Mixed News for News Corporation

We cut our fair value estimate on

The halving of Foxtel's EBITDA to USD 76 million (versus our forecast of USD 104 million) is disappointing, given News has just upped its interest from 50% to 65% with the pay TV operator's result now consolidated in News' accounts. Pressure on Foxtel is likely to continue, as revenue impact of diversifying into lower-priced streaming products (average revenue per user down 3% in the quarter) will be compounded by the cost impact of investment into content (cricket, a step-up in National Rugby League rights cost), as well as the burden of introducing more genre-specific subscription video on demand offers.

A 35% jump in "Other" losses to USD 46 million in the fourth quarter was also discouraging. We recognise the need to carry a certain amount of firepower to incubate some loss-making ventures or to find the next growth units such as REA Group or Move. However, we view USD 173 million of such annual costs (up from USD 165 million in fiscal 2017) as too high. Still, we have lifted our "Other" loss forecast to reflect the reality these higher costs are likely to continue for the foreseeable future.

While the 82% (or USD 32 million) jump in book EBITDA to USD 71 million was impressive, we treat the growth as mostly a one-off event. An estimated USD 21 million of the increase reflects the windfall from sub-licensing the "Lord of the Rings" trilogy titles to Amazon during the quarter--something we are not extrapolating in our forecasts.

The combined effect of these dynamics has led to an average 5% fall in our EBITDA forecasts for the next three years. This drove the 4% cut in our fair value estimate for no-moat-rated News, with shares in the group now trading broadly in line with our intrinsic assessment.

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