News Corp: Interim result 2014

Hans Christian Andersen would be proud. The new News Corp was seen as an ugly duckling when it was cast off from the Fox empire last year, but some shiny white feathers have been peeking through in the past week.

The first was last Tuesday’s stunning interim result from REA Group, in which News owns a 62% stake. In our original sum of the parts analysis of the new News last July – see Old Murdoch, new News on 25 July 13 (Speculative Buy – $17.00) we included $2.4bn as our bullish valuation for REA, or about $4 per News share.

That was based on the top of our then Hold range for REA Group of $20-$30. But if you put in the current share price of $45.60, it would take REA’s value up to about $6.40 per News Corp share, and it’s not hard to imagine better outcomes. If you’re reluctant to buy REA directly, then this wouldn’t be a crazy way of getting some exposure.

Following News’s own half-year result, it also looks like we might have been a bit conservative with our valuation of the Book Publishing division (mostly HarperCollins). E-book revenues rose 39% in the second quarter and now contribute 17% of the divisional total. As we explained in our analysis last July, e-books make much higher margins than traditional books and they drove an overall quarterly increase in earnings before interest, tax, depreciation and amortisation of 38%, excluding the impact of acquisitions, disposals and currency movements.

Foxtel subscribers up

Last but not least is Foxtel, which has been accused of being a monopoly recently after signing an exclusive deal for the new series of Game of Thrones. We’d say that signing exclusive deals does not make a monopoly, but it’s an encouraging reflection of the company’s market position.

In the year to December, Foxtel increased subscribers by 5% to 2.5 million, thanks in large part to people signing up via Telstra’s T-Box. Churn dropped from 14.2% to 12.4%. In US dollars, Foxtel’s EBITDA fell 3% but, based on average exchange rates, we estimate that Foxtel’s Aussie dollar EBITDA rose about 10% (giving $238m for News’s 50% share), helped by cost savings from the Austar acquisition and the absence of costs associated with the London Olympics.

Moving away from the swans, the result’s other main highlight was the absence of anything very nasty from elsewhere, which had been feared particularly at Dow Jones after the departure of its chief executive Lex Fenwick last month following the failure of its new institutional product DJX.

News and Information Services revenue fell 9% in the second quarter, but that was better than had been feared. Within this figure, advertising revenues fell 10% while circulation and subscription revenues fell 7%, with the blame for the latter falling on the problems at Dow Jones and the disposal of Dow Jones Local Media Group. Australian newspapers also didn’t do as badly as expected, with revenues falling only 7% in local currency terms (and 17% in terms of the US dollar).

Putting it all together, excluding UK newspaper litigation costs, segment EBITDA was down 1% over the quarter and up 1% over the half. Overall, there’s plenty in the result to encourage us to nudge up our Buy price for the voting stock to $20, although we’ll keep the Sell price at the round number of $30. For the non-voting stock we'd be prepared to pay about 3% less.

We stress, though, that this is a relatively risky proposition and suggest that you keep a close eye on our recommended maximum portfolio weighting of 5%. The stock is barely changed since News Corp: 2014 Q1 result on 12 Nov 13 (Speculative Buy – $18.41). SPECULATIVE BUY.

Note: Our model Growth Portfolio owns shares in News Corp.