Nine’s cost-cutting: Will it be enough as ad spend prospects drop?

Chris Pash
By Chris Pash | 2 April 2020
 
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Market analysts have severely marked down ad spend prospects, forecasting falls of 20% to 30% in the metro free-to-air TV market for the next two quarters.

However, they have welcomed Nine Entertainment's cost cutting in anticipation of more fallout from the coronavirus.

Nine revenues for the three months to March were in line with previous guidance but the company is expecting a "material negative impact" from April. 

The media group, in assuming the COVID-19 crisis continues for the rest of the calendar year, plans to cut $266 million in costs including broadcast programming and capital expenditure.

The savings include $130 million not paid to the NRL if the now-suspended 2020 season doesn’t go ahead.

Other cuts will come from operations, capital expenditure, plus cancelled or deferred broadcast shows on Nine television.

Nine earlier this month withdrew its profit guidance in what it called an "uncertain" an advertising market

How effective Nine's cuts will be depends on how long the pandemic will last and the duration of lockdown measures now squeezing economic activity in Australia.

“Our discussions with media buyers continue to suggest the near term impact of COVID-19 on the ad market will be severe,” analysts at investment bank Credit Suisse write in a note to clients.

Analysts at Credit Suisse say the current June quarter will be tough for advertising.

They forecast the full year to June metro TV ad market to record a 12.5% fall.

And if the COVID-19 related restrictions continue well into the 2021 financial year starting in July, Nine has scope to protect its cash flows, say the analysts.

“To illustrate the potential benefit ... $230 million of cost/cash flow benefit … would offset a further ~18% decline in NEC’s advertising revenues (across TV, Radio, 9Now, Metro Media and Digital Publishing),” they say..

Credit Suisse has an outperform rating on Nine and a target price of $1.90 a share. Nine shares last traded at $1.21.

Macquarie says ad markets have been fairly consistent in the March quarter, tracking down 8% for the year so far.

“However, this momentum is expected to shift significantly going forward, with COVID-19 leading to a significant contraction in momentum,” Macquarie analysts say.

Free-to-air television is expected to end the financial year in June down 20%.

Combined with the absence of major sporting events, Macquarie sees the six months from July also down 20%.

“There is currently very limited visibility, and we will continue to review as appropriate,” the analysts say.

Macquarie has a 12-month price target of $1.60 a share for Nine.

“While further downside risks to earnings exists from the current macro backdrop, valuation upside does remain, with our valuation under-pinned by NEC’s key digital assets of Stan, Domain and 9Now,” says the analysts.

“In addition, 9TV is better positioned than its FTA competitors in this environment, and forward earnings are supported by sustainable medium-term cost out strategies.”

UBS says Nine’s cost cutting is likely not enough to offset weaker ad markets.

Based on industry feedback, the UBS analysts expect a 30% fall in the metro TV ad market in the June quarter, followed by a 30% drop in the September quarter and 10% in the three months to December.

“We think an ad market recovery is unlikely to eventuate until 2HFY21 (the six months to July 2021),” says the analysts.

UBS has a buy rating and a 12-month price target of $1.85 a share.

Nine in February posted a 5.3% lift in headline profit after tax to $114 million for the half year to December. Revenue was up 67% to $1.18 billion. Statutory profit was $101.9 million. The company declared a fully franked dividend of 5 cents.

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