Morningstar | Forces of Yin and Yang Evident in News' 1Q Performance
Enthusiasm over the 75% (or USD 154 million) year-on-year jump in News Corporation's fiscal 2019 first-quarter adjusted EBITDA to USD 360 million needs to be tempered. USD 48 million of the gain was due to a settlement from exiting the Sun Bet joint venture with Tabcorp in the U.K., while another USD 86 million stemmed from 65%-owned Foxtel whose earnings only began being consolidated from fourth quarter of fiscal 2018.Excluding these items, first-quarter EBITDA increase was a more modest 10% to USD 226 million. This was a touch below our estimates, with a disappointing performance from the news and information division (adjusted EBITDA down 7% to USD 68 million) more than offsetting another robust 36% growth in books' EBITDA to USD 68 million. Indeed, five straight quarters of growth have elevated books quarterly earnings to match that of news and information's. This is the first time a parity has been achieved and demonstrates the divergent fortunes of these two "old media" in a digitising world.
The yin and yang of News' business mix is also evident in digital real estate and Foxtel. The former posted another stellar result (EBITDA up 11% to USD 105 million), particularly driven by continuing remarkable growth from REA Group in Australia. On the other hand, Foxtel suffered a 30% EBITDA fall to USD 86 million as digital streaming alternatives continue to pressure the traditional set-top-box-based pay TV model--a disruption forcing Foxtel to enter a critical reinvestment phase (distribution, content, services).
Our USD 15.30 fair value estimate (AUD 21.00) for no-moat-rated News encapsulates the the potential of the digital-centric divisions (digital real estate, books) to hold the fort, while the structurally-challenged divisions (news and information, subscription video services) transition to more digital-led models. Judging by the 11% discount that News shares are trading relative to our intrinsic assessment, the market does not seem as convinced.
Fiscal 2019 first-quarter normalised net profit after tax, or NPAT, came in at USD 97 million, from USD 41 million a year ago, primarily boosted by consolidation of Foxtel earnings, as well as the one-off settlement payment from the Sun Bet joint venture. EPS was USD 0.17 versus USD 0.07 a year ago. The group ended the quarter with a net cash position of USD 29 million.
The 11% rise in digital real estate EBITDA was once again fuelled by a strong contribution from 61.6%-owned REA Group in Australia (local currency EBITDA up 23% to AUD 131 million). Move in the U.S. also grew revenue by 10%, as Connections for Buyers product revenue and average monthly unique visitors to realtor.com continue to deliver healthy growth. The 36% lift in books' EBITDA was even more impressive, on the back of just 4% increase in revenue. The resultant 16.3% EBITDA margin (up from 12.5% a year ago) was the second-highest on record, and demonstrates the favourable economics of growing back-catalogue title sales and consumers' increasing appetite for digital audio, all driven by the positive effect of digitisation in the book publishing industry.
On the negative side, the decline in news and information earnings was disappointing and shows there is still some way to go in the division's digitisation and cost base recalibration journey. Furthermore, the 30% fall in 65%-owned Foxtel's EBITDA continues the recent downward trajectory for the Australian pay-TV operator. This has led to significant changes to management, a wholesale restructure of the business model and a reinvestment program to cater to the insatiable consumer appetite for over-the-top streaming products. While this is likely to cannibalise Foxtel's core satellite-based, set-top-box powered pay-TV business, to the extent that our five-year forecast EBITDA CAGR for Foxtel is minus 5%. Still, we see this as a better alternative than doing nothing and losing subscribers to third parties such as Netflix and other sports-specific streaming apps.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.