What: Nine Entertainment Co Holdings Ltd (ASX: NEC) relisted on the ASX in December 2013 and yesterday reported a fall in full-year profit of 95.2% from the year before. Group profit for the year to June 30 was just $57.9 million on revenue of $1.55 billion, however this was impacted by a number of one-off items that boosted profit last year and hit profit this year.
Nine said that its pro-forma adjusted profit, which strips away those inconsistencies, actually rose 5.5% to $144 million. This number was 3% ahead of the company's own forecast and marginally ahead of consensus estimates.
So what: Leading up to the result, Nine Entertainment was widely regarded by investment analysts as a strong 'Buy'. A study by Bloomberg last week found that Nine Entertainment was the most popular company among analysts, with an average rating of 'Buy' among prominent analysts.
I'm unsure what prompted this rating as the local advertising market has been soft for most of the last 12 months, and companies coming out of ownership from private equity can sometimes spring surprises. Regardless, shares fell 3.1% following the announcement as Nine flagged a slow start to the 2015 financial year and predicted a 5% to 10% fall in local advertising revenue in the September quarter.
What now: Analysts haven't yet revised their estimates of earnings or price targets, but seeing as Nine managed to beat underlying profit and dividend forecasts one would imagine they will remain bullish.
I'm less certain. While Nine managed to grow its share of free-to-air advertising revenue from 37.9% to 38.7% over the past 12 months, and is targeting a 40% share by this time next year, I find it hard to justify buying a company that sources the majority of revenue from what appears to be a diminishing market. This goes against one of Warren Buffett's most important investing criteria.
Shareholders in rivals Seven West Media Ltd (ASX: SWM) and Ten Network Holdings Limited (ASX: TEN) have seen losses of between 70% and 80% over the last five years due to stagnating or falling revenue in the industry as a whole.
