Australia | Jun 02 2021
This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED. For more info SHARE ANALYSIS: NEC
A deal struck by Nine Entertainment with Facebook and Google in the wake of the stoush over sharing news content on digital sites has been welcomed
-Deal provides strong earnings contribution to Nine Entertainment
-Potential for extra sales from a video deal with Google
-Is the market underestimating the benefit of a cyclical recovery?
By Eva Brocklehurst
In a well-anticipated announcement after the Australian government enacted its News Media Bargaining Code, Nine Entertainment ((NEC)) has finalised commercial agreements with Facebook and Google.
The code, developed by the Australian Competition and Consumer Commission, requires large digital platforms which operate in Australia to pay news publishers such as Nine Entertainment for content that is made available or linked to their platforms.
The Facebook deal is over three years with flat fees per annum while the Google deal, minus YouTube, is five years and comprises a fixed annual fee with modest growth. The agreements with Facebook affect the supply of news video clips and access to digital news articles while news content will be supplied to Google for the News Showcase and other news products. Google will also expand its initiatives across the Nine Entertainment platforms.
While no financial terms were disclosed, Nine Entertainment expects its publishing business will grow operating earnings (EBITDA) by $30-40m in FY22. Given limited disclosure, Macquarie is reluctant to presume on the cash flow being received and, as a result, does not include the digital cash flows in FY22 estimates.
The broker does point out that, at the 2021 Macquarie conference in early May, Nine Entertainment indicated cash flows would be fixed over time with the level of indexation, and observes this indication is consistent with the latest announcement.
Macquarie calculates that $30m per annum additional cash flow would result in an extra $0.12 per share for Nine Entertainment or around a 3.5% tailwind to valuation. The broker also believes the market continues to underestimate the ability of Nine Entertainment to capture the cyclical recovery, reiterating an Outperform rating with a $3.60 target.
Guidance for publishing segment growth is consistent with expectations and Credit Suisse factors in a $35m benefit from the agreements, offset by slight declines in print circulation and advertising. The broker expects the increased certainty provided by the announcement will be welcomed across the market.
Morgan Stanley is one, increasingly convinced of the investment thesis for Nine Entertainment, and lifts estimates for earnings per share by 8.9% and 9.4% for FY22 and FY23, respectively.
UBS has factored in a $50m gross contribution in FY22 in its base case and anticipates potential upside in the future stemming from incremental sales from a video deal with Google, namely YouTube.
Goldman Sachs, too, welcomes the deal, given the strong earnings contribution and recurring nature of the payments. There are now a number of incremental earnings drivers which more than offset the broker's forecast for a decline in traditional TV revenue.
On the downside, Goldman Sachs moderates its margin profile for Stan, as competition is increasing in SVOD (subscription video on demand), and anticipates flat margins across FY21-23.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, reiterates a Buy rating and $3.40 target. The database has four Buy ratings and one Hold (UBS). The consensus target is $3.45, suggesting 15.4% upside to the last share price.
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