Morningstar | Investors on Love Island with Nine
We lift our fair value estimate on Nine Entertainment by 13% to AUD 1.70 per share. While the stellar 25% jump in fiscal 2018 underlying EBITDA to AUD 257 million was in line with our expectations, we were impressed with the quality of the result. The 2% beat relative to our forecast on TV EBITDA (up 27% to AUD 238 million, over 90% of group total) was particularly notable, leading to TV EBITDA margin of 20.7%, from 17.4% a year ago. The performance highlights the sheer operating leverage in Nine--one that can magnify when revenue tailwinds from a recovering TV advertising market (up 2.5% in fiscal 2018) combines with Nine's strong ratings growth (commercial share up 1.9 points) on a largely fixed-cost base.Strength of the operating momentum is such management has guided to fiscal 2019 EBITDA of AUD 280 to 300 million, necessitating a circa 20% upgrade to our near-term earnings estimates. In fact, our AUD 309 million EBITDA projection for fiscal 2019 is higher than guidance, as we believe Nine's forecast 1% growth for the TV advertising market in fiscal 2019 is conservative (we forecast 2%), especially with likely flow of political advertising amid current turmoil in Canberra.
The increase to our fair value estimate is a more modest 13%, as our view remains anchored on a long-term, midcycle TV revenue market share and EBITDA margin of 37.5% and 16.5%, respectively. This compares with Nine's eight-year historical average of 37.0% for revenue share and 19.3% for EBITDA margin, with our conservatism predicated on continuing structural threats from digital media giants on TV consumption.
Shares in no-moat Nine remain at a substantial premium to our intrinsic assessment, due to investors' willingness to extrapolate the current earnings momentum. And we commend Nine for taking advantage of this buoyant stock price to acquire Fairfax--a combination that will ensure audience and advertiser relevance, at least longer than if these two entities stayed independent.
Nine Entertainment Co. Holdings is engaged in the television broadcasting and program production and digital, internet, subscription television, and other media sectors. Co. manages its business based on two reportable segments: television, which includes free to air television activities; and digital, which includes its Nine Digital Pty Limited subsidiary and other digital activities.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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