Description

NZME is a mix of the NY Times (30x EV/EBITDA), iHeartMedia in radio (9.8x EV/EBITDA), and a mini Zillow (5.8x EV/Sales). Let me try to unpack this. NZME is a far above average business with a far below average valuation which is reflected in a rock bottom 2.8x EV/EBITDA  multiple. We believe substantial multiple expansion will follow over the next 3 to 12 months.  In 2020 NZME EBITDA margin is will likely be +50% higher than the NY Time or 18% for NZME vs. 12% for the NYT. So NZME has a +50% higher EBITDA margin and 1/10^th the valuation of the NY Times. Management has guided to growing EBITDA off $60-63 million base in 2021. For the current year, NZME has guided to EBITDA is .32 cents a share on a .60 cent stock or .98 cent EV per share. This should lead to EBITDA margins in the low 20’s percent range and CAPEX runs approximately 3% of revenue. The NZ Herald also generates the same pricing as the NY Times ($1,040 per year subscription home delivery and $200 for a digital only annual subscription). In fairness, NZME’s NZ Herald has a digital subscriber base of only is 45,000 members (18 months old) and growing at 100% per year off a smallish base. The NYT has 5.7 million digital-only subs (took 8 years to get to) and print 6.5 million.  One interesting point, the NY Times generates in the US per capita revenue of $5 per person while NZME generates approximately 13x this or $66 per person in New Zealand with a mix of dominant radio position (40% of country), newspaper (50% of country), and lesser extent a collection of emerging digital assets (24% market share). NZME properties reach 67% of population every week or 3.3 million out of 5 million. Aside from dominant assets, the New Zealand Media and Entertainment is a deeply undervalued business that produces roughly $45-$50 million free cash flow with a market cap of $110 million and an enterprise value of $165 million or approximately just over 3x ev/free cash flow. NZME has some unexpectedly positive factors: record growth in audience in both radio (NZME radio reaches 1.83 million listeners w/ the fastest growth in market share since 1987) and newspapers (NZ Herald alone reaches 1.75 million out of 5 million in the population, +16% yr/yr), and an extremely manageable Debt/EBITDA that by December 2020 0.5x. EBITDA is growing as the competition is struggling mightily* which is creating unique high ROIC reinvestment opportunities and the company actually has visibility into 2021 guiding to grow EBITDA over the $60-63 million for current year. NZME radio and digital are certainly worthy of far higher multiples than the current 2.8x EV/EBITDA. The business model is attractive with a cash conversion cycle of -15 days and a ROIC-WACC= +12% with high teens free cash flow margins. NZME is paying around 3-4% interest on their debt, which declines with additional debt paydown. It is possible that NZME would renew a substantial dividend in the 2H21. In 2017 and 2018 the payout equated to a 15% dividend yield on the current share price. Using several valuation methods we get values for this business between $1.70-2.20 per share over the next year vs. 0.58. Using a 7x multiple on this year's EBITDA would be $2.00 per share or +233%. 

NZ Herald won best website of the year, best app of the year, and best newspaper of the year. 

Record audience in Radio (October 2020): 

https://advertising.nzme.co.nz/nzmes-zb-and-zm-networks-hit-highest-audiences-ever/

Record readership in Newspapers (September 2020): 

https://advertising.nzme.co.nz/extraordinary-nz-heraldnzme-newspaper-readership-growth/

We believe a major catalyst will be the November 15^th Investor Day (their first as a public company)

·         I believe the company will segment the EBITDA profitability of Radio, Newspaper, and Digital.

·         The investor day will spend about 90 minutes for each unit: newspaper, radio, and digital

*Struggling Competition:

Bauer Media (German) shut down all NZ operations and #2 competitor Stuff Media sold to the CEO for $1 in May 2020. NZME has been trying to acquired Stuff Media for years (mainly regulatory issues).

NZ Supreme Court and NZME/Stuff Merger:

NZM has been trying to buy Stuff Media for 3-4 years now, the case has gone to the Supreme Court of NZ. NZ Supreme Court ruled that NZM+Stuff would form a monopoly with over 90% market share. NZM has tried to answer the court's worries about building a dominant media force….It's still in process. Currently, NZM is in a unique competitive position of actually generating synergies between radio and newspapers to drive traffic to their digital assets.

Is there money to be made in New Zealand????

Trademe Group had 95% of its revenue out of New Zealand and is a mix of Zillow, eBay, Craigslist. Trademe Group was acquired approximately two years ago for $2.6 billion by US PE firm Apex. Trademe had limited competition and nearly 65% operating margins. With this backdrop, NZME has an understandable strategy to see how leveraging weekly reach into 67% of the country to drive traffic to high-value digital assets makes sense. https://www.trademe.co.nz/ 

https://www.trademe.co.nz/a/property/residential/sale?bof=WIbdtxvL

Vs.

NZME commercial, residential and businesses for sale: https://www.oneroof.co.nz/

NZME autos for sale: https://www.driven.co.nz/

NZME has some pricing power in newspapers: 

Synergies?

We believe there are unique synergies between radio/newspaper and growing their digital media businesses. With 67% of the country reading or listening weekly to NZME product, this creates a significant call option on digital which might not reach Trademe Group $2.6 billion exit but then again it is close to a free option.

The company is focused on needle-moving initiatives: 

What is NZME worth?

Much better than a 2.8x EV/EBITDA multiple. NYT EBITDA multiple has expanded from 5x in 2014 to 30x this year with adoption of their digital strategy that has gotten them 8% revenue growth (which, I guess is the newspaper equivalent of Shopify type growth).

With $63 million in EBITDA in 2020 we think $70 Million in EBITDA is possible in '21 at a 6x multiple of EBITDA, the business would be worth $420 million and the debt should be close to paid off. W/ 196 million shares, this would equate to $420/196 or $2.14 a share vs. $0.60 or +250% from current prices.

Using a DCF I get a $2.19 a share valuation or pretty much the same as above +260% from current prices.

Valuing Radio: at $180 million for Radio or 3x $60 million in contribution margin or what we believe is around 6-7.5x ebitda, $100 million for newspapers or around 1x contribution margin and estimated 4x EBITDA, and $110 million for digital ($56 million annually or 2x contribution margin). $1.70 per share. We have pushed management to segment margins for each business. We think this could happen on the investor day in November. 

A 10% free cash flow yield on $45 million in FCF= $450 million- $55 million in net debt as of 6-30 or $2.00 per share 

Shareholders are pushing for change:

NZM’s shareholders are very frustrated with the extremely low valuation and proposed a shareholder vote to break up the company. It failed but, led to a new chairman, a full-time IR person, and now their first investor day as a public company in on November 15^th. Since 2015, NZME as a newspaper/radio/digital company has some of the best margins in public equity.

 DISCLAIMER: This does not constitute a recommendation to buy or sell this stock. We own shares of the company, and we may buy shares or sell shares at any time.

Catalyst

First investor day as a public company November 15th 

Big enough to care: $330 million with $60-63 million in EBITDA 

#1 dominant newspaper and radio in New Zealand (40-50% market share)

Attractive economics: 18% EBITDA margins with CAPEX is roughly 3% of revenue 

Very clean balance sheet: Dec 2020: Debt/EBITDA 0.5x 

Guidance for growing EBITDA in '21 

Valued at only 2.8x EV/EBITDA and nearly a 30% EV/Free Cash Flow