NZME nzm au
December 08, 2016 - 3:26pm EST by
aaron16
2016 2017
Price: 0.52 EPS .15 0
Shares Out. (in M): 196 P/E 3.73 0
Market Cap (in $M): 102 P/FCF 3.73 0
Net Debt (in $M): 110 EBIT 46 0
TEV ($): 222 TEV/EBIT 4.56 0

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  • Media
  • FCF yield
  • Radio
  • Spin-Off

Description

NZME, a leading New Zealand media company, is extremely cheap at - a 32% FCF yield, a 13% dividend yield (the highest yielding stock in NZ - as a recent spin the dividend does not appear in a stock screen), and 3.3x EBITDA, for a company that had its earnings (1h16 vs 1h15) up slightly year over year.
 
Furthermore, the cause of the under-valuation is apparent:
  1. NZME was spun-off (end of June 2016) from APN, an Australian company focused on Australian media assets and with an Australian shareholder base. 
  1. Prior to the spin, NZME announced a merger with Fairfax Media's NZ assets. On November 15, the New Zealand Commerce Commission gave a Draft Determination ruling against the merger, sighting media ownership laws (control over 90% of the market) which sent an already in-expensive stock down 25%.
 
The thesis is relatively straight-forward in that the company - which is approx. 62% publishing (traditional and digital), 32% Radio, and 6% e-commerce is just too cheap. I think this idea is much more about knowing that it exists than having a real variant perception. With a committed pay-out ratio of 60-80% of NPAT you get paid to wait while the market re-values the asset.

 

At 10x NOPAT and 1 year of dividends the stock could conservatively return 2.3x MOIC ($1.29+ per share). Furthermore, the Fairfax merger is not completely dead, which if ultimately pulled-off would be compelling and likely provide additional upside.
 
Newspaper
 
NZME owns the number one paper in NZ, the New Zealand Herald, as well as six regional, daily papers, and 23 community papers. In 2015, revenue was 57% advertising, and 35% circulation. Print advertising has trended down mid to high single digits with circulation flattish. Total print revenue was down 4% in 2015.
 
Publishing 2013 2014 2015
Print Advertising 179 164 152.0
Print Circulation 96 98 94
Print Other 12 13 18
NZME Print 287 275 264
 
In general, this business is better than other newspaper businesses around the world primarily because there is less traditional competition within each geography as there is only one major masthead in each region. It was on this basis, that they do not compete with each other to begin with, that they pursued their merger with Fairfax.
 
Advertising declines have consistently been set-off with operational expense reductions. There is a limit to how far this goes, but current print metrics are improving as print readership and subscriber base grew in 1H16.
 
Radio & Experiential
 
NZME, owns 9 major stations across NZ and 40% audience share. They have the most listened to radio station - Newstalk ZB with12% share. They also have 457k registered users for iHeart Radio - which is growing revenue nicely but off a very small base. 
 
The radio business has been in a bit of flux - which could be a source of upside, the traditional industry survey was not run in 2015, which impacted ad sales and NZME moved from selling agency advertising as part of a long-time JV to fully in-house. As of 1H16 agency sales have returned to growth, but total radio advertising revenues were down. 
 
Digital 
 
Across its properties, NZME has the 4th largest unique audience in New Zealand after Google, Microsoft, and Facebook. 
 
The digital segment is compromised of a few different businesses:
 
Vision, which creates content across their properties; GrabOne (NZ's largest daily-deals site); and they have launched few vertical focused and niche classified sites (Herald Homes, Driven.co.nz).
 
Digital ex e-commerce has grew almost 30% YoY with strong growth in NZ Herald site.
 
Model
 
To be conservative, I bring down EBITDA over $7 million from their current run-rate. While they have continually been able to manage publishing expenses, I imagine there is a limit, while on the positive side their traditional print KPIs have stabilized / returned to low growth and newspaper digital growth has been strong.
 
Again, EBITDA was slightly up year over year, so I think this is quite conservative.
 
$60 million EBITDA 
- 24 D&A
= 36 EBIT
-6 interest
= 30 EBT
21.3 NPAT
 
+ 24 D&A
- 14 normalized capital expenditures
= 31.3 FCF
 
NOPAT = $35 million
 
10x NOPAT = $350 - $110 net debt / 196 million shares = 1.22 + .07 (1 year of dividends) = 1.29
 
Risks
Complete newspaper implosion 
NZ economy craters
I own this through NZM AU (so you have AUD/NZD exchange rate risk)
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Shareholder rotation

Dividend screen

Price

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    Description

    NZME, a leading New Zealand media company, is extremely cheap at - a 32% FCF yield, a 13% dividend yield (the highest yielding stock in NZ - as a recent spin the dividend does not appear in a stock screen), and 3.3x EBITDA, for a company that had its earnings (1h16 vs 1h15) up slightly year over year.
     
    Furthermore, the cause of the under-valuation is apparent:
    1. NZME was spun-off (end of June 2016) from APN, an Australian company focused on Australian media assets and with an Australian shareholder base. 
    1. Prior to the spin, NZME announced a merger with Fairfax Media's NZ assets. On November 15, the New Zealand Commerce Commission gave a Draft Determination ruling against the merger, sighting media ownership laws (control over 90% of the market) which sent an already in-expensive stock down 25%.
     
    The thesis is relatively straight-forward in that the company - which is approx. 62% publishing (traditional and digital), 32% Radio, and 6% e-commerce is just too cheap. I think this idea is much more about knowing that it exists than having a real variant perception. With a committed pay-out ratio of 60-80% of NPAT you get paid to wait while the market re-values the asset.

     

    At 10x NOPAT and 1 year of dividends the stock could conservatively return 2.3x MOIC ($1.29+ per share). Furthermore, the Fairfax merger is not completely dead, which if ultimately pulled-off would be compelling and likely provide additional upside.
     
    Newspaper
     
    NZME owns the number one paper in NZ, the New Zealand Herald, as well as six regional, daily papers, and 23 community papers. In 2015, revenue was 57% advertising, and 35% circulation. Print advertising has trended down mid to high single digits with circulation flattish. Total print revenue was down 4% in 2015.
     
    Publishing 2013 2014 2015
    Print Advertising 179 164 152.0
    Print Circulation 96 98 94
    Print Other 12 13 18
    NZME Print 287 275 264
     
    In general, this business is better than other newspaper businesses around the world primarily because there is less traditional competition within each geography as there is only one major masthead in each region. It was on this basis, that they do not compete with each other to begin with, that they pursued their merger with Fairfax.
     
    Advertising declines have consistently been set-off with operational expense reductions. There is a limit to how far this goes, but current print metrics are improving as print readership and subscriber base grew in 1H16.
     
    Radio & Experiential
     
    NZME, owns 9 major stations across NZ and 40% audience share. They have the most listened to radio station - Newstalk ZB with12% share. They also have 457k registered users for iHeart Radio - which is growing revenue nicely but off a very small base. 
     
    The radio business has been in a bit of flux - which could be a source of upside, the traditional industry survey was not run in 2015, which impacted ad sales and NZME moved from selling agency advertising as part of a long-time JV to fully in-house. As of 1H16 agency sales have returned to growth, but total radio advertising revenues were down. 
     
    Digital 
     
    Across its properties, NZME has the 4th largest unique audience in New Zealand after Google, Microsoft, and Facebook. 
     
    The digital segment is compromised of a few different businesses:
     
    Vision, which creates content across their properties; GrabOne (NZ's largest daily-deals site); and they have launched few vertical focused and niche classified sites (Herald Homes, Driven.co.nz).
     
    Digital ex e-commerce has grew almost 30% YoY with strong growth in NZ Herald site.
     
    Model
     
    To be conservative, I bring down EBITDA over $7 million from their current run-rate. While they have continually been able to manage publishing expenses, I imagine there is a limit, while on the positive side their traditional print KPIs have stabilized / returned to low growth and newspaper digital growth has been strong.
     
    Again, EBITDA was slightly up year over year, so I think this is quite conservative.
     
    $60 million EBITDA 
    - 24 D&A
    = 36 EBIT
    -6 interest
    = 30 EBT
    21.3 NPAT
     
    + 24 D&A
    - 14 normalized capital expenditures
    = 31.3 FCF
     
    NOPAT = $35 million
     
    10x NOPAT = $350 - $110 net debt / 196 million shares = 1.22 + .07 (1 year of dividends) = 1.29
     
    Risks
    Complete newspaper implosion 
    NZ economy craters
    I own this through NZM AU (so you have AUD/NZD exchange rate risk)
     
    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Shareholder rotation

    Dividend screen

    Price

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