Shares in Nine NEC continue to languish, trading at half of our unchanged AUD 2.70 fair value estimate. While fiscal 2024 underlying earnings before interest, taxes, depreciation and amortisation (“EBITDA”) fell 12% to $517 million, it exceeded our forecast by 9%, driven by upside surprises in TV and publishing.

Management's outlook is understandably circumspect, given the stubborn advertising recession. However, the group's revenue fundamentals remain well poised to snap back on a recovery in advertiser sentiment.

For instance, Nine's total TV audience grew 4% across free-to-air and 9Now in fiscal 2024. Its metropolitan TV revenue share (40.0%) and 9Now's broadcast video on demand streaming revenue share (46.8%) remain industry leading. All this is before the expected Paris Olympic halo effect in fiscal 2025 on content schedule for TV, audience data capture for streaming, and the prominence of Nine's app on smart TVs.

Cost discipline continues to be evident. Total expenses (excluding 60%-owned narrow-moat-rated Domain) were down 1% in fiscal 2024, with $65 million in cost cuts ($47 million underlying) offsetting inflationary pressures, and investments in sport and Stan. Another $50 million in costs are expected to be stripped out in fiscal 2025.

Our earnings forecasts are largely intact at the operating level. The balance sheet is well fortified to navigate the current subdued trading conditions, with net debt/EBITDA at 1.2 even after outlaying $68 million in share buybacks.

A closing of the discount between no-moat-rated Nine's stock price and our fair value estimate ultimately hinges on a recovery in marketer sentiment. No amount of improvement in audience metrics (TV), subscriber numbers/average revenue per subscriber (publishing, Stan), or productivity initiatives seems enough to overcome investor consternation about the advertising market. However, trading at less than 3 times our estimated midcycle EBITDA on a wholly owned basis excluding Domain, the pessimism built into the current price is overdone.

Business strategy and outlook

Amid economic uncertainties, we are encouraged by Nine Entertainment's progress on factors within its control. The balance sheet is solid, and TV ratings, advertising market shares, and pricing are improving. Critically, management has fundamentally restructured the cost base.

Through Nine Network, Nine offers exposure to the $3.2-billion Australian free-to-air television advertising market. This media segment has remained flat during the past decade, after enjoying growth of around 6% in the preceding decade. The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and broadband penetration. Indeed, the structural headwinds have been such that the free-to-air TV industry's share of the Australian advertising pie has slumped from more than 35% in the mid-2000s to just over 20% now, as advertisers follow viewers to digital media platforms.

The key investment consideration comes down to Nine Network's EBITDA margin outlook. This is important in the face of increasing competition for viewers and for content (from digital upstarts and incumbent television broadcasters).

In December 2018, Nine merged with Fairfax Media to increase its scale to better compete against digital companies. Transformation of Nine from a traditional advertising-dependent entity to a digital-led, multirevenue stream one is taking shape. Cash flows from legacy free-to-air TV (Nine) and media (Metropolitan Media, Radio) units are being reinvested to drive growth of new-age digital properties (9Now, Stan, Domain). The still-effective promotional power of the legacy divisions is also being leveraged to drive awareness and traffic to these new digital units.

Nine bulls say

  • Nine Entertainment commands a strong position in the Australian free-to-air television industry, with number-two ratings and revenue share positions.
  • The company generates solid free cash flow and boasts a strong balance sheet, key attributes that allow management the flexibility to invest in programming while engaging in capital-management initiatives.
  • Synergy from the merging with Fairfax could be greater than expected, with potential upside from collaboration and savings on newsroom/journalistic resources over time.

Nine bears say

  • Nine Entertainment's recent increase in ratings and revenue share has come at the expense of Ten Network. There is a risk of mean-reversion as Ten Network recovers from its current all-time low position.
  • The free-to-air television industry is structurally challenged, with proliferating entertainment choices for consumers.
  • Increased size and scale from merging with Fairfax does not furnish the combined group with an economic moat or spare it from the structural headwinds wreaking havoc on traditional media.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

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