Credit: Jackson Simmer via Unsplash
Nine Entertainment has just spent $850 million buying outdoor media business QMS, a move greeted by market analysts as a good way to add value.
The deal, along with the sale of Nine’s radio assets, reduces the company’s exposure to broadcast and adds a media sector with growth, outdoor.
Shares are trading at $1.02, valuing the whole the company at $1.6 billion, meaning that the QMS part is worth half the media group.
Analysts insist the company is worth a lot more than that. More like $2.5 billion.
At Morningstar, director Brian Han sees $2.20 a share as a fair value estimate.
“De-rating a stock's earnings multiple is fair game in the face of structural uncertainties, but there comes a point when underlying value needs to be recognized,” he wrote in a note to clients.
“AFR, Sydney Morning Herald, and The Age are still venerable mastheads consumers turn to when their thirst for fake news and social media scrolling is quenched.
“The popularity of live sports and the curious appetite for reality shows are still driving TV viewership, even if mostly by digital means.
“(Streaming platform) Stan is more than holding its own in the crowded subscription streaming space with its local content and sports strategy.
“And management is trying to stem the structural pressure-induced de-rating by diversifying into outdoor advertising, while also doubling down on cost control.”
Analysts at Macquarie believe the QMS acquisition will make Nine better placed to deliver more consistent growth.
Media stocks have underperformed the market by 18% on average since September.
However, out-of-home is one of the fastest growth segments in Australia, reporting a +6% compound annual growth rate since 2016 based and making up around 17% of total ad spend.
“Nine is highly exposed to the Australian & New Zealand ad market, which is cyclical, and right now is in a challenging spot with Australia in a rate hike cycle<” the analyst said.
“Importantly, when the cycle turns, Nine is well-placed, having exited radio and NBN, and acquiring QMS Media.
‘The risk to earnings however continues to be broadcast, which is still in structural decline, and as such cost-out must continue.”
However, Nine has cross platform benefits with QMS.
“Either way, it provides new access and a foothold in an attractive growth segment of the ad market,” the analysts write.
Nine completed the acquisition of QMS from Quadrant Private Equity almost two weeks ago.
The media group expects QMS to contribute $92 million of EBITDA and bring cost synergies of $20 million
And an important part of the deal is that revenue from digital assets rises with the acquisition.
Digital growth assets (Stan, 9Now, digital mastheads and now outdoor) are estimated to contribute more than 60% of group revenue, up from about 45%.
Nine, when announcing the deal for QMS and the sale of its radio assets, described the company goal “to be Australia’s leading, digital first media business”.
“Together with our existing media assets, the acquisition will allow Nine to offer customers a broader advertising solution and the use of tools such as Nine Ad Manager for more targeted and localised messaging across a wider set of customers," said CEO Matt Stanton.
"We also see the opportunity to promote and drive subscriptions for our publishing mastheads and Stan through leveraging any excess QMS inventory.
“The QMS network will provide Nine with a branded platform to support key national news and sporting moments and serve as a public service utility for governments at all levels in times of emergency or community need. We are excited about the potential in this space.
“QMS is a highly complementary media platform, offering Nine the opportunity to drive significant value by leveraging our premium content on QMS screens and creating an unparalleled advertising proposition that spans from ‘Sofa to Street’.”
A slide on Nine strategy:
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