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3 media companies and how they stack up

Glenn Freeman  |  29 Mar 2017Text size  Decrease  Increase  |  
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With television stations and newspapers facing threats in the modern communication era, as technology advances and a shifting regulatory landscape change the rules of the game, some are faring better than others to create pockets of opportunity.


Australia has three leading commercial television networks: Seven Network, Channel Nine and Channel 10--and all are regarded by Morningstar as having no economic moat.

Morningstar senior equity analyst Brian Han explains the no-moat rating is due to the concentrated nature of Australia's television environment--with only three commercial players in the metropolitan market--and the expanding technology threat.

"The intangible power of their licences has declined considerably and no longer acts as a barrier. Proliferation of alternative digital delivery channels and new forms of entertainment are fragmenting audiences and reducing television's appeal to advertisers," he says.

Part of the Seven West Media (ASX: SWM) conglomerate, Seven has been in the headlines lately, and for all the wrong reasons. The legal dispute between its chief executive Tim Worner and a former employee continues to drag on, as Han notes in his most recent update.

"Seven is trading at a 15 per cent discount to our 85-cent fair value estimate. Despite the discount, the muted start to the ratings season and the incessant noise surrounding the legal dispute with a former employee provide grounds for caution," Han says.

Its television channel generates 86 per cent of Seven West Media's total earnings, which also offers exposure to the $3-billion Australian capital-city free-to-air advertising market.

"It is a media segment that has eked out a compound annual growth rate of just 0.4 per cent during the past nine years, after consistently enjoying growth of about 6 per cent in the preceding decade," Han says.

"The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and increasing broadband speeds."

These structural headwinds have beset the entire free-to-air television industry, seeing its share of the total Australian advertising pie slump to 24 per cent today, from more than 35 per cent in the mid-2000s, "as advertisers follow eyeballs to digital media platforms".

Seven holds the leading position with a 40 per cent rating and revenue share of the commercial metropolitan free-to-air television market.

"In our view, Seven Network can sustain revenue shares at the 37.5 per cent level during the next five years," Han says.

However, Nine Entertainment Co Holdings (ASX: NEC) is Morningstar's preferred stock within the sector, having enjoyed a solid start to 2017.

"The ratings momentum supports our thesis for Nine's share of the metropolitan television advertising market to increase to 37.5 per cent longer term, from 35.3 per cent currently," Han says.


Free-to-air TV networks: capital-city advertising revenue market share (June year-end)


Source: KPMG, Free TV and Morningstar forecasts


"We expect this to provide the springboard for Nine to reach our midcycle television EBITDA [earnings before interest, tax, depreciation and amortisation] margin of 17 per cent, from an estimated 15 per cent in fiscal 2017."

Han believes competitive intensity will continue, which will prevent "any sustained improvement in Nine Network's margins".

"The same can be said for the Mi9 division, which operates in the equally competitive digital media space," he says.

"However, Nine Entertainment has a strong balance sheet and is highly cash-generative. This provides management with significant flexibility, allowing it to invest in marquee television content, diversify into digital businesses, and engage in capital management initiatives--a luxury that is beyond most of its peers in the traditional media industry."

He sees Nine's 50 per cent stake in streaming service Stan, and potential cuts to affiliation fees in the May federal budget, as offering further upside.

Ten Network Holdings (ASX: TEN) is trading at a 52 per cent discount to Morningstar's $1.20 fair value estimate, but with very high fair value uncertainty.

"The effect of Ten's recent improving ratings is being ameliorated by the weak advertising market. Critically, there is a need for continuing content reinvestment to sustain the current ratings momentum--a strategic bind that has tipped Ten back into a loss-making position for the near term," Han says.

However, overall he notes its rating and revenue shares are improving, after downcast years "due to a lack of marquee sports programming and a legacy target audience of 16- to 39-year-olds".

"The company finally now has the financial firepower to invest in content and fully execute on its new strategic focus on the 25-54 age group," Han says.

"Furthermore, the advertising sales relationship with the 24.99 per cent-owned MCN arms Ten with a powerful partner to monetise its recent ratings gains and boost its share of the metropolitan television advertising revenue market.

"All this sets a solid foundation for Ten to return to sustainable profitability in the long term."

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Glenn Freeman is Morningstar's senior editor.

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