According to News Corporation’s management at the company’s 2016 results announcement, the Digital Real Estate Service division is ‘expected to become the biggest contributor to EBITDA in the future’. With an underlying 24% increase in earnings to US$273m for the 2016 financial year, it’s not an outlandish statement.
What management didn’t say was how the division would get there. If it’s through the continued decline of the largest contributor, News and Information Services (NIS), where underlying EBITDA fell 10% to US$545m, then the prediction will be bittersweet.
As is usually the case, News Corp’s results were a mixed bag (and the aggregated results in Table 1 don't mean much as a result). The NIS result was better forecast in News Corp’s leap of faith, partly thanks to the cost-cutting management has been undertaking. It’s reassuring that NIS’s rapid profit decline eased a little in 2016, although there’s next to no chance of a sustainable return to growth any time soon.
Better than expected result
Acquisitions bearing fruit
Reliable cash flow
Look out for our separate coverage of REA Group’s result shortly, but it continues to be the highlight of News Corp’s Digital Real Estate division. With each new result however, it looks like Move (which owns the US website realtor.com) might end up rivalling its Australian sister company. Move’s revenues rose 27% to US$357m, the business is now EBITDA positive, and management expects profitability to ramp up from here. There’s a long way to go, but Move looks like a sensible acquisition.
We’ve previously said News Corp’s Book Publishing business is a bit of a sleeper. While 2016 wasn’t a vintage year, with underlying EBITDA falling 19% to US$184m, a turnaround in the fourth quarter meant the full-year result was better than expected. News Corp’s acquisition track record is underrated in our view, with management saying it was ‘very pleased’ with Harlequin (the romance publisher acquired two years ago).
|Year to 30 Jun||2016||2015|| /(–)
|* US 10 cents final div, ex date 13 Sep|
If you were looking for negatives, then you might find them at Foxtel. Foxtel’s EBITDA fell 21% to $604m due to higher programming costs and marketing investment but, despite new subscription offers, the number of subscribers has stalled at 2.9m. Average revenue per user fell 4% to $89 and customer churn has increased sharply.
Despite stalled subscriber numbers, management flagged Foxtel would focus on driving that number higher in 2017. That suggests another profit decline for Foxtel in 2017, which will probably make it harder to float should 50% co-owner Telstra decide it wants out.
While Fox Sports managed to grow underlying EBITDA by 2% in 2016, the future looks a little less certain. There will be higher programming costs in 2017, but the launch of a new National Rugby League channel should boost revenue. According to management, more than 90% of new Foxtel subscribers take up a package that includes Fox Sports, which shows why News Corp considers sports broadcasting a core business.
Half a billion here...
Having previously highlighted News Corp’s value primarily with a ‘sum of the parts’, it’s also worth mentioning its strong cash flow. In 2016 News Corp generated free cash flow of US$488m (excluding the Zillow legal settlement mentioned in News Corp’s leap of faith). This half a billion dollars of free cash flow is a handy figure to keep in mind because, despite spending $1.7bn on acquisitions over the past two years, the company’s cash balance has only fallen from US$3.1bn to US$1.8bn. News Corp remains a cash generation machine.
The slightly stronger than expected full-year result means News Corp’s share price has rebounded 13% since our last review. But the stock remains excellent value and, in our view, the improving results from acquisitions like Move and Harlequin provide confidence management is a sensible steward of shareholders’ capital. Quarterly results will swing about of course, as will the share price, but News Corp remains a BUY.
Note: The Intelligent Investor Growth and Equity Income portfolios own shares in News Corporation. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.