Investors to take axe to Seven

SHARES in Seven West Media are expected to come under pressure this morning after a profit downgrade on the eve of Anzac Day.

SHARES in Seven West Media are expected to come under pressure this morning after a profit downgrade on the eve of Anzac Day.

The company announced late on Tuesday that full-year earnings before interest and tax were likely to be almost $50 million less than analysts' expectations of $515 million.

It comes as a resurgent Channel Nine attacks Seven's prime time schedule with The Voice and The Block, stunting the growth of Australia's Got Talent, Packed to the Rafters and Revenge and forcing Seven to reschedule shows.

Analysts were caught by surprise. "We clearly underestimated the level of cost growth in the TV network," a Citi analyst, Justin Diddams, said in a note to clients.

Seven West told the market on Tuesday it was committed to reining in costs growth to below inflation, "except for the continuing investment in programming in the television division", prompting Citi to forecast annual cost growth of more than 8 per cent.

"Our previous forecasts assumed a portion of the incremental AFL costs, at circa $20 million, would be absorbed into the existing programming budget."

While overall revenue growth at Seven West would ease 0.6 per cent, newspaper revenues were expected to decline 7 per cent in the second half, Citi forecast.

Derryn Chin at Macquarie said in a note that the extent of the weakness came as a surprise, given Seven has the free-to-air rights to broadcast AFL games and recent commentary from Ten that suggested the market was stabilising, although still weak.

"Putting this all together, we expect the weakness is more likely coming from higher than expected costs in television as well as broad-based weakness across the publishing assets in newspapers and magazines, which to date had not been evident in the numbers despite the much publicised ex-mining slowdown," it said in the note.

Macquarie also said that management had told it that visibility for the ad market was "extremely limited", which led it to conclude that "there may be an element of conservatism inherent in this update".

The announcement will in all likelihood prompt pundits to revisit their forecasts for the $13 billion main media ad market, given Seven's commanding position. Earlier this year the consensus for growth in this calendar year was 3 per cent.

Seven West leads in the TV market, with a 40.7 share of the $2.7 billion metropolitan TV ad market, a monopoly of the newspaper market in the boomtown of Perth, through West Australian Newspapers, and strong positions in magazines through Pacific and on the internet through its 50 per cent stake in Yahoo!7.

March quarter figures from the advertising analysts SMI showed the prolonged downturn in advertising has not abated. Anaemic broader economic conditions were underscored on Tuesday by quarterly inflation figures of just 0.1 per cent.

Seven West shares have outperformed the sector so far this year and closed on Tuesday at $3.77 after starting the year at $3.27.

News Corp, despite constant coverage of the British hacking scandal, has outperformed, opening 2012 at $17.95, and closing on Tuesday at $18.88. Elsewhere, Fairfax Media Holdings, publisher of the Herald, is trading close to the same level it started the year at, closing Tuesday at 72?. Shares in the Ten Network last traded at 82?, below its New Year price of 86?.

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