Australia | Aug 30 2021
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.