Cash Flows Boost News Corp’s Outlook

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News Corp’s consensus-beating second quarter results reveal a significant lift in free cash flow, raising the likelihood of a net cash position by year-end.

-News Corp’s second quarter beats consensus expectations
-Conversion of earnings to free cash flow materially improves
-Impetus from ongoing debt reduction, Dow Jones and REA Group
-News Corp is Jarden’s preferred exposure to REA Group

By Mark Woodruff

After adjusting for last December’s sale of the Foxtel business, globally diversified media and information services company News Corp’s ((NWS)) second-quarter earnings and profit surpassed consensus expectations by 11% and 30%, respectively.

News Media accounted for approximately half of the earnings beat thanks largely to higher advertising revenues, as well as cost discipline and the inclusion of Sky News, explains Goldman Sachs.

News Corp’s reporting segments are News Media, Dow Jones, Book Publishing, and Digital Real Estate Services, comprising a majority stake in REA Group ((REA)) and the wholly owned Move Inc in the US.

Major brands include the Wall Street Journal, New York Post, The Sun in the UK, The Australian, The Herald Sun, Factiva, Dow Jones, and HarperCollins.

Of greater importance than the earnings beat, according to UBS, was significantly improved conversion of earnings to free cash flow (FCF) without the large capital-intensive burden from Foxtel.

This broker expects a transition to a net cash position by the end of 2025, after free cash flow (FCF) rose by 25% in the second quarter compared to the previous corresponding period, driving net debt to just US$216m (0.1x times leverage).

Regarding valuation, beyond the disposal of Foxtel, Morgan Stanley still sees options to close the -20-30% gap to its sum-of-the-parts (SOTP) estimation, noting management’s commitment to further strategic work on the asset portfolio and unlocking value.

After the significant contribution from News Media, the Book Publishing and Dow Jones segments accounted for the remainder of the second quarter earnings beat.

Book Publishing benefited from better-than-expected volumes in its seasonally strongest quarter, but Jarden cautions against extrapolating this level of performance for the remainder of the year. As Ord Minnett points out, the current March quarter includes marketing and promotion expenses related to frontlist releases, i.e. a publishing house’s newly published books.

The key driver for Dow Jones was the surprisingly low -1% year-on-year deterioration in costs versus Jarden’s -5% projection. Here, Ord Minnett expects the business will enjoy faster earnings growth in the second half as management executes on its business-to-business strategy via offerings in the risk and compliance space and the Dow Jones Energy product.

For professionals seeking insights into energy markets, sustainability, and commodities, Dow Jones offers several energy-related products and services designed to provide real-time news, data, and analysis across the entire fuel supply chain.

While not providing full year FY25 guidance, as expected, management did suggest the rate of earnings growth will likely slow in the second half.

News Media

While cost discipline and the inclusion of Sky News aided a strong second quarter for News Media, some analysts suggest such a performance may prove hard to replicate.

As uncertainty continues for advertising markets in both Australia and the UK, Ord Minnett envisages a tougher second half for this segment due to both soft advertising markets and negative currency movements.

More positively, the broker expects a partial offset courtesy of cost savings from the UK commercial printing joint venture between News UK and DMG Media, along with lower expenses at the TalkTV operations.

TalkTV recently transitioned to an online-only platform from a British television channel, rebranding as “Talk” and continues to offer content through digital streaming services.

Real estate exposures

Jarden suggests News Corp’s 61% ownership is the preferred way to gain exposure to REA Group, after noting the majority of the broker’s 8% increase in 12-month target for New Corp resulted from an increase in REA Group’s s share price and the analysts’ standalone valuation.

Hypothetically, if News Corp were to sell its stake in Australia’s number one property portal, it could do so at a premium to the market and Jarden’s valuation, though any potential sale or demerger will attract capital gains tax on a cost base of less than $2.50 per REA Group share.

On the same day as News Corp, REA Group reported a strong first half result with Australian dollar revenue rising by 22% year-on-year, in line with the broker’s forecasts.

Increasing for the first time in ten quarters, revenue for News Corp’s Move Inc nonetheless remained subdued, observes Jarden, as lead volumes continue to be impacted by high mortgage rates and affordability issues.

Move is a leading provider of online real estate services in the US, operating realtor.com, the official website of the National Association of Realtors.

For the second half, Ord Minnett anticipates revenue gains from realtor.com, though cautions reinvestment to drive growth is likely to be higher than in the first half as the division sets itself for an eventual recovery in the American property market.

Outlook

Over FY24-27, UBS forecasts News Corp will deliver a three-year EPS compound annual growth rate (CAGR) of 23%, largely driven by momentum for the Dow Jones division and REA Group, along with ongoing debt reduction.

Given a “reasonable” one-year forward price earnings multiple of 30x times, the analysts believe EPS growth alone can produce acceptable share price returns even without potential multiple expansion.

Following the release of interim results for News Corp, the average target price of four brokers covered daily by FNArena increased to $58.17 from $54.50, which suggests 7.6% upside to the current share price, ex dividends.

Three brokers are Buy-rated or equivalent, though Macquarie is yet to update research for first half results, and Ord Minnett has upgraded to Accumulate from Hold.

Outside of daily coverage, Jarden (Overweight) and Buy-rated Goldman Sachs have targets of $54.60 and $61.00, respectively.

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