Australia | Nov 09 2015
This story features NEWS CORPORATION, and other companies. For more info SHARE ANALYSIS: NWS
-Online real estate business key to upside
-Competitive risks at Foxtel
-Print headwinds continue
By Eva Brocklehurst
News Corp ((NWS)) continues to be a variable-speed company, highlighted by a first quarter result which revealed strong growth for the two online real estate businesses countered by FX headwinds and a struggling print division.
The company is a majority owner of Australian-based online real estate portal REA Group ((REA)) and also holds a majority stake in the US online realtor, Move, purchased last year in joint venture (NWS 80%) with REA. News Corp expects Move will become earnings positive in FY16.
Citi remains willing to consider News Corp from a positive angle, largely because of the REA contribution to revenue, on which a substantial portion of its value lies. As well, cable networks – Fox Sports earnings were up 10% in local currency terms – offer potential. Other brokers concur. Print, meanwhile, is in the doldrums, with advertising seen weakening in Australia and the UK.
First quarter earnings fell 18% on a reported basis and 7.0% on an underlying basis, adjusted for currency and acquisitions. Revenue at the company's largest division, news and information services, fell 11%, and the rate of decline in the advertising base in Australia accelerated. Book publishing was also soft. There is no doubt at Credit Suisse the overall result was weak
Credit Suisse believes the stock has had a solid run and the scope for near-term upside is limited. Hence, the broker downgrades to Neutral from Outperform. Credit Suisse's target of $23.40 reflects a 10% discount to valuation, on which the broker expects News Corp will continue to trade given its current structure.
One aspect of news & information services that the market may be too dismissive of is the Dow Jones service, with both Citi and Morgan Stanley suspecting this could be the case. The latter also notes higher circulation revenues for The Wall Street Journal. The biggest surprise for Morgan Stanley was Foxtel, which reported an earnings drop of 37%, largely stemming from higher programming costs.
News Corp is interesting on a "sum of the parts" basis but Morgan Stanley highlights negative earnings momentum and unclear capital allocation priorities. With a company still in transition, the broker retains an Equal-weight rating.
Foxtel may be increasing its subscriber base but Macquarie warns this is founded on lower prices and increased costs. Guidance for growth at Foxtel in FY16 is maintained, despite a 21% decline in the quarter, with management indicating that expenses associated with the triple play launch will roll off over the course of the year.
Some negative trends will continue into the second quarter, namely the FX and e-book comparables, but this situation should ease as the year progresses, in Deutsche Bank's view.
The Foxtel business is considered a key source of risk, despite the company's assurances, as the decline in the current quarter is severe. Deutsche Bank expects competitive pressure in the Australian market will impact on Foxtel, despite the recent attempts to adjust pricing. The broker now values it at five times earnings.
Management has confirmed the Amplify business has now been sold and any future costs associated with the digital education venture will be minimal. This confirmation boosts Deutsche Bank's earnings forecasts, partly offset by the weak trends in news & information services and publishing.
JP Morgan acknowledges parts of the print business are withstanding the headwinds better, such as the Wall Street Journal, but this is more than offset by the challenges elsewhere. While encouraged by the recent moves to sell Amplify and deliver on capital returns earlier in the year, the broker considers the poor visibility on earnings growth and the subdued longer term outlook for print prevents a more positive view of the stock.
FNArena's database has three Buy ratings and three Hold. The consensus target is $24.44, suggesting 15.5% upside to the last share price. Targets range from $23.40 (Credit Suisse) to $26.00 (Deutsche Bank).
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