Casino comeback and the uncertainty engulfing Seven West

-- | 29/05/2020 Text size Decrease

Lex Hall: Let's talk about casinos because I think you've been saying that people are dying to get back to casinos for the social aspect. They're not going to be content to game online for the rest of their lives, are they? Brian Han: Yeah, I think so. I think during the current lockdown and given the ridiculous increase in the amount of money spent on online gambling, some people are questioning perhaps online gambling would take market share away from physical gambling in physical venues. And I personally strongly disagree with that simply because I think there is a social aspect. As you said, Lex, there's a social aspect to gambling that people underappreciate. I think people enjoy gambling, but I think at the end of the day most people lose money. But they will rather lose money in a social environment having a beer with their friends than losing money in the basement all by themselves in the dark corner, and losing money all by themselves being miserable. So, I think there is that social aspect that people underappreciate. Now, once you accept that people will go back to physical venues, really in Australia, especially in Sydney, Melbourne, Brisbane, those casinos are owned by essentially two companies and that's Crown and that's Star, and that's not going to change for a long time simply because you need a casino licence to operate these things and those two companies hold all those licences. Hall: So, Crown is obviously building that huge structure next to our office in Barangaroo and Star has been upgrading its facilities too, I think. Han: Yeah, they are spending a lot of money on their Gold Coast—refurbishing their Gold Coast property and they are building a mega structure in Brisbane on Queen's Wharf. Hall: Let's switch, as I said, to the media landscape and let's talk about uncertainty because that's a key component of how our analysts rate companies. Uncertainty for one. Let me put it in a nutshell and you’ll correct me if I'm wrong: it reflects the divergence between your bull case and your bear case. Is that a fair sort of summation of it? Han: I think Lex that's more than fair. That's exactly what it is. So, what it is is we have a company and we try to estimate its intrinsic value based on its long-term sustainable fundamentals. But at the end of the day, we are trying to predict the future filled with uncertainties. So, what we do is, $1 is our intrinsic valuation, but our bull case it could be $1.50; on a bear case, it could be $0.50. That range around our fair value estimate, that range determines our uncertainty ratings. So, the wider the range, the higher the uncertainty. The lower the range, the narrow the uncertainty. So, for example, supermarkets such as Coles and Woolworths, our analyst Johannes Faul rate them low uncertainty rating simply because their earnings are very sticky, very predictable and they are susceptible to limited structural risk. I mean, they are still susceptible to some structural risk but limited compared to others and it's all relative and yet for other companies with highly volatile earnings we have a high uncertainty rating because we may have an intrinsic valuation but it could go really either way in a big swing depending on changes in the market. Hall: Yeah, which brings me, of course, to the only stock in our coverage now that now carries an extreme uncertainty rating and that crown—or I probably shouldn't say crown—but the wooden spoon goes to Seven West Media, which is a media company, which owns Seven, which owns West Australian newspapers and is synonymous with Kerry Stokes, who is one of Australia's most canny businessmen. The company has no moat. It's got a lot of debt. You say it faces intensifying competition and its earnings are weakening. Is there anything positive to tell shareholders about Seven West Media? Han: Well, I suppose the positive aspect is that I think the share market, the price of the company's shares, I believe, have more than incorporated all of those risks because we think it's worth $0.20 per share and right now it's still trading at below $0.10 per share. So, I think it's over-discounted all of those risks. But I think it's a good point you are making about the fact that the uncertainty on that stock is extreme and it is extreme because of this: we think it's worth $0.20 per share but the range is off the charts. On the positive side, it could be worth up to $0.60 per share. But on the lower case, it could be worth zero. And we actually attribute 50 per cent probability that the equity value could be zero. And all this is because this pandemic has not only accelerated the structural pressures on Seven Network's main business which is a TV, traditional TV business, but it's come at a time when Seven was already carrying a lot of debt. And so, with earnings under pressure that debt problem is becoming bigger and bigger and it's no secret that management is in the process of selling a lot of assets to get that under control. Hall: I just want to juxtapose Seven West Media with another company that you cover and that's Southern Cross Media. They are more associated with radio. Why are you a bit more positive on them? Han: Yeah. The first reason is because Southern Cross, as you know, about two months ago, they did do an emergency capital raising at a heavily discounted price. But because of that I think they now have the balance sheet to weather this pandemic storm. So, it has limited solvency risk. And secondly, Southern Cross actually operates regional TV stations. So, it is susceptible to some structural pressures on their TV business. But that TV business is less than 20 per cent of its earnings. More than 80 per cent of its earnings comes from, as you say, the radio business. And that radio business despite all of this Spotify and all of these digital disruptions radio has proven to be a very resilient medium and its share of total advertising pie has stayed at around that 80 per cent level for the past 20 years. So, it is because of that resilience of that medium Southern Cross' exposure to that medium which gives us confidence that its earnings are probably relatively to Seven more predictable. Hall: OK. Brian, it's lovely to see you again albeit in two dimensions. Hopefully, we can see each other in person very soon; at least we've got the rugby league to look forward to. Han: Yes. Hall: Thanks very much for your insights today. Han: Thanks, Lex. Hall: I'm Lex Hall for Morningstar. Thanks for watching.

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