Analysis
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Poor FY15 performance pressure, but in line with estimates: Nine Entertainment Co Holdings Ltd (ASX: NEC) reported a 2.6% yoy increase in revenues to $1.6 billion for the fiscal year of 2015. As per the business segments, NEC’s network revenues fell 1.1% yoy to $1.2 billion, impacted by the weakening FTA market. But, FTA Metro advertising revenue share improved to 38.9%, against 38.7% in the corresponding earlier year. The group’s digital business improved by 33.2% yoy to $163.4 million, as compared to $122.7 million in the pcp, driven by the double digit growth in both Search and Video revenue. However, the EBITDA fell 7.6% yoy to $287 million, affected by the rising TV costs, but this was in line with the guidance. The net profit after tax tumbled 2.9% yoy to $140.1 million, before the $732 million specific item during the period.
The group’s metro ratings and revenue performance over the years (Source: Company Reports)
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Balance sheet Highlights: The group improved its operating cash flow by 9.4% to $297.3 million, against $271.9 million in 2014 fiscal year and accordingly the operating free cash flow conversion rose to 103% in FY15, from 87% in pcp. Nine Entertainment is a solid dividend player, and also enhanced its dividends per share to 9.2 cents per share in FY15, as compared to 4.2 cents per share in FY14. Meanwhile, NEC also improved its net debt to $524.3 million as at June 2015, against $537.5 million as at June 2015, in spite of $62 million of on-market share buy-back. Interest cover increased to 10.8x during the period against 5.7 x in the pcp, due to decrease in interest costs post debt refinancing at June 2014.
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Balance sheet performance (Source: Company Reports)
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Initiatives to offset the declining revenues: NEC is focusing on the seamless content and audience experience, to offset the pressure coming from the TV advertising market. The group launched Coach, Honey and Pickle content brands during the year. Nine Entertainment is also performing well in the Australia’s video on demand market, and was able to generate 345 million streams. NEC also acquired stake in youth publisher website Pedestrian.tv. Meanwhile, Stan has more than 300,000 gross subscribers (households), having around 800,000 users of the service since its launch. Nine Entertainment intends to reach the range of 300,000 to 400,000 active subscribers by this ending of the year. Accordingly, Stan is continuously adding premium content and is enhancing its availability across the devices and distribution partnerships. Nine Entertainment also finished the sale of 100% of its Nine Live business to funds, as advised by Affinity Equity Partners (Affinity). The company received over $600 million post costs and tax. Accordingly, Nine Entertainment intends to use these funds to decrease its debt as well as use for its capital management activities.
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Improving Outlook: Despite the challenging market conditions, Nine Entertainment witnessed a decent growth in the months of July and August and intends the similar trend for the fiscal year of 2016. However, the Programming costs are estimated to grow by 2% in FY16 (before the benefit of FY15 Specific Item provisioning), on the back of higher contracted costs related to the NRL and cricket. The ongoing digital segments growth is also estimated to boost the market further.
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Remain Bullish: The shares of Nine Entertainment have been performing well since our “BUY” recommendation last month, and has generated over 6.8% in the last four weeks alone. In fact the stock jumped 10.3% on Aug 28, boosted by a positive outlook by the management despite posting a weak fiscal 2015 year performance. Nine Entertainment managed to improve the market share wherein the revenues from Metro FTA rose by 0.2 percentage points to 38.9% although the market declined by 1.5%. Growing online advertising market has impacted the FTA advertising due to which the stock crashed over 21.4% in the last three months alone. However, the group’s recent win of National Rugby League (NRL) broadcast rights would offer the firm some support for the coming years. Management also remains positive on its performance ahead, with its loss making international programs nearing expirations while the group has a flexible balance sheet. Given the decent growth opportunities ahead, the correction of the stock price over the last few months have placed it at an attractive valuation. The stock has a P/E of 13.3x, which is better as compared to its peers and has a solid dividend yield of 6.1%. Accordingly, we remain bullish on the stock and investors can initiate fresh buying at the current price of $1.655.
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