Australia | Aug 09 2021
A mention of buybacks sparked interest in the capital return policy of News Corp while real estate and digital investments drove a strong FY21, except for REA Group
-Move and Dow Jones remain drivers of value
-Acquisition of OPIS a key opportunity
-Buybacks could be key to crystallising significant value
By Eva Brocklehurst
Digital era investments provided News Corp ((NWS)) with a strong result in FY21, enough for a review of the capital returns policy and an increasing focus on buybacks. Revenue improved overall and Move provided a particularly strong outcome for digital real estate and its core realtor product.
At the operating earnings line (EBITDA) the better performance in digital real estate and subscription video services (SVS) offset the weak result in News Media. Digital real estate services revenue was up 74% while SVS revenue was up 33%. While the results missed UBS estimates this was primarily because of litigation charges being recorded to the tune of $40m which had not been factored in.
Revenue trends at Dow Jones were better than Macquarie expected, amid more digital subscribers, and video subscription trends for Binge, Kayo were also on an upward trajectory. The broker notes News Corp has a clear sense of how the professional information business can be developed, thanks to Dow Jones, and this is already higher margin and generating cash.
The acquisition of OPIS (Oil Price Information Service), a price reporting agency that provides information for commercial contracts and trade settlements, fits with this view. The broker asserts News Corp was able to act swiftly and decisively in purchasing the opportunity. OPIS is not only covering energy and commodities but also renewables and carbon-related products.
Credit Suisse agrees the outlook for Move is strong amid agent demand and increased inventory. Momentum in Move and Dow Jones will be aided by payments from Facebook/Google and a number of other acquisitions including Investor's Business Daily, HMH Books and Mortgage Choice (recently acquired by REA Group).
Morgan Stanley was encouraged by the performance and outlook of Move and realtor.com along with Dow Jones, and considers these divisions to be the key drivers of shareholder value.
In light of the US$2.2bn cash balance the company has announced plans to increase shareholder returns via buybacks and this is the main catalyst, in Macquarie's view. Even if one-off in nature, a significant buyback could result in the realisation of asset values that would assist in closing the gap between the market cap and the broker's valuation.
Goldman Sachs estimates US$500m to US$1.3bn could be deployed and still keep US gearing muted, ex REA Group/Foxtel. The broker points out News Corp has had a US$500m buyback authorised since 2013 but has only purchased US$71m.
Without any substantial M&A, Goldman Sachs agrees buybacks will be key to crystallising significant asset value and forecasts operating earnings will grow 17% in FY22. Potential value accretion from the buyback is not clear to Credit Suisse although this is considered a positive development.
The reaction to stablemate REA Group's ((REA)) FY21 results, in which News Corp has a majority stake, appears more lacklustre. Management has created some uncertainty surrounding the impact on listings of the Sydney lockdown as well as tougher comparables going forward. Then there is the federal election in the second half of FY22.