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Nine Entertainment Video



 

Stock Of The Day - Nine Entertainment (HOLD)

Nine Entertainment (NEC) has been in the news with its March 2015 announcement about selling of its Willoughby studios in Sydney to housing developers. The proposed sale of the Willoughby property in Sydney is expected to unlock more capital on successful accomplishment. The site has been approved for construction of a mix of 400 units and townhouses. Commercial Real Estate Services (CBRE) expects that there will be a significant amount of interest in the development from both local and offshore investors.


NEC has also been reported to be engaged in advanced discussions for buying the youth news website Pedestrian TV. Through media reports it has been indicated that the Company through Mi9 was looking to pay about $10 million for having a stake in the digital group. More particularly, NEC is reported to take about 60% stake in Pedestrian’s business. This may turn out to be a good opportunity for NEC given the fact that Pedestrian has more than 200,000 subscribers across its website and social media channels.
 
We recently noted and discussed about the results for the half-year of FY15 entailing total revenues declining by 1.9% from $ 845.6 million in the previous half year to $ 829.2 million and comparable sales showing a decline of 0.7%. Group EBITDA dropped by 9.4% to $ 171 million while NPAT dropped 6.7% to $ 88.8 million which was, however, is in line with the guidance of $ 85 million-$ 90 million indicated at the AGM. The negative effect on free to air (FTA) revenue caused by the weak environment for advertising was partly offset by the gains achieved in the share of revenue. The operations in Adelaide and Perth showed signs of progress as a result of the continuing integration and, following the acquisition of 100% of Mi9, digital transition and integration have begun. The conversion of operating cash flow reached 78% and, following the debt refinancing in June 2014, interest costs have dropped. Leverage continues to be conservative at the level of 1.7 times and interest coverage is comfortable at 12.2 times.


Cash and Capital Management (Source – Company Reports) 
 
The management also reported that it had substantially achieved the objectives it had earlier set for itself such as keeping the capital structure conservative and efficient, maintain the flexibility of the balance sheet and so forth. The move to buy back $150m of shares is also indicative of keeping the balance sheet efficient. After witnessing a soft first half there is a likelihood that NEC may benefit from improving ad markets and a better comparable period in TV while Nine Live performs well during the second half.
 
With regards to Nine Network, NEC is confident of achieving a 40% share of revenue. The integration of the Perth and Adelaide continues to be on track. The sports pipeline is healthy with events including the Cricket World Cup, the Rugby World Cup and the Ashes. The drama programming continues to be strong featuring programs such as Gallipoli, Love Child and House of Hancock.


Television_Programming (Source – Company Reports)  

For Nine Live, the time remaining on major deals with venues is around three years on average. The pipeline for touring and events is expanding to include The International Champions Cup, Exhibitions and One Direction with an international concert series on the cards. There is also a strong pipeline in the case of new initiatives.

With regards to Nine Digital, the benefits of integration with the rest of the group are beginning to bear fruits and should continue help the group. The focus is now on cost control and management. There are also a number of bolt on opportunities available.


Nine Digital Performance (Source – Company Reports)

The key positives that still embrace the market towards NEC entail continual effort to win audience and ad share; possession of rights related to two major sports reserved up until 2018-2019; and any potential opportunity emanating from expiry of the agreement with Warner Bros in Jan 2016.

Nonetheless, we note a high level of competition from the US-based streaming giant, Netflix, which has entered the Australian market and is capable of creating all kinds of problems for the free to air TV networks. The sentiment that there won't be much left of Australian broadcast TV by the year 2020 is slightly infusing into the market. The existing free to air networks, already facing a downtrend in advertising revenue, have joined forces to create a subscription video on demand service to counter Netflix's entry, the move is expected not to result in cannibalising their own existing viewers.

It is to be noted that the media industry in Australia (both print and TV) is being threatened by growing digital technology innovations, and the Deloitte Media Consumer Survey 2014 reiterated some trends. Consumers are turning away from TV in favour of online video on demand services. Historically, TV advertising revenue has been highly profitable but is on the decline and unlikely to improve greatly in the future.


Nine Daily Chart (source - Thomson Reuters)

Given the overall scenario, it will be prudent to adopt a wait and watch approach in view of the industry barriers and NEC’s efforts to counterbalance the same.

Accordingly, we reiterate a HOLD recommendation for this stock at the current price of $2.15.