Equities Analysis: Module 2

Collecting Public Information

This week, we will be walking through a case study of Seven West Media. This module is designed to support and consolidate understanding you have developed in 1st year commerce courses into a finance/business context. As you are going through each section of this module, you are asked to apply this to your chosen company. Please make sure you read all the way to the end, where we are looking for you to collate your team information into a summary – which will form a part of your interim report submission later as well.

Whenever we start researching a company, we use all the public information available and often this starts off with Annual Reports, Investor Presentations and associated supplementary material (e.g. commentary notes, media release announcement etc)
These can be found via:

  1. Company website’s ‘Investor Relations’ page [SWM.AX]
  2. The ASX website as per company name [ASX:SWM]
  3. Market news and Investment Analytics Platforms such as FactsetIRESSBloomberg Terminal and Thomson Reuters (as discussed in Module 1). For I4C, we will be using available web sources and reference to the Bloomberg Terminal which can be found at the UNSW Library. The tools above are the most commonly used by equity research analysts because the platforms provide live and timely updates and notifications.

Every time an Australian company makes a material and / or price sensitive decision, it is obligated by law to release a market news update via the ASX. Often the press release or market announcement will also be issued via the investor and media distribution lists too. On the street, it’s about how fast you can access information, process it and subsequently provide a view.
After the reports are collated, you can refer to published equity research reports [access via UNSW’s Bloomberg Terminal] and Factiva news run to get up to speed on the company and latest news reportings.

​Business Overview

​Once we have collected all the information, we’ll move onto recapping the company description. We can see from SWM’s annual report that they have described the business in a holistic sense, beyond just the core television operations – with operations based in Australia.
“Seven West Media Limited is Australia’s largest diversified media business, formed by the merging of Seven Media Group with West Australian Newspapers Holdings. It is a leading player in broadcast television, radio, newspaper publishing, magazine publishing and online. Seven West Media owns the Seven Network, Australia’s largest commercial television network. In publishing, Seven West Media owns two key Western Australian newspapers — The West Australian and The Sunday Times, as well as 21 Western Australian regional newspapers and the second largest publisher of magazines in Australia, Pacific Magazines. Seven West Media is building a substantial presence in online and new communications technologies, particularly through its 50% interest in Yahoo!7. “
Given there’s so much information, where do we start? Let’s break it down into five components

  1. Strategic Themes
  2. Identify the key operational drivers and performance
  3. Financial Performance
  4. Future Outlook
  5. Market Sentiment

1. Strategic themes

When we dig into SWM’s recent reports and presentations, we see that the last three years have a focus on 3 strategic goals:

  1. Maintaining leadership
  2. Redefining the operating model
  3. Fuelling new growth

By identifying these key themes, we know the context in which the company’s operational segments are involved. Please read the extracts below from the latest FY17 investor presentation and annual report for more detail.
Your turn: As we have done above start identifying the core themes for your selected stocks.

2. Key operational drivers and performance

Key drivers
The best way to learn about a company is to break it down into each divisional segment, which we call ‘Key Drivers’. These influence the strategic pillars above and form the foundations of your Financial Model. The key drivers will have specific metrics which generate revenues and subsequently cash flows and profits.
Analysts try to peel back the underlying factors to understand the fundamental drivers of performance. Rather than just applying +2% to a product or division in line with CPI or historical performance (or even just applying a random % growth), we want to get down to the bare bones and structures of what makes this business performance solid or weak. Remember to factor in competitive tensions too (from Module 1).
For instance, Coca Cola’s key metrics would be volume times price for the selling products per geographical segment. For SWM, the annual reports and presentations reveal a four-part breakdown.

  • Seven TV: driven by broadcast and digital advertising, affiliate fees and Seven Studios (production and distribution)
  • The West: driven by advertising, print and digital circulation and other revenues
  • Pacific: driven by circulation, advertising and digital revenues
  • Other Business and New Ventures: driven by radio, Yahoo7 share, RED Live and Other revenues

To give a more detailed example, let’s just focus on Seven TV as one segment to drill into.

Seven TV’s key drivers
The TV segment is primarily driven by broadcast and digital advertising performance, which is determined by the overall Free to Air (FTA) TV market growth in Metro Australia as well as Seven’s ratings and revenues share across cities and age demographics. Note that the key competitors in the metro FTA commercial TV market is Nine Network and Ten Network so their business performance also affects SWM’s.
To take another step back, ratings and revenues share are also influenced by particular TV shows and programs. For example, better cyclical periods are those which involve key programs such as AFL (Sep-17), MKR (Mar-18) and House Rules (May-18). Programs which are more popular attract more eyeballs, which thus attract more advertising dollars per time slot. Analysts must track all of these KPIs to not only understand underlying business performance but also to forecast future performance based on existing observed trends.
We found all this information by reading broker reports, annual reports and investor presentations. An excellent analyst is able to cut through all the noise from the public information and triangulate the qualitative and quantitative information related to the core drivers.

Your turn: Using this approach, let’s apply it to your own selected stock / project.

3. Financial performance

When we drill into each segment, we see the revenues, costs, EBIT and EBITDA results individually. To determine the group financial results, we must roll up the revenues into one line and the costs into another. After doing so, we build out the profit and loss statement, balance sheet, cash flow statement and subsequently, determine the valuation.
For this module, we will start by building up the historical profit and loss statements first, derived from the key drivers, with as much detail as possible. Segmental revenues, costs and EBIT figures should add up to the total group numbers reported in the annual reports. Sometimes we will choose to emphasise EBITDA over EBIT as it may be a better representation of underlying profit as as different companies have different depreciation and amortisation costs. Remember that numbers in a model don’t mean anything unless you have a story, context or meaning behind it.
For SWM, all the individual segments should total to the final group figures below. This is an approach which derives the total amounts from first principles, allowing future forecasts to be auto-populated easily. In 2017, Seven West Media reported:

  • Revenue of $1673.6m
  • EBITDA of $306.7m
  • EBIT of $261.4

Your turn: Once you have identified the historical performance, take note and discuss the historical trends and views around each division to determine how the company is tracking at a group level, in line with the strategic pillars.

4. Future outlook and forecasts

After looking at the historical performance, we want to gather the tools and resources to forecast appropriately. There are a number of ways to determine your predictions, incorporating both top down and bottom up approach (as touched upon in Module 1).
Analysts often prefer a bottom up approach when conducting fundamental forecasts, drilling into each division / segment, line by line. A top down approach is then used as a sense-checking mechanism. Of course, depending on the sector, this may not always be possible
For our purposes with SWM, we will take a number of angles:

1. Company Guidance
For most company results and announcements, management releases outlook comments and guidance around key metrics. These form the frameworks of an analyst’s forecasts. Note that, some companies scatter outlook comments across their announcements / releases so you may have to dig around for your selected company!
For SWM, management released a series of outlook commentary as seen below. These are incorporated into forecasting models:
2. Third party research
Guidance comments are only released at major announcements and results so analysts must also have their own way of tracking ongoing changes and trends. Also, we can’t just rely on management commentary because we need to have our own independent opinion. That is why a series of independent research and third party consultations are required.
For TV, we triangulate the data with official industry bodies such as:

  • CEASA data (Commercial Economic Advisory Service of Australia) for total ad revenues
  • OzTAM data for ratings shares data by segments
  • KPMG FreeTV data for revenues shares data by segments
  • SMI Data for agency ad expenditure

Your turn: For your own individual stock, come up with a list of industry sources which can help you value the business and understand the market. A good place to start is to dig into the annual reports and company releases of the selected company and their peer comparables. Then read existing broker reports and understand their source of information and research.

3. Broker Forecasts
To ensure that you can justify your forecasts, it is crucial to determine where you sit relative to the rest of the market. The most common metrics to check against are:

  • Revenues
  • EBITDA
  • EBIT
  • NPAT
  • EPS
  • DPS

One way to set out the updates is an excel layout below which can be updated when a catalyst occurs in the market which changes analyst views, e.g. the company makes an acquisition, or delivers a set of results.

Your turn: Have a go at setting out a template for your own company stock and use the UNSW Bloomberg Terminal to find the data. You can do this in the following steps:

  1. Log into the terminal and computer
  2. Launch the Bloomberg software and log in using the provided username and password details at the desk
  3. Search the company ticker name (“SWM AU EQUITY”) in the top bar
  4. Add “EEB” to the end of the search function to find the best analyst estimates in the market
  5. Take a screenshot and update your excel template according to each bank

We collate all of the above data first and then proceed to forecast line by line performances. See if you can use the information / approach for your own selected stocks and come up with your own independent forecasts as you work through the task items below.
At our next F2F workshop and in the next few modules, we will go through more detail about forecasting and valuation. Stay tuned!