Nine Entertainment Excites

This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED. For more info SHARE ANALYSIS: NEC

-Targeting 40% TV ratings share
-StreamCo launch in FY15
-News investment pays off
 

By Eva Brocklehurst

Nine Entertainment ((NEC)) is showing form to the detriment of its rivals in Free-To-Air TV (FTA TV). The company has held its inaugural investor briefing and brokers came away with increased confidence. Nine appears well placed to leverage a recovery in the advertising market, with its best ratings in eight years, while new initiatives in Perth and Adelaide provide potential upside to earnings expectations.

Macquarie observes the growth in ratings in both of the company's newer markets has outpaced gains in the established east coast markets. Advertising remains subdued but that is no surprise to brokers. Management confirmed weak data which showed the metro TV ad market falling 13% in the year to April 2014. This largely reflected the timing of Easter and the moving of 13 episodes of The Voice to May from April. Nine believes May and June bookings have stabilised but still suspects ad market growth could be negative for FY14.

Nine is confident its ratings momentum and programming strategy will deliver a 40% market share by 2015. The company is on track to launch a subscription video on demand service (SVOD), StreamCo, in FY15. The investment in this platform is $10-15m higher than Macquarie previously had expected, as Nine tackles the market more aggressively with a view to obtaining upside if the launch is executed successfully. Goldman Sachs has kept earnings estimates for key operating divisions unchanged but changed the treatment for StreamCo, with start-up costs now considered as operating expenditure. Break even for StreamCo is expected to be achieved in FY18. Goldman downgrades FY15 and FY16 estimates by 5.2% and 8.6% respectively, given start-up operating losses for StreamCo, but retains a Buy rating.

Goldman also welcomes Nine's initiatives to boost its brand and presence in Perth and Adelaide, such as investment in local news and increased engagement with the local community, which should drive improvements in ratings and revenue. Management has also stated it will fight for cricket rights but remains wary of potential cost increases in the next round of negotiations. Nine will look at AFL rights differently now it owns Adelaide and Perth and will not necessarily bid for the rights in order to win ratings. Nine believes the consolidation of media agencies is likely in the near term, resulting in increased buying power, which could place more commercial downward pressure in the future. TV and digital are envisaged becoming increasingly co-dependent and Nine is in the process of centralising TV and digital sales teams.

CIMB is more confident in the key businesses, particularly Nine Events and digital. CIMB agrees there is a ready market for SVOD but is concerned about the level of investment required and the risk of audience fragmentation in FTA TV. Still, the broker accepts Nine has a desirable asset mix and market share, and can justify a valuation premium to its FTA TV peers. One item that still needs to be considered is the overhang from the company's pre-IPO status. The counter side of any selling down from these shareholders will be increased liquidity and an increase in index weightings. Another area of concern for CIMB is the broader market outlook in the second half of 2014, where the broker thinks weakening consumer and business sentiment, and the cycling of federal election comparatives, will cause metro FTA TV advertising expenditure to decline 5%.

In traditional media UBS prefers Nine, as the network targets that 40% metro share, driven by programming improvements, one-off sports events and a turnaround in the Perth and Adelaide business. UBS also thinks news investment is paying off with the 6-7pm time slot ratings now at 44%, up from 38% in 2010. Earnings forecasts for FY14-17 are cut by 6-9% to reflect the higher SVOD investment and a softer advertising market in FY14, despite factoring in a higher revenue share. The broker finds the valuation attractive and believes there is upside if the company is successful in delivering and sustaining a 40% metro FTA TV revenue share. The broker also thinks Nine will be the prime beneficiary of any potential changes to media legislation which may crop up early next year.

Nine Entertainment has three core divisions – FTA TV, including Nine Network and NBN, Nine Events, including Ticketek, Allphones Arena and Live, and Nine Digital, including Mi9 and Nine Ventures. Nine Network accounted for 74% of earnings in FY13. FNArena's database has six Buy ratings, no Hold and no Sell. The consensus target price is $2.57, suggesting 16.9% upside to the last share price. Targets range from $2.40 to $2.75.
 

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