Mike Sneesby’s first anniversary as Nine Entertainment CEO is approaching on 1 April this year, and he will be pinching himself at how good his honeymoon has turned out.
Things have gone so swimmingly in 1H22 that NEC's guidance given in November 2021 expected EBITDA growth of 10%, but the reality turned out to be growth of 14.7% to $406.3 million.
To give some context on the headiness of this result, NEC’s full year EBITDA in 2020 was $394.8 million. That was the first full year of including the Fairfax businesses after the merger back in December 2018.
Momentum will carry NEC to group EBITDA growth of more than 22% over FY21’s $565 million, according to the company.
In Television, even with the Summer Olympics on a rival channel, the Nine Network (including 9Now) increased revenue by 11% and EBITDA by 15.6%. The Nine Network free-to-air channel on its own had revenue growth of 7% compared to the Metro Free To Air advertising market growth of 13%, courtesy of the Olympics on Network Seven. But Nine’s full year audience share is still likely to exceed that of Network Seven, proving that MAFS is better than MKR.
TV is at a structural turning point due to growth in BVOD. 9Now’s daily active users increased 55%, the same as total streams, emphasising the shift in audience viewing habits. Industry audience measurement system, Virtual Oz, is showing that BVOD is adding additional audience of up to 50% for key shows such as MAFS. Advertisers follow audiences and 9Now’s audience is high yield because the audience can be tracked much more accurately than FTA.
BVOD still only represents about 13% of total digital advertising in Australia, according to IAB data, so the opportunity for growth is large. NEC has said it expects BVOD revenue to grow at around 30% pa over the next five years.
Stan added 100k active users in the last 6 months to more than 2.5 million in total. Stan is facing heavy competition from new entrants Disney+, Binge and Paramount+, as well as the heavyweight Netflix. Some studios have taken content back from Stan (e.g., Disney, Showtime) but Stan is countering this with Stan Originals and Stan Sport. The content market is certainly fluid, but Stan has been able to renew some studio output deals (MGM, Warner and Starz/Lionsgate).
Earnings margins will remain low while the content battle rages, but with a strong brand and large customer base, Stan should be able to achieve EBITDA of about $100 million in 5-6 years. Often overlooked as the fading star of NEC, even Publishing conjured up a decent contribution to earnings as EBITDA increased 26.4% to $94.5 million. Publishing’s second wind is growth in digital subscriptions and digital overall now accounts for 60% of divisional revenue.
Investment view
NEC’s star is shining brightly at the moment, but the share price has yet to catch on. The evidently strong growth does not equate to a PE ratio of 14x FY23f EPS (10x ex DHG) and we think it deserves a sizeable re-rating.
Did we mention the dividend yield of more than 5%?
And given the very strong state of the balance sheet, we are expecting a drum roll before NEC must surely announce a share buyback.
Risks to investment view
Advertising spend could fail to continue its strong growth, or digital subscription and audience growth might slow down if consumer confidence and spending fell.
Recommendation
We have retained our Buy recommendation.
