Citigroup's News nod

Citigroup has put a buy recommendation on News Corp, arguing that while newspapers face huge challenges pay TV is a significant asset.

Justin Diddams likes News Corp.

The Citigroup analyst has initiated coverage of the company with a buy recommendation on its stock.

“Management execution is critical as earnings are forecast to decline in the 2014 financial year,” says Diddams. “That said, there are some quality assets delivering earnings growth, and an opportunity to deploy cash. Underlying valuations are attractive.”

At 1159 AEST News Corp shares rose 39 cents, or 2.2%, to $18.23. Diddams has a 12-month target price for the stock at $22.01.

“For the newspapers, it’s going to get worse before it gets better in revenue and EBITDA terms,” he says. “We forecast the 2015 financial year as the nadir. We are encouraged by the actions taken in Dow Jones and News' UK assets. News Australia remains the problem child, with major cost transformation required in this business.”

The Citi analyst sees the company’s key assets are the Rea Group and Pay TV, Foxtel and FoxSports. These businesses will account for 70% of operational earnings before interest and tax in 2015, says Diddams.

These assets are “structurally well-positioned, with earnings growth and robust cash generation,” he says. “Competitive threats are overplayed.”

Diddams believes News Corp is planning acquisitions with net available cash of $US1.8 billion or $US4 billion including debt.

“It’s a complex story, but one that can deliver upside, in our view, if management can execute,” he says.

News Corp is the parent company of Business Spectator.

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