Seven West Media Ltd (ASX: SWM) recorded a net profit of $150 million for the first-half of 2014, up 5.5% on the prior year. However, revenue declined by 1.1% to $975 million. The television division, which is the largest division, contributing 70% of revenue, delivered disappointing growth of 2.6%.
Management has upgraded its 2014 financial year television advertising market outlook to low-to-mid single-digit growth (up from low single-digit growth). The company has issued guidance for the 2014 financial year for net profit to increase by low single digits.
With improving domestic consumer confidence and retail conditions, analysts expected stronger half-year results. It would appear that growth is limited due to the structural shift from TV advertising towards online digital advertising, and a prolonged downturn in advertising spend.
Another concern is the company's high debt level, which currently sits at an uncomfortable $1.14 billion or net debt/EBITDA of 2.4x.
Despite the negative half-year result, the company is in a position to improve margins going forward by producing more TV content in-house at a lower operating cost rather than relying on U.S. content, which comes at a higher cost.
Foolish takeaway
Seven West Media has a strong portfolio of media assets that dominate their respective markets. Despite its dominant position in television, newspapers and magazines, the company is currently facing earnings headwinds as the structural shift in advertising from television advertising to online digital advertising takes place.
However, if advertising markets rebound on continued consumer and retail confidence, Seven West will be in a good position to see earnings growth. With shares trading on a low PE of 12 times, the current price offers an attractive entry point for the investor who's willing to take on a little risk.
