Morningstar | Lord of the Rings Brings Good News, Not So Much Foxtel; FVE Cut 4% to USD 15.30
We cut our fair value estimate on News Corporation by 4% to USD 15.30 (or AUD 20.50) per share. While the Foxtel-boosted 49% lift in fiscal 2018 fourth-quarter normalised EBITDA to USD 327 million met our expectations, it masked some compositional weaknesses.The halving of Foxtel's EBITDA to USD 76 million (versus our forecast of USD 104 million) is disappointing, given News has just upped its interest from 50% to 65% with the pay TV operator's result now consolidated in News' accounts. Pressure on Foxtel is likely to continue, as revenue impact of diversifying into lower-priced streaming products (average revenue per user down 3% in the quarter) will be compounded by the cost impact of investment into content (cricket, a step-up in National Rugby League rights cost), as well as the burden of introducing more genre-specific subscription video on demand offers.
A 35% jump in "Other" losses to USD 46 million in the fourth quarter was also discouraging. We recognise the need to carry a certain amount of firepower to incubate some loss-making ventures or to find the next growth units such as REA Group or Move. However, we view USD 173 million of such annual costs (up from USD 165 million in fiscal 2017) as too high. Still, we have lifted our "Other" loss forecast to reflect the reality these higher costs are likely to continue for the foreseeable future.
While the 82% (or USD 32 million) jump in book EBITDA to USD 71 million was impressive, we treat the growth as mostly a one-off event. An estimated USD 21 million of the increase reflects the windfall from sub-licensing the "Lord of the Rings" trilogy titles to Amazon during the quarter--something we are not extrapolating in our forecasts.
The combined effect of these dynamics has led to an average 5% fall in our EBITDA forecasts for the next three years. This drove the 4% cut in our fair value estimate for no-moat-rated News, with shares in the group now trading broadly in line with our intrinsic assessment.
For the three months ended June 2018, News reported a net loss of USD 372 million. This was weighed down primarily by a USD 337 million write-down of the Fox Sports channel distribution agreement intangible asset (once the Foxtel-Fox Sports merger was completed) and USD 78 million in impairment/restructuring charges. The messiness of the profit and loss is exacerbated by the impact of various tax adjustments and settlement of certain U.S. Internal Revenue Service tax matters stemming from the split with Twenty-First Century Fox in 2013. This is the reason why we tend to focus on EBITDA.
The group declared a DPS of USD 0.10, bringing the full-year total to USD 0.20, unfranked, equating to a 45% payout ratio of normalised full-year EPS of USD 0.44. Balance sheet remains solid, with News ending fiscal 2018 with net cash of USD 82 million.
Divisional highlight for the quarter, apart from the bumper book earnings discussed above, was the 14% rise in digital real estate EBITDA to USD 99 million, 6% above our estimate. This once again reflected the continuing growth in REA Group, as well as Move whose revenue grew 11% to on the back of a 9% rise in average monthly unique users to 63 million for realtor.com.
News and information EBITDA fell 9% to USD 94 million, 4% shy of our estimate. While management trumpeted the strong growth in digital subscribers (for instance, 60% of Wall Street Journal subscribers are now digital), the cost of this digital is still being felt at the bottom line. This is despite continuing focus on publishing costs, with the Australian operation having just undergone a restructure and the British operations still carrying room for further cost savings.
Circling back to Foxtel, management appears to have bitten the strategic bullet and is gearing to push more aggressively into digital streaming. While this is likely to cannibalise Foxtel's core satellite-based, set-top-box-powered pay TV business, we see it as a better alternative than losing subscribers to third parties such as Netflix and other sports-specific streaming apps. This heightened focus on the streaming space will come at a cost, and is reflected on our five-year EBITDA CAGR forecast of 5% for Foxtel, with EBITDA margins projected to decline from 21.8% in fiscal 2018 to 17.0% in fiscal 2023.
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.
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