News Corp: Result 2014

The message was loud and clear from News Corp at its full-year results presentation this morning: the US$3.1bn on its balance sheet isn’t going anywhere any time soon – or at least not to shareholders. Asked twice – quite pointedly as these things go – about whether the company would consider buybacks or a dividend, it was left to chief financial officer Bedi Singh to respond with the usual cookie-cutter platitudes about ‘making sure [its] businesses are stabilised’, looking at ‘internal investments’ and ‘making sure we do smart strategic acquisitions’.

Still, that’s what you get from Rupert Murdoch’s companies and we’ve gone into it with our eyes open. We think there’s value in News Corp and, one way or another, we think a large part of it will end up with shareholders, but some patience may be required.

Overall, though, this was a decent result, in line with expectations. Excluding the impact of acquisitions, disposals, currency effects and UK newspaper litigation, adjusted revenues fell 1% to US$8.6bn and adjusted segment EBITDA fell 2% to US$832m.

Adjusted EBITDA fell 13% to US$676m at the News and Information Services division, which includes Australian newspapers, UK newspapers, Dow Jones and The Wall Street Journal, due apparently to ‘erratic patterns’ in advertising spending.

News clearly isn’t going to back away from its commitment to print any time soon, with chief executive Robert Thompson declaring that the medium offered a ‘concentrated, intense reading experience with unique affinity in our digitally distracted age’ that was ‘seriously undervalued as a platform by advertisers’. We think he should dream on and we hope that not too many of his ‘internal investments’ are directed towards this area.

Foxtel (50% owned) benefited from a 6% increase in subscribers over the year, to 2.6m, thanks largely to people signing up via Telstra’s T-box. This led to a 2% rise in revenues and an 8% rise in EBITDA, as measured in Aussie dollars. In US dollars, however, EBITDA fell 3% to US$903m. Fox Sports (100% owned – aka Cable Network Programming) also benefited from subscriber growth, as well as higher affiliate pricing and advertising growth, and saw adjusted EBITDA rise 32% to US$83m.

Book Publishing continued its spectacular performance, with adjusted revenue rising 6%, thanks largely to a 35% increase in e-book revenues, which now contribute 22% of consumer revenues, up from 17%. The higher margins earned by e-books meant that adjusted EBITDA rose 38% to US$198m.

REA Group was the other standout performer, with net profit increasing 37% to A$150m on a 30% increase in revenue to A$438m (see REA Group: Result 2014 on 8 Aug 14 (Hold – $43.10)).

Good bits getting bigger

News Corp ended the year with net cash of US$3.1bn, giving it an enterprise value of about US$7bn, which is only a little more than double the US$3.4bn value of its stake in REA. On top of this, book publishing is probably worth US$1.5bn or more, and we’d estimate that Fox Sports and the Foxtel stake are worth at least US$4bn. There must also be some value to the nascent Amplify digital education business, which should increase student numbers rapidly over the next year.

So the good bits are getting bigger while the not-so-good bits are getting smaller. Taken together, they easily support the current share price, which is down slightly since News Corp: 2014 Q3 result (Speculative Buy – $18.21). We're possibly being a little conservative labelling the stock a Speculative Buy rather than an outright Buy, and we might change this in future, depending on price of course. But with uncertainty over the value of most of the company – not least large contributors like REA and Foxtel – and niggling worries about what management might do with that pile of cash, we'll stick for the time being with SPECULATIVE BUY.

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