Nine’s Stan holds high ground in streaming battle

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Glenn Freeman: In this edition of "Ask The Expert" I'm speaking with our senior equity analyst Brian Han about Channel Nine. Now Brian it's been an interesting period for Channel Nine it obviously had the – there's been a takeover of Fairfax. But Disney+ has just entered which has had quite a bit of a shake up for Stan in terms of the type of content and just basically another competitor to the market.

Brian Han: Yes, so I think with Disney+ entry into the Australian market on last count I think we'll have about 10 streaming players in Australia. So that spells certainly a step up in competitive intensity going forward from a market that's basically to date has been dominated by Netflix, Stan and to a lesser extent, Foxtel Now and Kayo. So, there is no doubt that this will have an impact on Stan going forward. And in terms of how much of an impact, we still think Stan will be one of the last player standing after this land grab is over. The reason why I say that is because number one, it has a first mover advantage, it is the clear number two in the market with about 1.7 million subscribers. And that first mover advantage is very hard to overcome. And secondly, it differentiates itself from all the others because it has the most original Australian content. So that certainly gives people an incentive to subscribe to Stan on top of Netflix or whatever else that they're attracted to.

And the third factor is Stan has a very wide relationship with a lot of studios such as Warner Brothers, Sony, even BBC and NBC Universal. So, what that means is as an aggregator, it has a very good library, not just from its own, but from all the other studios. Whereas Netflix, I think one of the key attractions on Netflix is people go to Netflix because there's so much original content created by Netflix itself. Whereas Stan has studio content from all these other people plus its own Australian original content. So, for those three reasons, I do believe that Stan will be the last player standing. And in five-years' time I wouldn't be surprised if it earns about $70 million in profit on $350 million dollars of revenue in five-years' time, and on 2.5 million subscribers. Compare that to now, which is probably about $200 million in revenue, loss making becoming profitable now and 1.7 million subscribers. But because of those three reasons, we do believe that it can make all that money in five-years' time.

Freeman: So, that $200 million revenue amount that you mentioned now, what sort of -- how does that play into the broader value that you guys attach to Nine as a stock.

Han: The simplest way to look at it is our fair value estimate for Nine is $2 per share. We think Stan is about 15 per cent of that or $0.30 per share per Nine share, which equates to about $510 million, which is the value we place on Stan right now as we see, and on those financials that I projected in five years' time. So, it is significant enough, but not significant enough to break the bank.

Freeman: It's now almost 12 months since the merger between Nine and Fairfax. And how is that going, and you've written recently about the the advertising segment and how that's impacting Nine as well.

Han: Yeah, on the positive side, the actual integration and execution is going quite well I believe. Unfortunately, the benefits of that integration and all the synergies currently they are being wiped out by the weak advertising market overall. So recently Channel Nine came out, I mean Nine Network came out and said that our profit growth will only be about 1 per cent or 2 per cent this year instead of 10 per cent that we previously guided to. That is a big change because of the advertising market. But a positive way to look at this, is this, this is exactly the reason why Nine decided to merge with Fairfax so that it can reduce the traditional TVs dependence on the volatile advertising market. And let assets such as Stan, Domain and all the digital assets of Fairfax and Nine to shield all the traditional media from the cyclicality of the advertising market. And let me ask you, Glenn, if they didn't merge with Fairfax, they wouldn't be looking at 1 per cent to 2 per cent profit growth, they'll be looking at double digit profit decline like all the other media companies are expecting in fiscal 2020.

Freeman: It’s had a very much mitigating effect for them.

Han: Definitely and that was the whole purpose of this merger, which is to reduce their independence to traditional media, and the dependence on the wider cyclical advertising market. And longer term less structurally more sound businesses, such as Domain and Stan, draw the future growth.

Freeman: So, despite the challenges at best it remains a stock that is currently trading at a moderate discount to the fair value estimate, isn't it?

Han: Yes. And we are obviously very comfortable with our $2 fair value estimate on Nine and depending on how fierce the streaming space becomes that might have some swing factors on our $0.30 per share value that we put on Stan. But as I said before, that's 15 per cent of our $2 fair value on Nine so it's not a big deal breaker.

This report appeared on www.morningstar.com.au 2019 Morningstar Australasia Pty Limited

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