Can Nine Entertainment Achieve Market Share Target?

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

-TV audience in decline
-Market share target difficult
-Predator or target?

By Eva Brocklehurst

Nine Entertainment ((NEC)) has revealed what many brokers suspected. Free-to-air (FTA) TV advertising is currently very soft and conditions remain difficult. TV is diminishing as media audiences fragment and this has weighed on advertising revenue.

The company has downgraded FY15 earnings guidance to $285-290m from prior expectations of “at least in line with” 2014, which was $311m. The guidance suggests advertising markets in May and June have been materially weak. JP Morgan retains a Neutral outlook as the company’s position in any industry consolidation is expected to be acquisitive and gearing is moderate versus its peers. Still, the broker remains concerned about the emerging audience decline for FTA TV.

JP Morgan has identified a decline in prime time audience of around 7.5% at the start of 2015. Rather than an actual decline in Nine Entertainment’s advertising income in the second half, the broker forecasts a flat outcome but suspects guidance has been impacted by lower-than-expected market share (at around 38.5%), which compares with the company’s target of 40% by the end of 2015.

Citi echoes this suspicion. The broker’s view is that the market is soft, but not that bad. A flat second half for advertising revenue is also expected. Reading between the lines Citi’s take is that operational issues are more to the fore than the company acknowledges. The share of commercial FTA TV ratings is 36% year to date, which is down from an average of 38% in 2014. Citi expects a bounce in ratings in the first half of FY16 because of the Ashes and World Cup Rugby, to 39%, before revenue share drops back to 38% in the second half.

While TV is not dying, Citi believes earnings growth will be tough to achieve, aggravated by soft economic conditions and a structural decline in audience. Citi considers Nine Entertainment a potential acquisition target as a pure play FTA TV operator.

Nine Entertainment has increased its advertising revenue share to 39% from 33% over the last five years, which Morgan Stanley considers is impressive. Nevertheless, this broker now believes further gains are likely to be difficult to achieve and lowers forecasts for market share in FY16 to 38.5% from 40%. Morgan Stanley is bearish on FTA TV asset values in Australia and has been for some time. Advertising as a percentage of GDP is trending lower and audiences are falling, while sports costs are rising and industry margins are lower. While retaining a positive view on the company’s stock over the last 18 months the broker has wondered whether market share has been peaking.

There are strategic advantages, none the least being Nine Entertainment is the only FTA TV network in a net cash position, but Morgan Stanley points to history, which suggests a TV network losing audience and advertising market share is unlikely to outperform. Hence, rating is downgraded to Underweight from Overweight. Goldman Sachs also downgrades, to Neutral from Buy, with a target of $1.98. The broker notes the sizeable deceleration in momentum and attributes the underperformance to concerns over the structural headwinds facing TV.

While it remains difficult to judge whether the deterioration is across the board in the TV advertising market, Goldman Sachs suspects this is the case. Reductions to TV market forecasts result in downgrades to forecasts for Nine Entertainment of 8.9% in FY16, 20.7% in FY16 and 21.5% in FY17. Goldman Sachs has a bearish outlook for TV advertising spending and believes fragmentation in terms of delivery and consumption in media is likely to drive an intense battle for audience. This will in turn place upward pressure on content costs. This is likely to be a negative for TV industry profitability.

While allowing for some share losses to Ten Network ((TEN)), given the strength in MasterChef ratings, Deutsche Bank now expects revenue share for Nine at 39.2% in the second half. The broker recognises the company will continue to rely on advertising market movements but the broker is mindful that balance sheet strength presents options. UBS is also more positive, although tempers FY16 growth assumptions to 2.0% from 3.0%. The broker notes the company has flagged capital management as a possibility, with the balance sheet now net cash.

UBS has a Buy rating on valuation grounds and positive catalysts include a likely step up in the affiliate fee at the end of FY15 and savings from the Warner Bros contract renegotiation. There is also the potential for reductions in TV licence fees over time, although UBS does not factor this into valuation. The broker expects the advertising market to decline by 1.3% over the second half which implies a decline in May and June of 4-5% in aggregate.

FNArena’s database contains six Buy ratings, one Hold (JP Morgan) and one Sell (Morgan Stanley). The consensus target is $2.26, suggesting 35.1% upside to the last share price, and compares with $2.46 ahead of the update. The dividend yield on FY15 and FY16 forecasts is 5.4% and 8.8% respectively.

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