Description

Thesis

We’ve written about News Corp before, but think it is more attractive now than ever. NWS owns a collection of media assets including Dow Jones, REA Group (the Zillow-equivalent of Australia), Move (owner of Realtor.com, the #2 US digital real estate platform), Harper Collins (one of the world’s largest book publishers), Foxtel (Australian video distribution), and a collection of digital and print news publications. The company has made great strides in shedding non-core businesses, upgrading management, and optimizing its key segments, and the financial results have improved markedly over the last several years.   We believe the conglomerate is poised to harvest value through the simplification of its corporate structure via a series of potential sales or spinoffs from its collection of severely undervalued assets.   

NWS currently trades at ~$15.50 a share, with its publicly traded internet real estate holding, REA, trading at A$115 (NWS owns 61%).  When backing out its 61% stake in REA (and tax affecting it), News Corp’s remaining assets – which include Dow Jones, Move (Realtor.com), Foxtel, Book Publishing (HarperCollins & HMH) and the company’s various US, UK and Australian News Media publications – are collectively valued at an EV of only ~$5.8Bn or less than 5x Pro Forma fiscal year 2023 EBITDA (FYE June 2023).

While we believe the possibility of multiple rationalization transactions is being overlooked, we also think the street has not fully factored in the digital transformation and improved profitability at all the Company’s business units, particularly Dow Jones.

At Dow Jones, known primarily for The Wall St. Journal, an increasing percentage of revenue is now derived from its high-margin Professional Information Business, which includes a Risk & Compliance data division growing close to 20% y/y and benefitting from incremental KYC (Know Your Customer) initiatives required to abide by the sanctions on Russia. Additionally, through forced divestures in the S&P Global/IHS Markit merger, Dow Jones recently acquired energy and petrochemicals data businesses which are highly EBITDA accretive and becoming increasingly valuable since the time of acquisition given the recent elevated global focus on the price of carbon products. So, while it’s known for the WSJ and Barrons, (now more than 80% digital), Dow Jones has increasingly morphed into a B2B, data-centric info services business. Despite these positive developments, Dow Jones’ implied EBITDA multiple is still only a fraction what NYT carries, let alone a high multiple info services businesses like SPGI.  We think this gap will fill over time, with or without corporate simplification. 

Meanwhile, the News Media segment is being turbocharged by over $100M in new, 90%+ margin Google, Facebook and Apple annual licensing revenue and Book Publishing is sustaining the elevated demand it saw during Covid. News Corp’s digital real estate businesses also continue to show strength despite macro headwinds.  Realtor.com is taking share from Zillow in the US, and double-digit yield growth at REA should offset any listings weakness driven by the move up in mortgage rates. 

Altogether, we see a sum of the parts worth ~$30 per share or more than 90% upside.

Examining the Downside

However, given the current environment, we’ve re-underwritten the stock to assess the downside assuming the macro continues to deteriorate. To do so, we reverse engineered a sum of the parts analysis to solve for the current $15.50 price.

To be conservative and even assuming that REA shares fall another 25% from current levels, the multiples on NWS’s other businesses would still have to be incredibly low to result in a $15.50 NWS share price. These multiples are applied to financial estimates which we also consider to be adequately conservative given the weakening macro environment.  Our estimates are slightly ahead of consensus largely due to assumed upside at Dow Jones. 

As shown in the table below, Dow Jones would be the most expensive of NWS’s businesses at only 7.6x 2023 EBITDA – quite a low multiple for a subscription-based information services provider with an increasingly recurring revenue base, mid-teens revenue growth and 20%+ EBITDA margins.

NWS SOTP – Sensitivity Analysis

• 25% REA drawdown
• Implied multiples to achieve current price

Looking through a different lens, if we use the valuation multiples that we believe to be more representative of the economics and outlook for each of the News Corp’s businesses which range from a low of 5X for NWS’s stake in Foxtel to 15X and 20X for Dow Jones and REA, respectively, we would need to assume 44% downside to our estimates for each of the segments to achieve a valuation which results in today’s stock price. 

Either way you slice it, NWS shares are materially below our assessment of intrinsic value and are discounting overly draconian assumptions that do not reflect an even remotely accurate picture of their current and future earnings.  As such, we see 90% upside using our estimates and multiples we think are realistic.

Catalysts

News Corp management is actively repurchasing ~$2M of stock each day. To date, News Corp has bought back $300M worth of NWS and NWSA shares with $700M remaining in its authorization from the board.   This is a material amount of stock in relation to the market capitalization of the company, and at the current valuation, we are happy to see management deploy capital in this highly accretive manner. 

The most imminent value realization event is likely to be the IPO or sale of its Foxtel business unit, however, a partial listing or spinoff of Dow Jones as well as a REA/Move separation transaction could also be positive catalysts in the coming quarters. In our view, the most value creative scenario would be REA buying out the rest of Move from NWS, and subsequently NWS spinning off the combined entity of REA Group and Move.

While they have not directly indicated one of these actions will occur, their recent commentary suggests they are actively considering their options.

Robert Thomson, CEO, Q4 FY 2022 Earnings Call (8/08/22)

Analyst: “What would you like to do with the REA, but you cannot do because you don't own100% of it.?”

Robert: “Well. Look, we're very proud of REAs performance. I would leave it to Owen and the teamhere to give you specifics and we're passionate generally about digital property. As youknow there's real cooperation between and among the teams and we do see aconfluence in a broader market trends with more emphasis on providing a sale sidesolutions in the U.S. market which is the strengths characteristically in the Australian marketwhere we provide premium solutions for agents. More broadly for News Corp, we'reconstantly reviewing the structure of the company. We're institutionally introspective andcertainly never complacent self-satisfied all smug.”

Robert Thomson, CEO, Q1 FY 2022 Earnings Call (11/04/21)

“As for simplification, candidly, we're constantly reviewing our structure. As you know, we've sold quite a few companies along the way. The local newspaper business at Dow Jones, which we presumed would struggle, and that didn't turn out to be the case. Amplifier, we've found a bit of home. News America Marketing was -- which was less meaningful to us as print sales declined somewhat. Unruly, which has found a welcome home elsewhere and with whom we still have a relationship but ad tech per se is for others. So, we will constantly be institutionally in perspective, reviewing our structure, whether Foxtel or digital real estate or as we've done to designate Dow Jones as a separate segment so that you can see not only the potential there but also to be clear about the very positive progress that the team is making in News Media. We've made many changes. Those changes have been productive and profitable, and we will never stop questioning or challenging ourselves.”

Risks

n  No catalyst to drive a revaluation: the risk with cheap SOTP investments is that the company never takes the steps necessary to force a revaluation. The conglomerate discount may remain for longer than expected.

n  Housing cycle, inflation, and interest rates: REA and Move are sensitive to housing trends so rising interest rates that slow housing demand could negatively impact results. The combination of lower earnings and a lower multiple on the real estate businesses could cause the stock to languish despite ongoing strength at Dow Jones.

n  Foxtel missed its opportunity: While News Corp has indicated it is actively evaluating options for Foxtel, and there has been much rumor and speculation regarding an impending IPO, a potential transaction may be too late for significant value creation. Valuations of global streaming business have declined precipitously as rising content costs and increased competition have cast doubt on the profitability and feasibility of the streaming business, in general.

Summary and Conclusion

n  Business has been vastly improved and is running on all cylinders with more improvements to come

n  Stock has languished due to complexity, general weakness in TMT/media tech, and an incorrect view that NWS is perpetually hampered by a declining news business

n  SOTP analysis shows that many of the businesses are dramatically undervalued

n  We are confident that a series of transactions will be executed to significantly narrow the value gap that exists today

Catalyst

n  Corporate structure rationalization events: Foxtel sale/IPO; Dow Jones listing/spin off; REA/Move transaction; other optionality with Book Publishing and News Media

n  Revaluation of Dow Jones, particularly considering the Professional Information Business sub-segment / Risk & Compliance

n  Google/Facebook/Apple licensing payments continue to drive earnings above expectations