Pressure mounts on Seven

SEVEN West Media shares are expected to come under pressure today after a profit downgrade late on Tuesday.

SEVEN West Media shares are expected to come under pressure today after a profit downgrade late on Tuesday.

The company announced 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 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," Citi analyst Justin Diddams said in a note to clients.

Seven West told the market it was committed to rein in cost 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, as 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 AFL broadcast rights and recent suggestions from Ten indicated 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 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 added 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 this calendar year was 3 per cent.

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

March-quarter figures from advertising analyst SMI showed the prolonged advertising downturn is yet to abate. And the anaemic broader economic conditions were underscored on Tuesday by quarterly inflation of 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, too, despite the hacking scandal in Britain, has outperformed, opening 2012 at $17.95, and closing on Tuesday at $18.88.

Elsewhere, Fairfax Media is trading close to the level it started the year at, closing on Tuesday at 72?, while shares in Ten Network last traded at 82?, below its new-year price of 86?.

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