Calculating The Fair Value Of Nine Entertainment Co. Holdings Limited (ASX:NEC)

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26-05-2025

Using the 2 Stage Free Cash Flow to Equity, Nine Entertainment Holdings fair value estimate is AU$1.91
With AU$1.58 share price, Nine Entertainment Holdings appears to be trading close to its estimated fair value
Our fair value estimate is similar to Nine Entertainment Holdings' analyst price target of AU$1.91
Today we will run through one way of estimating the intrinsic value of Nine Entertainment Co. Holdings Limited (ASX:NEC) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
We've discovered 1 warning sign about Nine Entertainment Holdings. View them for free.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (A$, Millions)
AU$180.9m
AU$207.1m
AU$222.9m
AU$157.6m
AU$149.1m
AU$145.1m
AU$143.6m
AU$143.9m
AU$145.4m
AU$147.7m
Growth Rate Estimate Source
Analyst x4
Analyst x4
Analyst x4
Analyst x1
Analyst x1
Est @ -2.69%
Est @ -1.00%
Est @ 0.19%
Est @ 1.02%
Est @ 1.60%
Present Value (A$, Millions) Discounted @ 7.1%
AU$169
AU$181
AU$181
AU$120
AU$106
AU$96.1
AU$88.8
AU$83.1
AU$78.4
AU$74.4
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$1.2b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.1%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$148m× (1 + 2.9%) ÷ (7.1%– 2.9%) = AU$3.7b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$3.7b÷ ( 1 + 7.1%)10= AU$1.8b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$3.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$1.6, the company appears about fair value at a 17% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Nine Entertainment Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.1%, which is based on a levered beta of 0.960. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
See our latest analysis for Nine Entertainment Holdings
Strength
Debt is not viewed as a risk.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Media market.
Opportunity
Annual earnings are forecast to grow faster than the Australian market.
Good value based on P/E ratio and estimated fair value.
Threat
Dividends are not covered by earnings.
Annual revenue is forecast to grow slower than the Australian market.
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Nine Entertainment Holdings, we've put together three pertinent aspects you should consider:
Risks: Case in point, we've spotted 1 warning sign for Nine Entertainment Holdings you should be aware of.
Future Earnings: How does NEC's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.