Brokers at investment bank, Deutsche Bank, have initiated coverage on the newly re-listed television and media company Nine Entertainment Co Holdings Ltd (ASX: NEC), with a "buy" recommendation according to a report in the Australian Financial Review.
Nine Entertainment owns and operates three divisions: Nine Network, Nine Events and Nine Digital and Ventures. Since December when stock was sold to the public in an initial public offering (IPO) at $2.05 – which was at the bottom of the indicative price range in the prospectus – the share price has struggled to trade above the issue price, which has no doubt been disappointing for investors in the float. However, Deutsche has provided some hope for IPO investors with the broker slapping a $2.30 price target on the stock – providing 12% upside for shareholders.
Valuation
According to the prospectus following the IPO there would be 931 million shares outstanding, however as at 16 December the shares on issue stood at 940 million. The prospectus also forecast a pro-forma net profit after tax for financial year (FY) 2014 of $139.5 million. Based on these figures the forecast earnings per share in FY 2014 (assuming no further dilution) will be 14.8 cents per share.
At $2.30 this equates to a price-to-earnings ratio of 15.5 times.
Competitors
While investors are aware of the structural headwinds facing free-to-air television, as Deutsche Bank reportedly noted – television is still a powerful medium. This point is highlighted by Motley Fool writer Andrew Mudie who noted here that TV is still attracting eyeballs thanks to summer sports viewing.
Although television may still be an important medium for advertisers, the competition amongst networks is fierce, with fellow listed stations Seven West Media Ltd (ASX: SWM) and Ten Network Holdings Limited (ASX: TEN) battling it out with Nine for ratings and market share of advertising spend. Likewise pay-TV provider Foxtel owned by News Corp (ASX: NWS) and Telstra Corporation Ltd (ASX: TLS) is an always present force.
Powerful medium or not, competition can erode profitability.
Foolish takeaway
There are indeed good reasons – particularly price – for value investors to analyse the media companies that own TV stations for investment opportunities. The potential for structural decline however makes investing in this sector a possible value trap, so extra care and diligence should be taken by investors in this sector.
