Eighteen months ago, there were three major catalysts and question marks:

- A return from the Covid ad-spend reduction

- Cash return to shareholders and prudent capital allocation

- Google/Facebook paying for access to NZME content

 

As well, a longer term catalyst has been the growth and development of online subscriptions and their digital assets (esp OneRoof) and slowly taking market share as smaller players fade away.

 

The scorecard on all these has been positive except with the big disappointment of the paltry amount settled upon with Google and Facebook. More on this below.

 

The company has no net debt, and the stock trades at 6x FCF. The business ex-OneRoof is stable and growing slightly. NZM is the dominant media company in NZ, owning half the print market; 40% of the radio market; and a quarter of the digital display market.

 

In terms of comparison, there are few good comps in the U.S. On the positive side, this is not comparable to the formerly dominant newspaper in, say, Indianapolis, getting its lunch eaten by national news sites and digital sites (dislocating classifieds and local advertising). On the negative side, this is not the NY Times with an opportunity to expand nationally and globally via its digital offerings. NZM is already national, and NZ is two small islands in the middle of the Pacific Ocean. NZM is a big fish in a small, isolated pond. This protects its current profitability, but this provides few growth opportunities.

 

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Google/FB Deals

 

The stock is down 30% from recent highs because the Google/FB deals have disappointed as details have been released. On Feb 23, with no effect from Google/FB deals, they guided to 2022 EBITDA "higher" than 2021 EBITDA ($66mm) despite losing a few million EBITDA in the GrabOne divestment. From management comments plus growth expectations, I interpreted the guidance as "slightly higher" (or about $67mm). H1 results (which did not contain significant Google/FB payments) and management comments surrounding these results further confirms this interpretation.

 

A day after this guidance was announced, Russia invaded Ukraine. The Google deal with updated guidance was announced with details on March 25, a month later. The global economic outlook had worsened considerably in that time period. Energy prices skyrocketed in March, and the NZ housing market stalled for the first time in years. So when management gave updated guidance of $67-72mm, I interpreted that as $5mm of incremental EBITDA from Google/FB, almost all of which was to be received in H2. I still believe this to be the case.

 

Here is where I and the market erred. The stock peaked shortly after the March 25 announcement. Without management offering clarification, I had believed NZM would receive double the $5mm per year going forward since the agreement only kicked in at mid-year 2022. Further, I had thought that this number did not include FB, and that NZM would receive a slightly smaller amount from FB. I was dead wrong on both counts. The March 25 press release contains a hazy line about other commercial agreements, and it turns out this was a reference to the as-yet unsigned FB deal. And on the recent call, management clarified that NZM will receive the same total payments in 2023 as they will receive in H2 2022. Management clarified the second issue months ago when they announced a signed FB deal. It was not until the recent call that they clarified the first issue, but based on the movement of the stock price, this information was known by the market months ago. The questioning analyst on the call was surprised, but the market had already priced in the disappointment.

 

NZM will only be receiving about $5mm in payments from Google and FB, which is a tiny fraction (adjusted for market share and population and GDP) that Google and FB paid in Australia. The reason is that the NZ government (for reasons (other than cynicism) that no one knows) would not pass a law protecting their native media companies as Australia had done. And when the media companies of NZ sought an anti-trust exemption to negotiate collectively, the government pushed back and then delayed a decision.

 

The interesting thing is that while it would have been much better for NZM to have received a payment proportional to the Aussie payments (which would have been about $NZ20mm), this is especially bad news for NZM's smaller competitors (which have gotten zero thus far and will likely get pennies as Google/FB now have less reason to negotiate given the deal with NZME), and I expect further market share gains as a result. But to be clear: these mkt shr gains will not make up for the hoped-for large payment from Google/FB.

 

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Cash Returned to Shareholders

 

Management has returned $30mm to shareholders in the past year via dividends and share buybacks. And they have stated they will return at least that amount in the next 12 months. Management iterated its commitment to returning cash to shareholders, and mgmt stated on the latest call they are not looking at significant acquisitions. So the capital allocation risks have been reduced over the past 18 months.

 

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Operating Performance

 

Operating performance was strong in H1, esp considering the economic headwinds and hit to media earnings elsewhere in the world. NZ ad buying returned to near pre-Covid levels, and NZM ad revenue returned to pre-Covid levels as it added market share from pre-Covid. Digital subscriptions continue to grow at a quick clip, and print subscriptions continue to hold steady. This will never be a fast-growing company, but it is also not a melting ice cube.

 

OneRoof continues to grow, and mgmt iterated its guidance of 15-25% margin in 2023, which would be about $5-6mm EBITDA in 2023 vs the $1-2mm in 2022. OneRoof will provide over half the growth of the bottom line in the next 5 years.

 

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Valuation

 

Market Cap: 194mm shares * 1.20 = $232mm

Net Debt = $3mm

TEV = $235mm

 

Given H1 Results and Guidance and my reading of the Google/FB announcements,

 

EBITDA 2022 = $73mm (assumes H2 economic conditions similar to H1 and adding $5mm from Google/FB) 

Operating Lease = $11mm

CapEx = $6mm

Taxes (28%) = $15mm

FCF = $41mm, or about 21 cents per share. 6x.

 

The thesis here is simple: over the next 3 years, NZM (ex-OneRoof) will grow slowly (2-3%), and if OneRoof expectations are met, it will grow the bottom line an additional 3-4%. Meanwhile, management will return half the mkt cap to shareholders over the next 3 years.

 

Given how this has traded, I do not expect a multiple reset unless private equity seeks to acquire, and due to foreign media ownership laws, that would need to come from a NZ group and is unlikely.

 

Another catalyst would be a dividend recap. Raise $50-75mm of debt and return it to shareholders. This is not likely, and I expect management to run the company with $0 net cash/debt going forward.

 

I believe this stock should trade at double the current price (11-12x), but as I mentioned above, I do not expect it to re-rate. The gains will likely come as the company returns FCF to shareholders, and the market cap grows LSD. I expect a handsome 20% IRR over time, but I do not expect to be up 50% in the next year. 

 

 

Risks:

- There should be an obvious existential risk to an unlevered stock trading at 6x FCF, but I have not been able to identify one.

- Management making a bad acquisition. Management has been clear they are not seeking a significant acquisition. As well, NZM cannot buy any large media assets within NZ because of antitrust concerns. Could an Aussie media asset attract their attention? This management has done a good job cutting costs and running the business without dreams of grandeur, but this is always a risk.

- The NZ economy tanking and the ad market cratering. There is a significant fixed cost component to the business so operational leverage is high, but they produce a respectable 15+% pre-tax margin (EBITDA -op leases-capex)/Revenue. In covid-affected 2020, after removing the gov't covid subsidy, EBITDA - op leases - capex still exceeded $35mm. And advertising revenue was down 25% (vs 2019) during the worst 6 months and 14% overall.

- A major international competitor entering NZ. The issue here is NZ is small (population 5mm) and remote, and it makes little sense for a new entrant to produce content and spend money trying to build a business. There is not a large pot of gold even if successful.

- Mediaworks is for sale, and a buyer could move aggressively to take market share in radio and change the current duopoly competitive dynamics.

- Online sites (Google, FB, etc.) make major gains in ad mkt share versus traditional news media. This effect will continue, but it has slowed and stabilized over time.