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Nine’s Market Update Flops

Australia | Apr 07 2016

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

-Structural decline in TV audience
-Olympics to shift focus to SWM
-Catalysts in media reform, election


By Eva Brocklehurst

Nine Entertainment ((NEC)) is facing mounting challenges as Free-To-Air TV audiences wither. The company acknowledges third quarter revenue weakness has accelerated on the back of a 5.0% decline in the first half, with comparables affected by the early timing of Easter and the absence of last year's Cricket World Cup.

Nine Entertainment now expects the metro FTA TV market to record a low single digit decline in FY16. Revenue share is expected to be 37%, versus 38% previously.

Macquarie suspects the network will struggle to regain momentum and the Olympics later in the year will be a headwind, as Seven West Media ((SWM)) scoops the benefits. The broker notes advertising softness in TV is underscored by a structural decline in audience. Spending has been shifting to the out-of-home segment, radio and digital outlets.

Meanwhile, regional TV has been weaker than the metro areas in recent times. Nine Entertainment has a direct and indirect exposure to the trends via its ownership of NBN TV and affiliate arrangements with WIN Corp. The broker also believes a weaker revenue share outlook reduces the implied arbitrage synergies from any possible tie up with Southern Cross ((SXL)).

Yet Macquarie finds valuation support in the stock and potential positive catalysts from media reforms, licence fee reductions and election-related advertising expenditure. The FY16 audience decline is expected to be 1.2% and Macquarie estimates a share of 37% for Nine Entertainment.

Morgan Stanley suggests the company was hoping for a better start to the ratings year in February but this does not appear to have happened. Several of the new shows were disappointing and six weeks into the new season the audience share is actually lower than in in the same period last year.

The broker believes risks are skewed to the downside and whilst a lower FY16 forecasts is appropriate the broker encourages investors to look beyond this, when a further loss of share and higher costs are expected to weigh. As a result, Morgan Stanley retains an Underweight rating.

After updating its analysis, Ord Minnett cuts its recommendation on Nine Entertainment to Sell from Hold. More broadly, the broker considers FTA audiences as the canary in the coal mine, with a 3.8% decline in 2016 following a 6.0% decline in 2015. The broker believes this is the start of a structural decline in FTA TV advertising dollars.

There are three events in 2016 which may contribute $80-100m in revenue which could offset audience pressures, including the federal election, the Olympics and the census. Olympic packages revenue should start to make its mark towards the end of the half, but then this flow is directed to Seven West Media.

The revenue weakness reflects company-specific factors, Deutsche Bank contends. Industry data suggests the network's ratings share for 2016 year to date is 35%, down from 37% in the preceding corresponding year, with key shows such as Australia's Got Talent and Renovation Rumble failing to deliver.

Deutsche Bank retains a Buy rating but concedes this is based on improving revenue share in FY17, with the company expected to gain some momentum in the fourth quarter from the start of the NRL season and a new season of The Voice. Costs remain in focus and some discipline on this front may provide a minor offset. The broker adjusts cost reductions in its model to 4.0%.

UBS expects fourth quarter revenues will decline at a slower rate relative to the third quarter as the impact of Easter reverses, welcoming the news that TV costs will be at least 4.0% lower than the previous corresponding period.

The broker downgrades market growth forecasts and market share forecasts to be in line with the new guidance. Slightly higher digital contributions and lower operating expenditure for TV are only partial offsets. While the guidance has negative implications for the broader sector UBS suspects Seven West Media and Ten Network ((TEN)) have taken share at Nine's expense.

UBS maintains a Buy rating on valuation grounds and the dividend yield. The broker expects catalysts can be sourced from affiliate fee re-negotiations, potential licence fee cuts and changes in media ownership laws.

Election spending may aid growth in the short term for the sector and the broker considers it is unlikely the company's market growth forecasts factor in any uplift from an election. However, Seven West's broadcast of the Olympics will probably hurt Nine's first half market share.

FNArena's database shows four Buy ratings and two Sell. The consensus target is $1.47, suggesting 30.7% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 11.1% and 12.3% respectively.

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