Company Reports

News Corp operates in a sector undergoing significant changes, with the legacy print-based publishing business model being dismantled by proliferating news and information outlets in the digital space. This is compounded by ever-improving means for consumers to access them, driven by mobility and continuing device innovation. Consequently, News faces material structural headwinds, with consumers migrating from newspapers to the digital arena and advertisers following suit.

News Corp operates in a sector undergoing significant changes, with the legacy print-based publishing business model being dismantled by proliferating news and information outlets in the digital space. This is compounded by ever-improving means for consumers to access them, driven by mobility and continuing device innovation. Consequently, News faces material structural headwinds, with consumers migrating from newspapers to the digital arena and advertisers following suit.

News Corp is tracking broadly in line with our unchanged earnings forecasts, and we retain our USD 21.00 per share (or AUD 32.80 at current exchange rates) fair value estimate. Granted, the 3% rise in fiscal 2024 first-quarter adjusted EBITDA to USD 367 million was below the 7% growth we are projecting for the full year. However, much of the difference can be attributed to short-term "noise."

News Corp operates in a sector undergoing significant changes, with the legacy print-based publishing business model being dismantled by proliferating news and information outlets in the digital space. This is compounded by ever-improving means for consumers to access them, driven by mobility and continuing device innovation. Consequently, News faces enormous structural headwinds, with consumers migrating from newspapers to the digital arena and advertisers following suit.

The competition among residential marketplace incumbents like Zillow, Realtor.com, and Redfin remains fierce, but wide-moat CoStar is emerging as a new entrant in an already crowded space. The company has shown great progress in acquiring traffic on Homes.com and has already become the fourth-largest platform by traffic in the United States. The residential marketplaces in the U.S. have very distinct business models, with each model having its own set of advantages and disadvantages. CoStar's strategy is to challenge the incumbents through an advertisement-focused business model that is more agent-friendly and with better customer experience potentially leading to faster adoption. However, we find CoStar's model considerably more difficult to monetize compared with the one adopted by its larger competitors, Zillow and Realtor.com.

It was imperative News Corporation deliver a stellar fiscal 2021 second-quarter result, given the 30% surge in its shares since the last results release on Nov. 6, 2020. It did not disappoint with a 41% lift in normalised EBITDA to USD 500 million—the highest quarterly profit since the group's split from Fox in 2013. Much of the strong showing was cost-driven, as EBITDA margin jumped to 20.7%, from 14.3% a year ago despite a 3% fall in headline revenue (up 2% adjusted for acquisitions, divestitures and currency).

The coronavirus is likely to have a material negative impact on News' earnings. Advertising and marketing activities ultimately hinge on corporate confidence and consumer sentiment, two qualities in short supply amidst the current global health crisis. This is especially dire for the news and information division, which generates over 40% of its revenue from advertising. As the health crisis mutates into an economic one, other revenue sources are also under siege, as pressure mounts on units such as subscription video services and property market-sensitive digital real estate services. However, News is the best-placed among the media names under our Australian coverage to weather the storm, with USD 255 million of net cash on the balance sheet.

No-moat-rated News Corporation's fiscal 2017 fourth-quarter EBITDA of USD 219 million was in line with our estimate, but the quality of the result was subpar. Even after adjusting for one less trading week in the quarter compared with a year ago, news and information services suffered an estimated 32% EBITDA fall to USD 103 million, while book EBITDA slumped an estimated 18% to USD 39 million. Add to that another USD 509 million in abnormal charges--primarily impairment and restructuring of U.K. newspaper assets--it is little wonder the stock is giving back some of the recent gains heading into the result.

Britain's decision to exit the European Union is likely to cast the equities market into a sea of uncertainty. The impact on News Corporation’s stock price is likely to be pronounced due to currency, its operations in Britain/Europe and the fact it is a company critically dependent on advertising and marketing--two activities likely to take a back seat as corporate confidence suffers in response to a Britain-less European marketplace.

News Corporation's third-quarter fiscal 2016 result was disappointing, with normalised EBITDA down 6% to USD 168 million. The statutory result was worse as it included a USD 280 million pretax charge to settle a legacy lawsuit, resulting in a loss of USD 149 million. Excluding the lawsuit charge gives rise to a normalised net profit after tax, or NPAT, of USD 32 million, up 14%. Despite the poor headline numbers, there was enough silver lining for us to maintain our positive view on News, with the stock trading at an 18% discount to our USD 17 fair value estimate (AUD 23 per share, down from AUD 24 due to currency movement). There is no change to our no-moat and high uncertainty ratings, reflecting the cyclicality of the advertising industry and the structural challenges facing the print media assets.

News Corporation reported an underlying net profit after tax, or NPAT, of USD 114 million for second-quarter fiscal 2016, a decrease of 34% on the prior period. Underlying EPS was USD 0.20, a decrease of 33% on the year-ago period. No interim dividend was declared during the quarter. The underlying result was materially affected by adverse foreign currency fluctuations, which reduced group revenue by USD 141 million and group EBITDA by USD 25 million during the quarter. The digital real estate services division was the standout, with underlying EBITDA up 19%, reflecting strong growth in depth products for REA Group. However, weakness in news and information services more than offset this, with underlying EBITDA down 22% from continued structural weakness in print advertising. We expect financial performance to improve in the second half with the subsiding of second-quarter headwinds, which included Rugby World Cup costs for cable network programming and the book publishing division cycling tough comps from the popular Divergent book series.

We resume coverage of News Corporation with a no-moat rating and a fair value estimate of AUD 24.00.

We are placing our fair value estimate for News Corporation under review as we transition coverage to a different analyst. We will have an updated valuation published by the end of February 2016.

The 18% decline in News Corporation's first-quarter earnings before interest, tax, depreciation and amortisation, or EBITDA, to USD 170 million (excluding the recently sold digital education unit) was disappointing. However, while we regard currency impact as part and parcel of operating a global conglomerate, the USD 29 million earnings hit in the quarter from a stronger US dollar is too stark to dismiss. Adjusting for this, first-quarter EBITDA would have been down just 4%--a commendable performance in light of a litany of challenges during the period (weak newspaper advertising conditions in Australia and the United Kingdom, tough prior-year comparisons for the books division, an uneven global economy).

After six consecutive quarters of year-on-year decline, News Corporation's news and information division delivered a bumper 29% increase in its fourth-quarter fiscal 2015 earnings before interest, tax, depreciation and amortisation, or EBITDA, to USD 169 million. This was despite a currency-impacted 10% fall in revenues in the quarter, with benefits of recent restructuring and cost vigilance finally coming through. This drove a 7% lift in group adjusted EBITDA to USD 902 million for the fiscal 2015 year, 6% above our expectation.

News Corporation reported a 4% increase in comparable earnings before interest, tax, depreciation and amortisation, or EBITDA, to USD 175 million. The performance was helped by a stronger-than-expected contribution from the book publishing division, reflecting the popularity of the Divergent book series. REA Group also contributed strongly, with revenue up 14% and EBITDA up 29%. Both divisions helped to offset declines from the newspaper division which reported a 9% decline in comparable revenues. News Corporation has USD 3.2 billion of cash and continues its pursuit to evolve from its newspaper publishing origins to an increasingly globalised digital media platform. We see merit in the strategy. We make no change to our fair value estimate of USD 18.00 (AUD 20.00). The share price is currently below our fair value estimate and we expect the market will become more favourable to the stock as they gain comfort in the long-term strategic plan to evolve the company.

News Corporation, or New Corp, has agreed to buy Canadian-based women's romance fiction publisher Harlequin Enterprises for CAD 455 million (USD 414 million) in cash. The deal is subject to a number of conditions and approvals and is expected to settle by the end of third-quarter calendar 2014. News Corp expects the transaction to be earnings accretive and to improve free cash flow. Harlequin will become part of News Corp subsidiary, HarpersCollins Publishers but will retain the Harlequin name and operate as a distinct business.

News Corporation's second-quarter earnings before interest, tax, depreciation and amortisation, or EBITDA, increased 9% to USD 327 million demonstrating the strong contribution of earnings from the non-newspaper assets. Digital real-estate services business, REA Group, continues to capture a growing share of advertising expenditure for real estate listings with its revenue contribution up 18% and EBITDA up 20%. The book publishing division surprised, with revenue up 4% for the quarter while EBITDA increased by 33%. This material increase in operating margin reflects the company's focus to drive down costs through the reduction in headcount and transition to eBooks, which increased its revenue contribution by 40%. This better-than-expected performance leads us to increase our book publishing EBITDA margin assumptions from an average of 9% during the next five years to 11%. We increase our fair value estimate from USD 17.00 to USD 18.00 to reflect this change. We use the current Australian dollar/U.S. dollar exchange rate of 0.90 to translate this value into an Australian dollar fair value estimate of AUD 20.00. We view the stock as undervalued. We expect the ongoing performance from the non-newspapers divisions will be the catalyst for the share price to move towards our fair value estimate.

After the spin-off of its entertainment assets into 21st Century Fox, News Corp. is left with its publishing businesses and a handful of media assets based in Australia. The newspaper publishing side of the business faces challenges in the U.K. and Australia, where News Corp. is attempting to get online readers to pay for access. This business will continue to suffer from revenue declines and the company will probably do its best to take costs out of the business to maintain profitability. Still, we believe how well management allocates capital will be a major factor that determines the long-term value of News Corp.

After the spin-off of its entertainment assets into 21st Century Fox, News Corp. is left with its publishing businesses and a handful of media assets based in Australia. The newspaper publishing side of the business faces challenges in the U.K. and Australia, where News Corp. is attempting to get online readers to pay for access. This business will continue to suffer from revenue declines and the company will probably do its best to take costs out of the business to maintain profitability. Still, we believe how well management allocates capital will be a major factor that determines the long-term value of News Corp.