Australia | Aug 30 2021
This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NEC
Despite strong advertising markets providing potential for earnings growth, the market reacted negatively to Nine Entertainment's higher investment in content
-Cost guidance up for FTA TV and Stan Sports
-Growth guidance in publishing largely reflecting Google/Facebook flows
-Further upside should be available as Stan Sports is appreciated
By Eva Brocklehurst
It's all about perspective when it comes to Nine Entertainment ((NEC)). Free-to-Air TV and publishing — old media — are providing some earnings growth while new digital ventures such as streamed video on demand (SVOD) are facing a stiffening of competition.
The company reported FTA TV market share of 40.3% — marginally lower, and attributed to timing associated with the Australian Open. Meanwhile, Nine Entertainment's radio exposure is 85% in NSW and Victoria and the most heavily affected by lockdowns among its businesses.
UBS notes early trading in the first quarter has revealed solid growth across the business, given the pandemic impact on comparables. Macquarie agrees the media buyers are more resilient now and appear to be more positive compared with previous lockdowns.
Within the FY21 results the main focus was on the cost side, with management guiding to FTA TV costs up 3% in FY22. Yet Nine still expects further growth in FTA TV revenue in FY22 as the market strengthens overall.
Goldman Sachs notes the growth in operating expenditure has partly offset a stronger revenue outlook, specifically reflected in Stan Sports content, and the cost of showing Tennis as well as staffing costs.
Morgan Stanley found this a clean result with strong advertising markets in the first quarter setting up the potential for high single-digit operating earnings (EBITDA) growth in FY22.
Momentum has continued into the second quarter of FY22, despite the cycling of benefits from the NRL finals and State of Origin. BVOD (broadcast video on demand) service 9Now is also trending well, which Credit Suisse finds impressive given this is occurred while Seven West Media ((SWM)) has been showing the Olympics and capturing significant revenue share.
Ord Minnett believes Nine will experience further upside as the market comes to appreciate the investment in Stan Sports and entertainment. The BVOD platform and digital publishing business should also drive top-line growth, supported by the exposure to real estate advertising at Domain Group ((DHG)), in which the company has a 60% shareholding.
Macquarie remains concerned about the outlook for subscriber growth, particularly as competition in SVOD increases. There is also downside risk to publishing, the broker asserts, although Nine reaffirmed growth guidance for FY22 of $30-40m, implying EBITDA would be up 26-34%.
Yet the broker points out this will largely reflect the Google and Facebook cash flows, and digital platform cash flows are not unique to Nine Entertainment.
The company commented the industry may potentially reinvest these proceeds. Macquarie interprets this comment as flagging potentially higher costs while Nine invests in digital subscriptions in the near-medium term.
On the other hand, the share price, in the short term, does not capture the cyclical upswings, in the broker's view, and Nine, excluding Domain, is now trading near its record lows, so there should be plenty of valuation support.
Credit Suisse note some "sticker shock" associated with higher cost guidance at Stan yet believes revenue trends will provide an offset and the share price reaction has been overdone.
Stan experienced modest subscriber growth with around 2.4m active subscribers at the end of FY21. Credit Suisse suspects guidance surrounding Stan disappointed the market as it was driven by investment in entertainment content and Stan Sport.
Still, the broker notes Stan is a solid platform that has consistently delivered revenue and subscriber growth in a competitive environment, and remains of the belief that Stan will deliver growth over time, although the profile has lengthened.
Ord Minnett also notes the share price reaction following the results removed the equivalent of $494.6m in market capitalisation from the value of Stan because of lower, although profitable, EBITDA guidance from the increased investment in Stan Sport.
Given sports subscribers are higher-value and more engaged, the broker is confident momentum can be obtained. Macquarie is not so convinced, having already factored in higher investment costs as the company faces increased entertainment costs from investment in Stan Originals and the NBC-Universal contract.
The pace of subscriber additions was also softer than the broker expected. The launch of Stan Sports added 250,000 subscribers. Of these, around 40% were new, which implies all subscriber additions were stemming from Stan Sports.
The -$40-50m start-up loss for Stan Sports flagged in the results, while strategically sensible, should not be capitalised into perpetuity, Morgan Stanley asserts, as a lift from 250,000 subscribers to 500-600,000 would accomplish break-even.
The main upside risks the broker envisages are a quicker recovery in the Australian economy, which supports Domain, along with TV market share continuing to rise compared with peer Seven West Media. Negative risks include a weaker advertising market for TV/print/radio and market share loss.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $3.30 target while the database has four Buy ratings and one Hold (Macquarie). The consensus target is $3.31, signalling 23.5% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.1% and 4.6%, respectively.
See also, Nine Entertainment's Digital Deal Welcomed on June 2, 2021.
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