Watching Seven's star

Shareholders would doubtless agree with him, as it was the new media strategy that put a $85m black hole in Seven's latest annual accounts.

This does not look quite so bad, however, when measured against the $327m lost by PBL in its disastrous venture into new media with One.Tel.

Yet, in spite of this, Stokes is buoyant on his company's future prospects. Just how justified is he?

Olympic high point

The broadcasting of the Olympic Games was the high point of Seven's year but its full year results show a significant drop in net profit.

The last time we reviewed the company, in issue 78 (Hold for the Upside - $6.85), we were concerned about the impact of sluggish economic growth. Five months on, the economy is still languishing in the doldrums but Seven's current strategies have renewed our faith somewhat.

The share price has held up reasonably well despite the uninspiring full year results. Net profit after tax was down 81.5% on the previous year, to $16m, mainly due to the $85m loss incurred from new media and telecommunications investments such as the pay-TV venture C7, internet site i7 and mobile phone reseller BDigital.

But while we wouldn't recommend buying in just now, there are plenty of reasons for the company's shareholders to continue to hold on for a while.

The first is that Seven is continuing to expand its share of the advertising market. As one of only a handful of companies to have profited from the Olympic Games, Seven never looked back over the course of the 2000-01 financial year and took the gold medal in the fiercely competitive race for prime time ratings in all demographic and socio-economic sectors.

Another very good reason for holding on to your shares is that Kerry Stokes, who owns 35% of the company, is a great manager and visionary who is unafraid of taking risks.

Tenacious

Rival media mogul Kerry Packer admires 'little Kerry's' tenacity. He has a proven track record and it was on his initiative that Seven acquired the television rights to all Olympic events from 1996 to 2008.

He was also instrumental in moving the television network from analog production to the more efficient digital transmission. This will place the company at the forefront of the digital age in Australia.

A third reason for holding is that investment in the new media enterprises (C7, i7 and BDigital) will be cut to only $20m this financial year.

The new economy losses led to a 76% drop in EPS to 6.1 cents in the full year results so we're happy to see management reining in its commitment to these ventures.

Sound strategy

We also like the company's short-term strategies of concentrating on programs offering higher returns and cross-promoting its branding via its own magazines and internet sites, all with a view to increasing its share of the advertising market.

We're giving the company a fundamental risk rating of two and a half stars because of these strategies, which are likely to create shareholder value by improving Seven's position against competitors.

The share price risk is three and a half stars due to volatile market conditions, uncertainty over the war on terrorism and poor sector sentiment.

Seven is facing many challenges. With the need for constant technology upgrades and tough competition for the advertiser's dollar not least among them, the company's strategy remains sound.

Despite the fact that the shares have dropped 6% since our last review, we wouldn't panic. While we wouldn't advise buying in now, current investors should HOLD FOR THE UPSIDE.