Many thought the introduction of television video recorders in the 1980s spelt a certain end for the movie theatre as a commercial proposition. Cinema survives though due to a timeless popularity that generates sufficient revenues to make it a profitable proposition come rain or shine.
Free-to-air television now faces similar structural threats as advertising revenues follow the shift to video content and television online.
Despite the technological fragmentation it seems reasonable to assume the bulletproof like popularity of free-TV is here to stay. A popularity enshrined by the competitive advantage of anti-siphoning laws guaranteeing free broadcasts of the most popular events.
So how do the ‘free three’ listed broadcasters shape up?
Nine Entertainment Co Holdings Ltd (ASX: NEC) debuted on the ASX last December and after an oversubscribed IPO is up about 10% on the initial price of $2.05 per share.
Its share register suggests promise, being a who’s who of big hitters on the local fund management scene, with Perpetual Limited (ASX: PPT), AMP Limited (ASX: AMP), BT Investment Management Limited (ASX: BTT) and Commonwealth Bank of Australia (ASX: CBA) all taking up substantial shareholdings.
Nine confirmed in its February half-year update that it expects earnings around $305 million for the year to June 2014 and trades on a price-earnings of 15 based on consensus forecasts.
The television business with its popular sport, news and entertainment offerings is the main revenue driver, although it has a growing digital interface with Mi9 and an Events division including the Ticketek business.
Nine shares about 80% of all free-to-air TV advertising revenue with arch-rival Seven West Media Ltd (ASX: SVW), a business that posted a half-year net profit of $150 million for the first half of fiscal 2014.
Seven appears to offer much more value than market darling Nine, trading on a price-earnings of 9 and dividend yield of 6.2% based on analyst consensus forecasts for fiscal 2014.
Seven’s performance in matching Nine’s market share in a half that included two series of Ashes cricket (the second a ratings blockbuster) is more than respectable, yet Seven’s shares have collapsed almost as fast as England’s batting line-up recently, down 25% in six months. Net debt standing around $1.1 billion at 2.4 times EBITDA is a concern, but looks manageable and Seven could rebound strongly if advertising revenues pick up.
Ten Network Holdings Limited (ASX: TEN) remains the poor relation of Seven and Nine even after an expensive sporting blitz including the Big Bash Cricket and Winter Olympics. However, its overall return on investment appears poor after ratings slumped to all-time lows in March.
It posted an $8 million loss in the recent half year and with ratings and shareholder returns flatlining it has a big battle on its hands to stop the rot. It has the support of power trio Lachlan Murdoch, James Packer and Bruce Gordon, among others, but even they will have their limits.
With regulatory protection free-to-air TV and broadcast media remains a strong medium with potential to pack a punch right into the digital future. Investors need to choose carefully though, with Nine and Seven the obvious front runners for profitable futures. Seven looks the value pick with rebound potential.
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Motley Fool contributor Tom Richardson has no financial interest in any company mentioned in this article. You can find him on twitter @tommyr345
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