Presentation on Stock Pitch

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Carslaw Capital Research

The University of Sydney Laurence Baudert Luke McAlpin Daniel Schimek

S Seven West W t Media M di Li Limited it d (ASX: (ASX SWM) 29 April 2014

Recommendation: SELL Target Price: $1.70 Last Close: $1.92 Market Cap: $1.92bn

Our investment thesis for SWM revolves around five key messages… messages

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1

Consensus advertising g revenue forecasts are overly y bullish,, g given SWM’s cyclical y and structural issues and its diminishing participation in growth that does exist

2

Newspaper margins are historically market leading, but it is only a matter of time before the WA based paper follows the same path as Fairfax, and the US

3

In Television Television, the competitive landscape is no longer benign benign, with both TEN and NEC recapitalised and possessing renewed management teams

4

Market has not recognised increasing costs of programming going forward forward, with AFL TV rights renegotiation to prove a massive catalyst at the end of CY14

5

Financial valuation confirms our thesis: fair valuation of $1 $1.70 70 represents an 11 11.5% 5% discount to last close of $1.92 (as at 28 April 2014)

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2

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SWM has outperformed other traditional media companies but has the furthest to fall… companies, fall

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SWM has underperformed the ASX300 considerably over the YTD

All four segments are driven by advertising revenue

$2.40

$2.20

(16.9%)

FY13 Revenue $2.00

$1.80 Jan-14

Feb-14

Mar-14

SWM

ASX300 (rebased)

Currently trading in line with LT averages

Despite a bad FY13, does not look cheap

12.0x 11.0x 10.0x 9.0x

Average: 7.9x

8.0x 7.0x

C Current: t 7.2x 72

6.0x 5.0x 4.0x 2009

2010

2011

2012

2013

Apr-14

2014

Metric (A$m)

FY11

FY12

FY13

Revenue

726

1,937

1,867

EBITDA

267

515

465

NPAT

115

227

(70)

EPS S

19c

35c

( ) (7c)

Net debt / EBITDA

7.3x

3.6x

2.7x

ROE

8.7%

8.8%

(2.5%)

Source: Capital IQ, company filings, ASX

3

The market’s expectations of AdEx are bullish and SWM is no longer well placed to capture it

1

AdEx is shifting away from traditional media… 350

1%

Ad dEx (A$m)

300

1HFY12

Q3 2014

0%

Q3 2014

(1%) (2%)

200

(3%)

2HFY12

(4%)

11% (25%)

1HFY13

2HFY13

1HFY14

Average: (3.8%) (3 8%)

(5%)

100

(5%) (13%)

50

(6%) (7%) (8%)

0 Television

Papers

Digital

Radio

Magazines

… and NEC starting to capture more AdEx (YTD)

Market share M

… with market (FTA viewership) in decline …

250

150

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45%

Seven

40%

Nine

35%

Ten

30%

Trends in advertising − TV ad spend (Q3 FY14): Seven up 4.6% pcp, Nine up 11.2% pcp − Digital (online) real winner up 9.6%, with time shifted viewing and audience fragmentation eroding the reach of television

25% 20% 15% 10%

− Low Australian Corporate revenue growth promotes cost cutting; typically in advertising

5% 0% 16-39

18-49

25-54

GB+Child

Source: OzTAM (6:00-10:30pm), CEASA

4

2

The decline of the Newspapers division is only a matter of time… time

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EBITDA margins traditionally market leading, but will follow the decline of print media… 50%

Low circulation

40% 30%

L Low revenue

20% 10%

Poorer content

0% 1HFY10 2HFY10 1HFY11 2HFY11 1HFY12 2HFY12 1HFY13 2HFY13 1HFY14 2HFY14 1HFY15 2HFY15 1HFY16

We note the similarities to Fairfax…

… and the ‘death spiral’ caused by AdEx losses

30%

140

25%

120

(14%)

FY13 FY14

100

20%

A$m

EBIITDA margin

Low circulation

15% 10%

80 60

(5%)

40

5%

20

0%

0 FY10

FY11

FY12

FY13

Advertising

Circulation

Source: Company filings, CCR estimates

5

There is an historical 40% cap on market share

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NEC and TEN are ready…

45%

− Improvement of Seven and Nine at expense of Ten

Historical peak: 40%

40% 35%

− Channel Ten has experienced hard times – now recapitalised and with new CEO Hamish McLennan, targeting older age bracket, sports and cannibalisation of Ten by Eleven

30% 25% 20%

Seven

Nine

CY13 C

CY12 C

CY11 C

CY10 C

CY09 C

CY08 C

CY07 C

CY06 C

CY05 C

CY04 C

CY03 C

CY02 C

CY01 C

CY00 C

CY99 C

CY98 C

CY98 C

CY97 C

15% CY96 C

3

Television landscape to provide reinvigorated competition going forward forward…

− Channel Nine will fight for current share

Ten

Seven has declined, whilst Nine has grown 45%

SWM governance a well known issue 2013

40%

2014

35% 30%

− SWM was originated on the initiative of Kerry Stokes after buying into and taking effective control of WAN − Treatment of WAN minority shareholders was controversial

25% 20%

− Query whether Stokes’ focus is on increasing the wealth of all shareholders, particularly going into a competitive environment

15% 10% 5% 0% Seven

Nine

Ten

Source: Company filings, OzTAM

6

Increasing attraction of live sports to the FTAs 100%

− Wi With h time i shift hif viewing i i and d audience di fragmentation, live sports is the last source of a large, predictable audience

80% 60%

− Cross promotion of internal material just as important as external advertising during sport broadcasts

40% 20%

− Competitors all place bids to prevent other providers from gaining cheap rights

Sports

Foreign

Australian

CY13 C

CY12 C

CY11 C

CY10 C

CY09 C

CY08 C

CY07 C

CY06 C

CY05 C

CY04 C

0%

− AFL could become ~15% SWM OPEX

News

FTA TV cost of AFL TV rights historically 250

2017E-2021E: Average $192m pa

200

100

2012-2016: Average $96m pa +100%

2007-2011: Average $96m pa

150 A$m

2002-2006: Average $43m pa

1997-2001: Average $33m pa

+0%

+123% +26%

50

CY Y21E

CY Y20E

CY Y19E

CY Y18E

CY Y17E

CY16 C

CY15 C

CY14 C

CY13 C

CY12 C

CY11 C

CY09 C

CY08 C

CY07 C

CY06 C

CY05 C

CY04 C

CY03 C

CY02 C

CY01 C

CY00 C

CY99 C

CY98 C

0 CY97 C

AFL TV rights renegotation to act as a negative price catalyst

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Why?

CY10 C

4

Cost of programming, particularly for sport, will rise due to hyper-competitive bidding… bidding

Source: Company filings, CCR estimates

7

5

Our financial analysis confirms that SWM is fully priced and trades materially above fundamental value

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Target price: $1.70

Our target price of $1.70 (EV $2.95bn) is derived by triangulating between DCF and multiples valuation methodologies

52w trading range

DCF

Trading comps

$1.88

$1.34

$2.60

$1.74

$1.48

$1.94

- 52 week trading range of $1.88 to $2.60 with last close of $1.92

- DCF based on CCR forecasts, assuming 50% increase in AFL TV rights cost - Range based on WACC of 1214% and TGR of 2.5%

- Historically trades at a premium to peers, which will not persist - Multiples range based on a g range g of 6.0-7.0x FY14F trading EBITDA

$1.00 $1.30 $1.60 $1.90 $2.20 $2.50 $2.80 Share price (A$)

Note: Based on FY14F EBITDA of $455m

8

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S Seven West W t Media M di R Recommendation: d ti SELL 1.

Market AdEx forecasts are overly bullish

2.

Newspapers division simply behind the curve

3.

TV landscape presents reinvigorated competition

4.

TV costs to increase substantially, esp. AFL

5.

p Overvalued and overpriced 9

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A Appendices di

10

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DCF analysis provides a valuation of $1.60 for SWM based on a WACC of 12 SWM, 12.8% 8% WACC calculations Risk free rate(a) Market risk premium Equity beta(b) Cost of equity

Y/E 30 June

5.5%

EBIT (1 - T)

6.5%

Plus D&A

1.6 15.5%

2014F(a)

Less capex

256

259

265

37

37

37

38

(23)

(23)

(23)

(23)

(23)

19

25

1

9

10

326

261

271

282

290

NPV at 13% WACC and 2.5% TGR

2,847

Cost of debt (post-tax)

6.7%

Less net debt

1,251

Leverage target

30%

Equity value

1,596

12.8%

Terminal value(b)

2 869 2,869

997

Share price

$1 60 $1.60

(a)

Sensitivity – WACC and TGR to share price WACC

T TGR

Based on long-term through the cycle (TTC) view on the Australian government bond rate (b) Bloomberg (c) Based on long-term TTC view on the Australian government bond b d rate + 400 basis point margin Source: Bloomberg, CCR analysis

2018F

222

9.5%

WACC

2017F

37

Cost of debt (pre-tax)(c)

Shares outstanding

2016F

292

Less ∆ in working capital Free cash flows

2015F

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12.0%

12.5%

12.8%

13.5%

14.0%

2.00%

$1.65

$1.59

$1.51

$1.37

$1.27

2.25%

$1.69

$1.64

$1.56

$1.41

$1.30

2.50%

$1.74

$1.69

$1.60

$1.45

$1.34

2.75%

$1.80

$1.74

$1.65

$1.49

$1.38

3.00%

$1.85

$1.79

$1.70

$1.53

$1.41

11

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Comparable company analysis provides a valuation of $1 $1.86, 86 using a discounted EV/EBITDA multiple

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FY14F NTM EV / EBITDA (x)

$1.8bn

Shares outstanding

1.0bn

Share price

$1.86

Source: Bloomberg, company filings, CCR analysis

8.2x 8.0x

7.6x

7 2x 7.2x

7.0x

6.7x

6.6x

Median: 6.8x 5.9x

6.0x

4.0x

2.0x

0.0x Prime Med dia Group

Equity value

Fairfa ax Media

$1.3bn

Southern Crosss Media

Net debt

10.0x

McCla atchy Co.

$3.1bn

Nine Entertainm ment Co.

Enterprise value

APN News & Me edia Ltd.

6.8x

Seven We est Media

Median multiple

Source: Capital IQ, company filings

12

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There is strong precedent to suggest a 100%+ increase in AFL TV rights costs will occur occur…

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Cost of cricket FTA TV rights over time 140

2014E-2018E: Average $110m pa

120 2007-2013: Average $45m pa

100

+144%

A$m m

80 60

2000-2006: 2000 2006 Average $21m pa

+114%

40 20

CY17E E

CY18E E

CY16E

CY17E

CY16E E

CY15E E

CY14E E

CY13 3

2 CY12

CY11

CY10 0

CY09 9

CY08 8

CY07 7

CY06 6

CY05 5

CY04 4

CY03 3

2 CY02

CY01

CY00 0

0

Cost of NRL FTA TV rights over time 250

2013E-2017E: g $205m p pa Average

200 2007-2012: Average $83m pa

100

1996-2006: Average $33m pa

+147%

+151%

50

CY15E

CY14E

CY13E

CY12

CY11

CY10

CY09

CY08

CY07

CY06

CY05

CY04

CY03

CY02

CY01

CY00

CY99

0 CY98

A$m

150

13