COMPANY DATA

Source: Bloomberg

Company Description

INVESTMENT STATEMENT

We rate NEC as a Buy for the following reasons:

• Upside potential to NEC’s share price from investors ascribing a higher value for Stan, NEC’s subscription video of demand (SVOD).
• Merger with Fairfax (FXJ) could unlock significant value, along with cost synergies. Revenue synergies are still yet to be quantified.
• Positive update on subscriber growth for Stan.
• Corporate activity given NEC’s strategic assets.
• Undemanding valuation relative to market and global peers, despite the group’s exposure to attractive digital assets.
• Momentum in TV advertising is expected to continue into FY19.

We see the following key risks to our investment thesis:

FY18 results summary…

Key performance numbers for FY18 on pcp are presented in the table below.

Figure 2: NEC FY18 P&L versus previous corresponding period

Source: Source: Company, BTIG estimates

• Group headline results. Group revenue was up +6.4% driven by +6.6% growth in TV And +7.1% in Digital. Solid cost control saw group operating earnings (EBITDA) jump +24.7% to $256.1m (in line with company guidance), with margins in TV expanding 320bps over the period. Solid revenue and earnings growth dropped to the both line with underlying NPAT increasing by +26.8%.
• Adjusted Revenue/EBITDA. NEC’s performance in FY18 was assisted by an extra week of trading versus pcp, which added $15m at the revenue line and $7m at the EBITDA line. Even adjusting for these, EBITDA was up +21.3% on pcp.
• Dividends. In line with expectations, the Company declared a final dividend of 5cps (fully franked), taking the full year dividend to 10cps.
• Television (87% of Group EBITDA). EBITDA was up +26.5% on pcp, driven by Metro TV market growth of +2.5% (above expectations), with a strong second half of the year at +3.8%. Nine’s share of Metro revenue was 38.6%, up from 35.7% in the pcp.
• Digital (13% of Group EBITDA). EBITDA was up +17.7% to $34m, a solid result given the loss of $13.6m of EBITDA related to the discontinued Bing search relationship with Microsoft. 9Now grew its registered user base to 6.5 million users and streams increased in the period by 93% while revenues grew by almost 90%. Digital Publishing had a solid year, with EBITDA up +46%.  
• Stan. Stan now has more than 1.1 million active subscribers, with revenue up +72% $100m driven by growth in paid subscribers and August 2017 price increases. Operating costs were up +23% over the period, with EBITDA losses improving over the year (Q4 losses 50% improvement on Q1). Management called out an incremental investment of $20m over the next 12-18 months.
• Balance sheet. NEC’s balance sheet remains in a very solid position, with net debt position of $121.3m and leverage of 0.5x.
• Trading update. Management noted Metro September quarter FTA revenues were trading approximately +1% above pcp and core September quarter digital revenues were approximately +15% ahead on pcp.
• FY19 outlook. Key comments: 1. management expect group EBITDA of $280-300m, representing an increase of +12-20% growth on FY18 (adjusted for extra week 2. FTA TV Metro market expected to be up +1%, with share growth expected on FY8 and segment costs are expected to be down 2-3%.
• Nine Entertainment / Fairfax merger. No real new information was provided ahead of merger, with management reiterating the key primary drivers of value creation: 1. premium advertising solutions at scale; 2. quality digital assets in the form of Domain and Stan; 3. News capability across distribution channels (TV, digital, print and radio); 4. Cost synergies, with pro forma estimates synergies of at least $50m (to be achieved over two years).

NEC incl. FXJ may be undervalued, in our view…

In July 2018, NEC and Fairfax (FXJ) announced plans to merge their operations.  The deal is EPS neutral for NEC shareholders and on completion will own 51% of the company post merger. Under the proposal FXJ shareholders will receive:

• 3627 NEC shares for each FXJ share
• $0.025 cash per FXJ share

What does this merger do: 1. create Australia’s largest integrated media player; 2. enhances position with agencies and advertisers in a consolidating environment; 3. optimisation of investing across FTA, BVOD, SVOD and digital; 4. will be able to provide data rich solutions; 5. accelerate Domain’s growth profile.; and 6. merger is expected to deliver annual costs savings of $50m. From our point of view, the deal is all about the digital assets. NEC will now own the other 50% of Stan with this merger and gain exposure to the attractive asset in the form of Domain (FXJ owns ~60% of Domain). Whilst we have not yet incorporated any numbers from this merger, our numbers suggests the current share price is undervaluing the combined group. Our analysis suggests (figure below), the current share price is valuing the combined group’s digital publishing assets, radio assets and traditional publishing assets at $0.28 per share.

Figure 3: NEC & FXJ merged entity – what are the core assets’ worth? Source: BTIG estimates

NEC peer group analysis…

On an EV/EBITDA based trading multiple, NEC trades at a slight discount to domestic TV peer-group average despite strong performing ratings by Nine and solid digital assets in Stan and now Domain.

Figure 4: NEC comps table

Source: Bloomberg

Figure 5: NEC Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

Nine Entertainment Co (NEC), through its subsidiaries, broadcast news and current affairs, sporting events, comedy, entertainment and lifestyle programs. Nine Entertainment serves customers throughout Australia. NEC has repositioned itself from a linear free-to-air broadcaster, to a creator and distributor of cross-platform, premium content. While the channel Nine Network remains core, it is now complemented by subscription video on demand (SVOD) provider Stan, a live streaming and catch-up service 9Now, digital network nine.com.au and array of digital content.