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Unique combo of technology, content and advertising
Swift Media Limited (ASX:SW1) is a technology, content and advertising service provider focused on the fast-growing closed loop and digital out-of-home market. It serves an installed base of ~73,000 screens (forecast for YE FY19), offering digital entertainment solutions to a range of verticals, including hotels, aged-care and the resources industry.
Advertising to leverage installed base of screens
SW1 has recently acquired the Digital Out-of-Home (DOoH) advertising business of Medical Media. DOoH advertising in Australia is growing at nearly 16% CAGR, which provides a strong revenue driver for SW1. SW1 intends to leverage its unique captive audience by offering highly targeted, high value advertisement opportunities to advertisers.
Operational synergies to drive margin expansion
Medical Media’s advertising business has a c.10% higher gross margin than SW1’s current businesses. As A$3M in synergies set into the system and further network monetisation takes place, we expect the group’s margins to expand significantly.
Valuation range of A$0.75–0.84 per share
We believe SW1’s commercial opportunities and revenue potential are not accurately reflected in the company’s current valuation. Driven by growth in the number of screens, the Medical Media acquisition and the new revenue stream from digital advertising on the installed base of screens, we value SW1 at A$0.75 per share in our base case and A$0.84 per share in an optimistic scenario, based on a blend of Discounted Cash Flow (DCF) and Sum Of The Parts based relative valuations
Key reasons to look at Swift Media
1) SW1 has a large and growing installed base of digital out of home screens (we project ~73,000 per year-end FY19), generating recurring revenues of approximately A$360 per screen per annum with 45% gross margins on average. We anticipate gross margins to grow to 50% in the next few years.
2) Following the recent acquisition of Medical Media, SW1 now also generates revenues from digital OoH advertising, a market expected to grow by 16% CAGR on average over the next 5 years in Australia. Gross margins for the digital advertising business are currently at ~70%, expected to grow towards 80% in the next few years. Overall, SW1 expects to derive A$3M in synergies following integration of the Medical Media acquisition into SW1’s existing business.
3) SW1 has started to deploy Medical Media’s digital advertising expertise in its existing entertainment business to leverage this expertise and drive revenues through new digital advertising revenue streams from national and local advertisers. SW1’s valuable insights into user behaviour and viewing preferences allow for high pricing of digital ads. Combined with the near-zero marginal costs of these new revenue streams in SW1’s existing business, we anticipate digital advertising to this captive audience will generate very high gross margins.
4) SW1 is set for strong expansion internationally. Through its attractive content licensing deals with some of the world’s largest content providers, and collaboration with large multinational reseller partners, SW1 should be able to expand into new geographies without any need for costly investment, driving revenues at attractive margins. We believe international expansion, i.e. other than through the Australian military, presents a very substantial opportunity for SW1 and is a pivotal driver for the next phase of growth.
5) In our view, SW1’s current valuation doesn’t accurately reflect the company’s commercial opportunities described above. Our revenue growth and margin forecasts, derived from the new business combination, indicate a value well in excess of today’s share price.
Focus on advertising
ASX-listed Swift Media Limited (SW1) is a technology, content and advertising service provider focused on the fast-growing closed loop and Digital Out-ofHome (DOoH) market. Its offering of content and network solutions includes premium entertainment content, voice and data communication services and wireless networks. Traditionally, SW1 has focused on providing content
and technology services to closed loop environments in the resources and energy exploration industries, aged-care & retirement homes, and hospitality sectors. More recently, SW1 has added the ability to extend its offering to include highly targeted DOoH advertising, most notably via the acquisition of the advertising network, Medical Media.
In February 2019, SW1 acquired a 100% stake in Medical Media for an initial $4.5m in scrip and an additional $20.5m in Performance Shares to be issued subject to certain advertising revenue targets. Representing less than 6 times earnings valuation at full vesting of the Performance Shares, the Medical Media business acquisition is highly earnings accretive for SW1. With over 1,500 screens and sites across Australia, Medical Media offers its stable of more than 2,500 local and national advertisers the unique opportunity to advertise in the trusted environment of Medical Practices with high dwell times of over 30 minutes per person per visit. The transaction positions SW1 favourably to capitalise on the growing DOoH advertising market, combining SW1’s premium out of home content with Medical Media’s network of advertisers and practices.
On the back of Medical Media’s wide reach across medical practices, extensive inventory of local advertisers, and growing relationships with global and regional brands, we believe the SW1 investment narrative becomes even more compelling. Historically, the resources sector has provided the biggest revenue opportunity for SW1. Over the last few years the company has managed this sector risk through diversification across other industry verticals, and the addition of the advertising revenue stream further improves its investment narrative. Through the Medical Media acquisition, SW1 is executing on its strategy to acquire closed-loop networks in fast-growing out-of-home verticals.
Leveraging its captive audience through intelligent advertising
Another key strategic development is SW1’s move to start targeting its existing, captive, audience with advertising. Because SW1 has key insights into its users’ demographics, viewing behaviour and preferences, the company is able to offer highly targeted advertising capabilities, which are usually valued substantially higher than more generic advertising, such as free-to-air TV and radio ads. Consequently, we expect strong demand for SW1’s advertising services going forward.
Higher growth, higher margins going forward
We believe the biggest advantage of the Medical Media acquisition is that it provides SW1 the leverage to further monetise its existing captive audience through the addition of highly targeted advertising, delivering accelerated revenue growth and significantly higher profitability going forward. Medical Media’s current business operations have c.10–15 percentage point higher gross margin than SW1’s content and network operations. With management’s expectation that advertising will contribute c.30% to revenues by FY2020E, the profitability of the group is expected to expand significantly.
Traditional powerhouse of content & network
1. Entertainment: SW1 started operations in 2008 as a provider of digital entertainment solutions, primarily to the resource sector of Western Australia. The company specialises in deploying entertainment systems that can operate in closed-loop and remote networks and has thereby quickly gained a significant market share of ~30% in the resource sector. The company has grown rapidly in recent years, from just 33 sites in 2016 to ~370 sites today. We estimate the company will have an installed base of approximately 73,000 screens by the end of FY19. Users typically watch 220 minutes of content per day (dwell time) on SW1’s screens.
SW1 provides a variety of leading linear and on-demand entertainment to its clients through the various agreements it has entered into. SW1 has negotiated attractive content licensing agreements with some of the world’s leading content providers, including 20th Century Fox, Warner Brothers, DreamWorks and Sony Pictures, allowing it to offer the latest movies, sports, gaming, and lifestyle channels to its customers. As content is king in the entertainment industry, we believe these content licensing agreements are instrumental in driving SW1’s revenue growth, now and in the future.
In 2016, SW1 further expanded by entering new verticals, including aged-care centres, retirement homes, and lifestyle villages, through the acquisition of Web2TV and Living Networks. In doing so, the company not only expanded its portfolio of rooms served but also gained access to new geographies on the Australian East Coast. The VOD acquisition in July 2017 delivered 26,000+ rooms in hospitality, predominantly on the east coast of Australia.
In order to keep up with the changing dynamics of the market, SW1 signed an agreement with Future TV to provide original Chinese content to its hospitality and student accommodation verticals. Consequently, SW1 became the first broadcaster to introduce Chinese entertainment content from the Future TV Group to the Australian market. This move was in response to the growing number of Chinese short-visit travellers whom Australia has been attracting, as evidenced by the 6% YoY uptick to 1.43m in 2018, which surpassed the number of travellers from New Zealand.
Going forward, we expect SW1 to expand further into the verticals it currently serves, thereby adding more screens to its installed base. Additionally, the company is likely to enter into new verticals it can serve with its current technological expertise.
2. OTT offering through Lumiair: SW1’s latest offering, Lumiair, is its first Over the Top (OTT) product that provides the latest premium content to guests in the hospitality industry. The product is available both in the form of a website and a mobile application, so customers do not need to incur any additional system installation costs. Content consumers simply bring their own device to log on through Lumiair and watch content, similar to how they watch content on Netflix.
This opens new market opportunities for SW1 with small hotels, motels, holiday villas, caravan parks in Australia, as well as being potentially deployable in overseas hotels with high speed broadband connections. SW1 recently announced their Lumiair product is now operational at over 100 new customer sites and more than 3,000 rooms since launching in November 2018.
As no hardware installation is involved, the time it takes to set up this offering and begin its usage is substantially less than for the traditional set-top box service. These advantages make it ideal for smaller establishments, such as boutique hotels and highway motels, and this increases the company’s penetration into the hospitality domain. The recent shift in the video content consumption pattern among Australians – from broadcast VOD to Subscription VOD (SVOD) – also acts as a driving force for Lumiair. Notably, revenue from the SVOD segment in Australia grew 90% YoY to A$700m in FY2018, while subscriptions posted a YoY uptick of 54% to 9.1m subscribers as of June 2018. We believe this shift in the video consumption trend represents a good opportunity for Lumiair, as people are moving away from traditional broadcast TV to internet-based solutions that offer content more customised to their tastes. Another advantage that SW1 enjoys over B2C OTT players is that Lumiair gets access to the latest movies well in advance of its competitors.
3. Internet and Telecommunications: In addition to providing home entertainment solutions, SW1 supplies internet and telephony services to its clients ensuring its guests are always in touch when they need to be. The majority of SW1’s end customers are temporarily displaced people, such as Fly-In, Fly Out (FIFO) workers and tourists, who require a reliable network to keep them connected to both their work and their homes. SW1 provides internet and in-room Wi-Fi services to its guests, in addition to telephony services.
4. My Community and My Family: SW1 provides various applications designed specifically to cater to the needs of residents of aged-care and retirement facilities. While SW1’s ‘My Family’ app allows family members to share photos and messages that can be delivered directly to their TV screens, the ‘My Community’ app allows residents to keep in touch with activities in their neighborhood.
5. Design and Engineering: The company provides a full suite of services for the deployment of digital entertainment and communication solutions – from feasibility studies to test the harsh environments of the resource sector to ongoing support and maintenance services. For residents of its clients’ facilities, the company provides 24/7 support services to ensure that systems are running smoothly. Significantly, SW1 provides weather and safety alerts to residents who are working on difficult terrain.
SW1’s engineers and technicians work with clients to design and construct communication and entertainment solutions that are best suited to their particular needs, meet industry and country standards, and are scalable enough to accommodate any future expansion in the clients’ operations. SW1 assigns a dedicated project manager to each client to better understand his/her needs and ensure the deployment is carried out smoothly. Once system construction is over, the company conducts tests in compliance with the Factory Acceptance Testing (FAT) and Quality Assurance standards.
6. Monetising the Bring-Your-Own-Device trend: Keeping newly emerging requirements in mind, SW1 has developed mobile apps that provide users with the ability to access Swift services through their own devices. In addition to the aforementioned Lumiair, the ‘Swift Entertainment’ app allows users to access all of the premium entertainment through their mobile devices, and the ‘Swiftville’ app allows site owners to access information within a facility at the touch of a button, sending important information directly to guests via a pop-up alert system. The apps are expected to undergo further enhancement, especially for retirement home clients. Its enhancements will include a customised proposition; namely, a set of channels for aged-care facility residents, among other new features.
DOoH advertising: Potent addition to the portfolio
Over the next four years we predict a massive growth in DOoH advertising in Australia that might surprise many observers of this sector. This growth will be driven by step changes in three factors:
– Content: SW1 is offering high end content with significant power to engage viewers.
– Audience: This attractive content results in a captive audience that is highly attractive to advertisers, i.e. with long dwell times, hyper local across multiple verticals.
– Technology: SW1’s various platforms (in-room screens, large OoH screens, mobile apps) offer different advertising channels to national and local advertisers.
We lay out below the various drivers of growth in the discussion below. We believe that the move from traditional OoH advertising in favour of DOoH in terms of audience and technology reached a tipping point around 2013. The reason we argue a significant amount of new business can come SW1’s way is that no peer can offer the range of digital advertising options that SW1 can. Consequently, as illustrated in the valuation chapter below, we submit that a key reason for SW1 being worth up to four times the current share price is its ability to ride the DOoH wave.
Digital OoH advertising growing at 16% CAGR in Australia
The acquisition of Medical Media brings an entirely new revenue stream to SW1; Digital OoH advertising. As per Nielsen’s 2017 Online Activation Survey, OoH continues to deliver more active online activity per ad dollar spent compared to offline media. Outdoor media accounts for c.26% of gross search activations generated by television, radio, print, and OoH combined, but it only accounts for 7% of the total combined advertising spend (it was only c.3% in 2002).
According to Statista, the revenue share of digital in OoH advertising in Australia stood at only 7.5% in 2012 and grew to 47.3% in 2017 and more than 50% in H2 2018.
According to the PwC-IAB Online Advertising Expenditure Report, for the 12 months ending June 2018, the total online advertising market revenue stood at A$8.5bn, with the share of mobile and video ad expenditure at c.58%. OoH in Australia is expanding at a time when all other non-digital advertising formats such as print, radio and free-to-air television are contracting, and the largest industry players are consolidating to attain higher traction. All the leading players – including local players such as APN Outdoor, oOh!media, and Adshel and global giant JCDecaux – are involved in competitive bidding and counter bidding.
PwC forecasts suggest that total OoH advertising in Australia is expected to grow at a 6.7% CAGR over 2018–22. During the same period, DOoH is expected to grow at a 15.9% CAGR, while physical OoH is expected to decelerate at a 5.7% CAGR. This clearly highlights that within advertising, if OoH is the single biggest growth driver, digital is its mainstay. In Australia,
the influence of mobile, video, and digital display is expected to continue to grow significantly.
Valuation considerably higher than current price
To derive SW1’s long-term value, we have used a weighted average valuation methodology, assigning equal weight to a peer-group-based SumOf-The-Parts (SOTP) valuation and a DCF calculation. Considering the distinct nature of SW1’s different businesses, a single peer group is ineffective. We have used two divergent peer groups to evaluate the main businesses, i.e. content and network, and OoH advertising.
Currently, we have considered only ASX-listed peers for business valuation. SW1 has been benchmarked against the following ASX-listed content distributors and advertising companies: Prime Media Group (ASX:PRT), Crowd Media Holding (ASX:CM8), and Beyond International (ASX:BYI) for the content and network business; and OoH!media Ltd (ASX:OML), and QMS Media Ltd (ASX:QMS) for the advertising business. Some other small ASXlisted companies were not included given the lack of earnings forecast (Figure 7).
Considering that SW1 is not a pure-play outdoor advertising company (that trades at a higher valuation) and will need to integrate new business, we believe that SW1 will trade at a slight discount to its peers in the near future. We have applied a c10% discount to the peer average EV/EBITDA multiple of 5.5x (content and network) and 10.2x (advertising) for FY2020E.
For SW1, the implied EV is A$67.6m or an equity value of A$0.45 per share (Figure 8).
DCF calculation suggests a substantially higher value
Our DCF model yields a 10.7% WACC for SW1 (risk-free rate of 2.1%, a beta of 1.05, and an equity risk premium of 8.2%). Applying this discount rate to our free cash flow projections through FY2028E and using a terminal growth rate of 2%, SW1 yields a value of A$1.04 per share (Figure 9).
We believe that as the company matures and enhances its operation and cost synergies, there will be room for lower discount rates over the medium term period. Furthermore, as the company initiates the upscaling of services, it will post a higher average rate per screen. This would translate into a further increase in the share price.
Fair value of A$0.75–0.84 per share
Our base case value of A$0.75 per share has been derived using a weighted average valuation methodology, which assigns equal weight to our SOTPbased relative valuation and our DCF calculation. Our bull case calculation results in a valuation of A$0.84. Both the cases imply substantial upside from the current share price.
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