Nine Entertainment Positioned For Upside

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

-Forecast to take market share
-Improving advertising trend
-Shares inexpensive

By Eva Brocklehurst

Nine Entertainment ((NEC)) continues to pull away from its rivals, guiding to improved profits down the track despite the weakness currently prevailing in the TV advertising market. The company's AGM commentary followed a similar theme to rivals, in that the Free-To-Air TV advertising market was notably weak. Beyond that, brokers expect company-specific initiatives will deliver growth in coming years, while Nine is well positioned to leverage the potential upside in advertising spending.

Nine expects the ad market will be weaker in the first half of FY15 but guided to 1-2% growth in the second half. Deutsche Bank now forecasts Nine to reach a revenue share of 39.2% in FY15, from 38.7% in FY14, primarily at the expense of Ten Network ((TEN)). JP Morgan expects a 39.5% share for Nine, assisted in the second half by the Cricket World Cup. Nine has a desirable asset mix and the market share gains from TV are coupled with strong growth in its events business, in Morgans' view. The broker notes guidance for 10% profit growth in FY15 was a little below consensus but this reflects a weak first quarter metro TV market and should give way to the improved trend the company is witnessing in the second quarter.

The fact that Nine expects profit of $85-90m in the first half but a full year at least in line with FY14's $311m implies a big second half, in Citi's calculations, and it will need higher ratings and, hence, revenue share or cost savings to help achieve targets. Citi suspects a lack of advertising growth and the intensely competitive environment could suppress near-term sentiment, but then the shares are priced accordingly. Citi also envisages value in leveraging the network effect, potentially in a merger with Southern Cross Media ((SXL)) and via expansion of the events business.

Internet film provider Netflix has announced it will launch a service in Australia in March 2015 but, near term, the threat to FTA TV is small, as Deutsche Bank observes Netflix will not compete for advertising spending and the content at launch will be limited. Still, the broker will watch developments closely on this front as any longer-term fragmentation of audiences could have an impact on the market. UBS reduces FY15-16 earnings forecasts based on the weaker market growth but, even with this downgrade, believes the stock is inexpensive. A future rebound in ad markets and potential cost savings on the Warner Brothers contract from FY16 are expected to underpin medium-term profit growth

Nine has stated it remains on the hunt for acquisitions in new consumer facing ventures where it can add value and this has reinforced Morgans' confidence that the network can deliver TV margin expansion over the medium term, as revenue growth exceeds cost growth, predicated also on the company's ability to re-orient historical investment in studio content to other content such as sports. JP Morgan bases its Overweight rating for Nine on revenue share momentum, moderate gearing and the company's ability to participate in any future media consolidation.

The stock has a neat appearance on FNArena's database, with seven Buy ratings, no Hold, no Sell. The consensus target is $2.45, suggesting 19.1% upside to the last share price. Targets range from $2.35 to $2.72. The dividend yield on FY15 and FY16 forecasts is 4.7% and 5.6% respectively.
 

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