Morningstar | Nine Grapples with Downside of High Expectations
Nine Entertainment's recent trading update was uneventful, with fiscal 2019 normalised EBITDA guidance of AUD 280 to 300 million reiterated. In fact, we continue to believe there is scope on the cost-front for guidance to be exceeded and maintain our AUD 309 million EBITDA forecast for the year.Granted, the flat year-on-year TV advertising revenue achieved in the September quarter slowed from the 1% growth pace back in late August. However, that minor slippage is hardly cause for great concern. While the 10% growth in September-quarter digital revenue also fell from the 15% pace in August, the unit contributes just 13% of group revenue.
Unfortunately, with investors expecting a continuation of the recent earnings upgrade cycle, we believe the cautious tone of the trading update has refocused investors' minds on the inherent cyclicality of Nine's businesses, particularly the free-to-air TV unit (over 90% of group earnings). Sentiment also has not been helped by a surprisingly weak trading update from Domain, a property classified entity 59.4% owned by Fairfax that Nine is proposing to merge with.
Critically, the decline in Nine's stock price suggests the market has gone from being enamoured with the benefits of the proposed Nine-Fairfax merger, to being ambivalent about the combined entity's ability to face structural pressures from digital insurgents amid cyclicality in the business (including crown jewel Domain). It is an issue we delved into in: "Nine and Fairfax Muscle Up to Enter the House of Pain: Urge to merge has strategic merits, but structural headwinds are here to stay," published Sept. 17, 2018.
Shares in no-moat-rated Nine are now just 4% above our AUD 1.70 fair value estimate, having traded at a 40% to 50% premium for most of this year. The risk-reward proposition is finely balanced at current prices and we await the competition regulator's decision on whether to approve the Nine-Fairfax merger before revisiting our fair value estimate.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
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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