The Nine Entertainment Co. Holdings Ltd (ASX: NEC) share price is racing higher after the company released a better than expected trading update today.
At current levels of around $2.40 per share, this represents a gain of roughly 190% since March. Are NEC shares a buy today despite the great run this year?
NEC share price chart
What does Nine do?
Nine is a diversified media company with operations in TV broadcasting, digital and publishing. It also owns a portion of Domain Holdings Australia Ltd (ASX: DHG) as well as streaming service Stan.
What did the update reveal?
Nine’s trading update revealed that the group expects first-half EBITDA to be up 40% on the prior corresponding period (pcp), after originally anticipating a 30% increase just last month.
The impressive results can be narrowed down to an increase in advertising revenue in free-to-air (FTA) television.
Back in August, Nine originally anticipated 2Q21 Metro FTA ad revenue to be up around 15% from the prior quarter. Thanks to better than expected trading conditions and the fortunate timing of major events such as the State of Origin and NRL finals, the group managed to push revenue growth up to 20%.
Keep in mind, first-half Metro TV ad revenues are only expected to be up around 1% on the pcp, but it’s great to see such a strong recovery nonetheless.
Is the NEC share price a buy today?
Given the limited visibility of the advertising market next year, Nine won’t be releasing any full-year earnings guidance. Therefore, it would hard to annualise these half-year figures to arrive at any sort of meaningful valuation estimate.
NEC shares were evidently fantastic value back in March/April as a recovery play, but it’s important to try and assess the current situation today in order to guide your investment decision.
Personally, I’ve typically viewed this company as an income/yield pick rather than a growth stock in the past.
I say this because Nine’s earnings and share price haven’t really moved too much over the last five years or so, but it’s paid a fairly consistent dividend of around 10 cents per share, which is yield between ~3-5%. The NEC share price itself has been quite volatile, which has led to the dividend yield also fluctuating.
Given that I personally tend to favour growth shares over dividends, I wouldn’t typically consider adding a stock such as this to my own portfolio. But that isn’t because it’s not a quality company or anything of that nature – it’s simply a difference in portfolio construction.
Is there a further growth story?
While I have viewed this company has an income play in the past, this doesn’t necessarily mean there aren’t any future growth prospects ahead.
I think in order to make a well-informed investment decision today, it’s worth investigating what Nine has in store to hopefully fuel further growth coming out of the COVID-19 period.
Here are a couple of things I’ve identified:
1. Nine’s partnership with Adobe
Nine partnered with leading technology company Adobe Inc (NASDAQ: ADBE) back in September to launch Audience Match – a solution designed for marketers to engage more effectively with their customers. Nine will use Adobe’s Data Management Platform (DMP), which analyses data points resulting in sharper and more targeted experiences.
I think this is a smart move by Nine to stay ahead of the times, especially coming out of COVID-19. We know that consumer behaviour will change as a result of the recent technology adoption and that businesses will need to modify their marketing strategies to effectively reach their audiences.
Nine has a huge reach of over 13 million registered users with tonnes of first-party data that customers have agreed to share across Nine’s premium content.
Coles Group Ltd (ASX: COL) was the first to sign on as the launch partner and will use this data management platform to create a more personalised customer experience.
2. High-quality assets (Domain and Stan)
While one of the biggest risks Nine faces is a secular shift away from traditional broadcasting, it’s worth noting the company is actually quite diversified across other channels.
Stan Sport has only just been released and the company believes it should be able to continue to acquire additional sports rights at attractive prices.
Stan currently has around 2 million active subscribers, but analysts from Goldman Sachs are predicting approximately 3 million subscribers by FY25, with much higher EBIT margins by this time.
Domain is a real estate listing website which generates revenue through property listings. I feel as if this segment has a structural tailwind with low interest rates for the foreseeable future as buyers and sellers are incentivised to enter the housing market.
Summary
These are just a few ways I analyse Nine that would help me guide my own investment decision.
I quite like the future growth story of this one, but it would probably require some more research on my end first before I hit the buy button.
For more share ideas, click here to read: 3 ASX share ideas for your 2021 watchlist.
