Brokers Cautiously Positive On News Corp

This story features NEWS CORPORATION, and other companies. For more info SHARE ANALYSIS: NWS

-Print decline levelling off?
-Several business lines unclear
-Stronger ad trends at WSJ
-Minimal value placed on key assets
 

By Eva Brocklehurst

Online real estate services remain News Corp's ((NWS)) clearest growth driver, with earnings in the division up around 30% in the September quarter. Brokers attribute much of the robust result and outlook in the quarter to majority-owned REA Group ((REA)) and its higher pricing, which suggests the online real estate move to a market-based pricing structure has not impacted on volumes.

The September quarter revealed a firm result for book publishing, up 24%, and cable network programming (Fox Sports), up 10%, more than offsetting weakness in news and information services. Revenue declines in traditional print media remain of concern but there are a number of one-off costs which should roll off in 2015. Macquarie was buoyed by signs the print decline appears to be levelling off. Advertising is improving but the broker is not sure if there is yet a material shift in trends.

Deutsche Bank notes management was surprisingly upbeat on the state of the advertising market, signalling that headwinds in Australia have dissipated, while the Wall Street Journal is showing solid growth. Moreover, Foxtel has new pricing packages in place this month and the international experience suggests to Deutsche Bank this will position the company for longer term growth.

Citi expects earnings growth to continue at a more modest pace than the underlying rate of 18% revealed in the first quarter results. The positive aspects are that newspaper revenue declines have moderated, the PayTV assets are delivering and real estate is robust. On the negative side, newspaper advertising is still declining in all three of the company's main markets – the UK, Australia and the US.

Macquarie is cautious about the outlook for Foxtel, while expecting some offset from recently-acquired Harlequin (publishing) synergies, and recently upgraded the stock to Neutral from Underperform, to reflect the improved value for shareholders after a fall in the share price. Meanwhile, education (Amplify) is considered an uncertain investment proposition at present. Amplify's first quarter growth was boosted by hardware sales and the business lacks clarity, in Citi's opinion. The company's trajectory remains choppy but, in summary, Citi finds evidence of a general improvement and retains a Buy rating.

Newspaper operating trends are volatile and there is limited financial visibility so JP Morgan prefers a Neutral rating on the stock. The broker notes book publishing once again benefited from strong sales in the Divergent franchise, while REA was also notable, making the broker less concerned about the competitive environment following the move to market-based pricing. There is upside potential in the recent acquisition (80%) of US-based digital real estate business, Move, in partnership with REA (20%). Despite the large opportunity, JP Morgan considers it still too early to gauge the benefits in what is quite a fragmented market in the US. News Corp is confident it can leverage its expertise to improve Move's positioning and any sign that this is gaining traction would be a key catalyst for several brokers.

The company's focus remains on digital acquisitions and, in terms of geography, the US, with global expansion more likely in Asia than in Europe. JP Morgan observes the company is conscious of the need to make acquisitions which extend current expertise. While total segment advertising revenue declined 7% in news and information, management notes strong trends at the Wall Street Journal, particularly in finance and technical areas.

JP Morgan is aware this could drive meaningful growth but warns trends are volatile and ad buying is short term, advising investors to wait on the sidelines at the current valuation until a clear path is delineated in the key business segments. Meanwhile, UK news advertising remains challenging, with revenue declining 13% in local current terms amid weakness in retail, telecoms and finance.

The value gap to its peers continues to weigh, in Credit Suisse's observation. After excluding REA and cash balances the value attached to the core assets has fallen to around US$3bn from US$4.4bn at the time of the corporate split in mid 2013. The earnings multiple attached to the core business has fallen to 3.6 times from 5.0 times over the same period, well below the trading values of key media peers across publishing and pay TV. Still, the company has some valuable assets to which Credit Suisse believes minimal value is being attributed at the current share price.

The quarter was solid beat on Goldman Sachs' estimates. Book publishing continues to surprise on the upside while costs at Amplify were lower than the broker expected. Goldman Sachs lists three areas to watch where the earnings growth profile could change materially. These include the success, or otherwise, of the newspaper pay walls, the size of the annual investment in Amplify and the use of the cash balance in any acquisitions.

FNArena's database has three Buy ratings and two Hold. The consensus target is $21.84, suggesting 23.5% upside to the last share price. This compares with $20.89 ahead of the quarterly update. Targets range from $19.40 (Macquarie) to $24.00 (Citi).
 

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