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One of my favourite, cheap ASX small caps just got more attractive

Australia’s most-watched television broadcast television network, the Seven Network, has announced a joint venture with one of my favourite small cap companies, Beyond International (ASX: BYI). Seven, which is owned by Seven West Media (ASX: SWM) will join forces with Beyond’s production arm, Beyond Productions, to create new programs for the North American market.

Seven currently produces more than 700 hours of content per year, and is recognised as a leader in Australia. Indeed, Seven Network has been the most successful Australian television station. It continues to attract more viewers than its main free-to-air competitors, owned by the Nine Entertainment Company and Ten Network Holdings (ASX: TEN). The joint venture will be called 7Beyond and has established a Los Angeles office.

Beyond International currently has four business segments:

  • TV production and copyright (the company also manages copyright created by other producers).
  • Content distribution (this segment is growing profits).
  • Home entertainment (in large part, this is distributing DVDs).
  • Digital marketing (this acquisition is yet to pay off and is losing money).

The first two segments are the core business of the company. In the past, I have had concerns that the company’s foray into digital marketing represented a loss of focus on the most profitable activities. Not for the first time, I was overly pessimistic. The 7Beyond JV proves this. The combination combines two production companies that excel in reality television (think Mythbusters and My Kitchen Rules), and will leverage Beyond’s expertise in production, and international content distribution. The content will be co-produced, and distributed by Beyond Distribution.

Beyond International has achieved improved return on equity over the last decade. The most important business segments — TV production and copyright — earn significant foreign revenue. The company pays also pays a decent (unfranked) dividend of about 4% (at current prices) and trades on a P/E ratio of less than 12.

Most importantly, I have enormous respect for the CEO, Mikael Borglund and his team: this is a company that has proven to have honest and competent management. Although Borglund has been selling shares on market recently, he retains a major holding, and his sales are dwarfed by on-market purchases by the chairman, Ian Ingram.

Foolish Takeaway

With a market capitalisation of about $108 million and low liquidity, Beyond International is a stock to hold for the long term or not at all. The nature of the business is that profits are somewhat lumpy, and one risk is the company’s exposure to DVD sales: I envisage that one day almost all home entertainment will be purchased (or stolen) over the internet. Nevertheless, the joint venture with Seven Networks makes Beyond International shares reasonably attractive at current prices.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. For more, find him on Twitter @claudedwalker.

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