STW COMMUNICATIONS

Company Overview - STW Communications Group is Australias largest local marketing communications group. SGN also has operations based in New Zealand and a
small but emerging footprint in Southeast Asia. SGNs service offerings span across a broad range of communication disciplines, including advertising, production and media,
digital, brand design, public relations, research and insight as well as a range of niche specialities. These disciplines fall under the umbrella of two divisions: Advertising,
Production and Media; and Diversified.
Analysis The first four months of 2014 have started more slowly than SGN would have liked. Management now expect mid-single digit NPAT growth in FY14 to be the upper
end of what they can achieve. We note that SGNs earnings are weighted to 2H. Management are looking at revenue and cost levers to support growth. We believe this is a
contributor to the SGNs more subdued outlook, with ad market momentum slowing YTD vs the run rate in 2HCY13. 9-10 months ago SGN had won a significant amount of
new business. While SGN have won some smaller accounts there have been missed opportunities and notably its IKON agency has lost some accounts.

STWAwards Dashboard (Source - Company Reports)

Global ad agency peers generally had a stronger 1Q14. In the Q1 results for Havas, Publicis and IPG, Australia was identified as having reasonable growth, with Publicis
notably achieving more than 5% organic revenue growth. Australia was not specifically mentioned by WPP or Omnicom. We believe SGNs revenue growth was in line to
modestly below its global peers over the quarter and expect it to have been below the 5% mark achieved by Publicis.

STW New Clients (Source - Company Reports)

At the full year result in February management provided the following earnings guidance and outlook statement. Guidance of FY14 Net Profit after Tax growth of 5%, with
Colmar Brunton only expected to make a small contribution. Momentum is building in the business with the management encouraged by the new business pipeline. The NZ
and offshore markets are delivering good growth and momentum is solid into 2014. SGN provided the following update at its AGM on 16th May. The first four months of 2014
have started more slowly than the management would have liked. The first quarter reforecast by SGN and its companies still supports EPS growth in FY14, however midsingle digit is now the upper end of likely outcomes. Management is continuing to focus on the cost base.

STW Strategy (Source - Company Reports)

Over January and February, the Australian ad market was only down modestly CYTD according to Standard Media Index (SMI) ad agency data (Source
www.adnews.com.au). This trend continued in March, with SMI data indicating the total market fell 2.5% year on year. Radio, Outdoor and Pay TV were weak in March,
however metro TV was up 3.2% (Source: ww.adnews.com.au). April was notably weak for the Australian ad market, with SMI data indicating it fell 9.2% year on year. This
was in part attributable to the combined Easter/ANZAC holidays as well as general hesitancy ahead of the Federal budget. While SGNs revenue are not directly correlated to
the ad market, it is still an important barometer for its clients and management will typically need to take a view on the ad market when setting earnings guidance.

Dividend + NPAT Growth (Source - Company Reports)

The other important component of SGNs revenue outlook is new business wins particularly from its larger agencies. After a strong run of large new business wins in mid-2013
the momentum has slowed. The following is a selection of SGNs business wins/losses 2014 YTD, sourced from press reports. This is purely illustrative and by no means a
comprehensive list:
Wins La Trobe University, The Smith Family, Officeworks and Transport Accident Commission.
Losses Vodafone, Coca Cola, SPC Ardmona and Tetley
Potential Missed Opportunities RACV, Pacific Brands and BUPA
Of the account losses, Coca Cola is clearly the trophy account but we suspect it was relatively low margin, as can often be the case with large media buying accounts. SPC
was estimated to have $8m in billings so we wouldnt expect it to have significant earnings impact. Ikon one of the ad agencies owned by SGN has had a significant churn in
senior/executive staff for the past 12 months including a new CEO and we believe this is partly reflected in it losing some of its accounts and not sustaining its momentum in
winning new clients. The new CEO James Greet comes with a solid reputation in the industry and we would expect this business to be back on track in the coming months.
Ikon is 100% owned and SGNs largest media buying agency. We note that Ikon recently also closed its Perth office.

STW Daily Chart (Source - Thomson Reuters)

Despite difficult markets we expect SGN will continue to grow organically and acquisitively. We believe SGNs expanded platform and market share gains will provide leverage
as the cycle strengthens. SGNs Australian digital capability is broad and deep. SGN is well placed to benefit from the structural migration of advertising spend to digital.
Southeast Asian expansion strategy offers growth potential to SGN. Rising wealth levels in this large region combined with rising online access and usage is expected to fuel
growth in advertising and branding investment by corporations over the medium term. The balance sheet remains reasonable healthy and we note the potential for accretive
acquisitions.

SGN is well positioned in a difficult and unrelenting industry that is characterised by continual and accelerating change. We believe that benefits of STWs diversified model
will continue to deliver results. SGN has a three pillared strategic growth focus: to drive growth out of their leadership positions in Australia and New Zealand; to continue to
grow and evolve their digital offering; and to selectively and carefully expand their footprint into new markets beyond Australia and New Zealand. We see SGN as a lower risk
way to obtain media sector exposure. In the current market we believe SGNs ability to rapidly adjust its cost base in light of a bumpy ad market recovery is a key positive.
We like the SGN story and reiterate a BUY on the stock at the current price of $1.39.

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