Nine Entertainment will be of the few remaining privately owned companies to list on the ASX before 2013 is over. The retail offer for the media giant will open on Tuesday, 12 November, and close on Friday the 29th in preparation for the commencement of trading on 12 December.
The float will offer 305 million shares at a cost between $2.05 and $2.35, to be determined via an institutional bookbuild process. The process involves gauging the investor interest in the company and selecting the issue share price based on how hot, or cold, the response is. A prime example of this is Twitter's IPO last week, which had a starting range of $17 to $20 but ended up being $26, such was the demand.
Based on the provided range, the IPO should value NEC at around $2.05 billion, 16% above its disclosed net assets. The company should list on a forward price-to-earnings (PE) ratio of between 13.8 and 15.5 and dividend yield between 3.5 and 4% with little or no franking. It should be noted that the company will not pay an interim dividend in 2014. This was cleverly — or sneakily — placed in the fine print of the prospectus, and will mean that the dividend for the first year of listing will likely be between 1.75% to 2% unfranked.
Nine therefore does not appear to stack up purely on the dividend front as much as rival Seven West Media (ASX: SWM) does. Seven pays a fully franked dividend of 4.9% and trades on a PE ratio of 10.3, even though the share price has appreciated by 50% this year.
Nine's advertised growth is also a slight concern. Of its revenue, 89% is generated from advertising, while the remaining 11% comes from Ticketek, Allphones Arena, and websites such as ninemsn. Advertising in Australia has averaged a compound annual growth rate of 3.6% over the past 10 years as TV's share of the overall Australian market has remained constant between 27% and 30%. There are few obvious factors to push this higher in the years to come and Nine is forecasting a 4.8% and 1.1% rise in revenue and net profit respectively in FY14. This is in line with low-to-mid single digit revenue growth expected from the big four banks!
Warren Buffett has always been a fan of companies that can consistently grow earnings by maintaining a sustainable competitive advantage over their peers. His famous mantra is to only invest in companies that he would be comfortable holding if the share market closed for 10 years. If we apply his philosophies to Nine, I believe we will find an investment that is not Buffett-worthy.
The company's net profit is dropping, it is in a low growth industry, and it has numerous, strong, Australian and overseas competitors. Nine appears overpriced on PE ratio and under-delivers on yield compared to its main listed competitor, Seven West Media. It does not appear to be a compelling buy at the current asking price based on its dividend or growth profile.