’s loans and reducing bad debts. We also expect to see their NZ business gain momentum coming out of lockdowns.
Disclaimer: SWM & MNY are both currently held in TAMIM portfolios
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.