MENU

Is Nine Entertainment Co a buy?

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.

The top ASX pick you've never heard of...

Top Motley Fool analysts just identified their #1 ASX pick for 2014, a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!). Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool's Top Stock for 2014."

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.