I note the dominant content in the media this week seems to be the phone hacking scandals at News of the World, the Murdochs, and News Corp in general as well as the ongoing issues with Sovereign debt and the proposed Carbon Tax. I won’t dwell on the Greek crisis (including all the other countries) as these things take time to resolve and the uncertainty means there will be continuing volatility in investment markets.
We have a number of clients for whom we hold News Corp as a stock, and with all the media noise I have been doing extra research on the potential impact of the phone hacking scandal from a shareholder’s perspective.
I have had a number of discussions with investment analysts this week and the sentiment is consistent: newspapers are a very small part of News Corp’s business so the profit impact from the News of the World loss is largely insignificant. A second theme is that not buying BSkyB may be a good thing as News have at times paid too much for assets in the past, hurting shareholders. Click here for more details.
EQR Research commentary about News Corp (NWS).
Overall, we haven’t changed our view of NWS and feel that it remains an attractive investment at current levels hence NWS is still in our Core portfolios.
NWS’ share price is obviously going to be volatile for some time given the legal and reputational fallout from News of the World (NOTW), however based on current information, we don’t see the fallout materially changing our positive investment thesis.
While NWS owns a wide range of media assets, we believe is existing cable networks and filmed entertainment businesses (which contribute more than 70% of overall cash flow) will not be materially impacted by this.
We think NWS’ suite of cable networks, esp. Fox News and its regional sports networks will benefit from continued affiliate fee growth over the next five years. The filmed entertainment segment including TV content is also a potential key contributor and has a history of generating major box-office hits (Avatar!). In short, our overall investment thesis remains positive due to:
• Valuation is compelling. EV/EBITDA is very low relative to peers
• Newspapers only represent US$ 550m of total operational EBIT which is US$ 4,459m.
• Content repricing drives low-risk, high-margin growth: The repricing of News Corp’s key content properties is a major driver of growth over the next three years. The revenue growth generated from these properties is largely subscription-based and is not reliant on a significant improvement in US economic activity.
• The cable networks division is a key driver to our investment thesis and continues to deliver strong results. EBIT contributions from domestic and international channels has risen 22% and 34% respectively
• Increasing global penetration of Pay TV
• Macro drivers. A cyclical tailwind is driving earnings within the TV segment, which is benefitting from both US ad market recovery and GFC-driven cost-out programs
For those who want some light reading on the proposed Carbon Tax attached is a long winded breakdown from an investor’s view point from EQR securities. click here for details
As always if you want to discuss this or any other matter please drop me a line or give me a call on (02) 0492 0444.
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