This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
There are 12 analysts covering this - what is your edge?
Conventially we say that there are 4 sources of edge; informational, analytical, behavioural and organisational/structural. For $NEC, I think the edge here is behavioural for the following reasons:
Informational - I am a fairweather media user. I do not think media loyalty will increase in $NEC's favour and the market already knows they will move from FTA to 9Now
Analytical - there are too many full-time TMT analysts who are likely to have this edge
Behavioural - There are a few things which make this interesting to me but NOT to sellside analysts
There is an embedded "falling knife" in the $NEC business
$DHG is the inferior business to $REA which leads people to forget the decent cash yield (2x REAs CF yield) it provides $NEC even if $DHG growth is slower
Compared to $SXL, $HTE & $SWM they are lukewarm with buybacks which has not inspired investors
For this reason - this no growth yield play is compelling to me. It does not cost anywhere near as much as a bond-like stock ($TCL/$TLC) and while there is operational risk (e.g. Stan/Domain/9Now growth) I consider that the price more than reflects this risk
Be careful of those SOTP valuations on $NEC
Nine Entertainment ($NEC), similar to News corp, is one of those companies that equity analysts love to do a "SOTP valuation". Let me explain why I prefer to not use this approach for a media company like $NEC
Divisional earnings erosion: Despite the fact some of the 'old world media' will die over time, analysts throw a 'low' multiple on these businesses. This overstate their value. Simply put, even though a 6x multiple for $NEC's TV business seems low; it is actually aggressive given the earnings outlook
Listed investments may be cheap/expensive: an analyst will always just take $NEC's 59% stake in $DHG at the last share price. Always apply your own estimate to this share price or at least build in a margin of safety
Communicated changes to cap structure: SOTP is especially wrong when net debt, share count or corporate overhead move around. In particular with old world media - they are doing huge buybacks.
Ok - well why are we looking at $NEC?
There are some particularly interesting items to note:
Content integration Unlike some of the other cheap media comps (e.g. $SWM, $SXL) $NEC & $SWV have a better portfolio of content,that can be shifted from the old world (FTA, Radio & Print) to the new world (9Now, Stan)
Free margin expansion: I do not believe for that 9Now will produce a 66% EBITDA margin going forward but it is likely to be c.40-50% going forward which is much higher than FTA
Domain does produce cash: $DHG does produce a boringly decent CF yield for $NEC and whilst I would prefer to own $REA longterm, the entry point for $DHG right now is not terrible (e.g. FCF yield is 2x better & P/E is 35% lower)
Clear guidance on Overhead/Capex:Their Corporate overhead, unlike $NWS, is not egregious, which demonstrates some conservativeness of management
170m shares to be bought back: They have commenced buying back their dilution following the Fairfax merger
So what would you value $NEC at?
Given the multiple drivers of the $NEC valuation, there is a temptation to model everything within an inch of its life. My thoughts are that it needs a sensible overall assumption
Revenue growth should be roughly
TV at (8)% p.a.
Online Publishing, Radio (small) & Corp Overheads at inflation or +3% p.a.
Domain at 9% and (lower rate for Stan at +6% p.a.)
9Now at 12%
EBITDA margin would evolve overtime
TV & Radio fall to 15% over time (TV currently closer to 25%)
Publishing margins sit at 30%
Stan margins grow to 12% over time
9Now's (fall) to 50% & Domain (grow) to c.45% over time
D&A is $150m p.a.
Capex is $100m p.a.
Example is set out below
Whilst this all does not look very appealing, let me explain
Despite the dire outlook from TV, $NEC produces a heap of cash (6x CF or 9x earnings adjusted for D&A)
Their relatively low interest burden means they can adequately service a 80% payout ratio and make significant buybacks (c.10% of share capital)
The relative downside risk is low because they simply need to grow the 9now platform and avoid Domain detonating itself
Conclusion: $NEC this is not compelling for certain types of investors. However, if you want 6x CF yield, 10% buyback this year (later buybacks will depend upon debt cost & s/price) and >70% payout ratio - it's great. Just be prepared for flat earnings. Even though I am sure coal fintwit will scoff at this low yield; these are stable returns over a 5yr time frame.
In terms of where I am most likely wrong is if the following happen:
- FTA TV dies quicker than I expected (i.e >(8)%)
- Domain, 9Now or Stan do not collectively grow at >12% p.a.
- Corporate overheads grow materially despite them moving to a lighter capital/online model
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