What's new?

Seven Network boss Kerry Stokes is steadily accumulating a sizeable stake in WA News, owner of the flagship state paper The West Australian and various other media properties. At last count, Seven's stake was 22.3 per cent. But Stokes doesn't look like stopping there. Earlier this year he tried, unsuccessfully, to remove the existing board. He nominated himself, among others, as a replacement but his motions were voted down at an extraordinary annual meeting. The plan here seems simple: buy more shares (votes) and try the same thing in six or 12 months.

Why the interest in WA News?

Well, the company is extraordinarily profitable. This profitability stems from the company's very strong position (from low competition) in a high-growth market.

Moreover, the company is not capital intensive, meaning earnings do not need to be regularly reinvested in the business to maintain its competitive position. This leaves plenty of free cash flow, an obvious area of interest for Stokes.

To give some idea of the strength of the business, consider the following. According to Bloomberg estimates, WA News will generate a 140 per cent return on equity for 2008. Adjusting for the high debt levels, return on assets is still a very strong 34 per cent.

When you have free cash flowing at such a rate, you want a solid management team to do the right thing with it. And this is where opinions differ. Management recently completed a $200 million printing plant upgrade. Stokes says the investment has been badly managed; WA News says that the benefits will flow through for years to come. We're not sure who's right on that front but we would hope the board does not authorise any more Hoyts-type acquisitions. Having bought 50 per cent of the cinema chain in late 2004, the company sold it recently for about $60 million less than it invested. As well as losing money, the acquisition diluted the profitability of the main businesses.

The outlook

Aside from corporate manoeuvres, the company's long-term outlook is sound. Despite the weaker housing market in WA, which will have an impact on classified income, the region looks like maintaining good economic growth rates for some time to come. And following the completion of the printing plant upgrade, benefits should flow through to earnings in the years ahead.

Price

The stock took off in late 2006, as takeover speculation buoyed the whole media sector. Then - with the credit crisis and reality sinking in - the stock price began to tumble quite rapidly. The stock now trades about the $8.50 mark, after reaching highs of nearly $17 in 2007.

Worth buying?

WA News is a great business and would fit many of Warren Buffett's requirements for a successful investment - although we're not sure if it matches up on the "sensible price tag" score. The high return on equity is already reflected in the price - the stock trades on a price-to-book multiple of more than 18.

The recent fall in the share price merely reflects a retreat from ridiculous levels. We would be more comfortable buying between $7 and $8, which we think is a better reflection of actual value.