News Corporation demonstrated consistent improvement in advertising and subscription across most of its businesses, but there are a few squeaky wheels appearing. A big stock buyback will support the share price which we think is now trading at fair value.
There was plenty of positive news throughout NWS's 1Q22 result from the very strong digital real estate segment to the often overlooked book publishing business.
NWS reported 1Q22 revenue of US$2.5 billion, an 18% increase over last year while group EBITDA jumped 53% to US$410 million as every segment improved earnings by double digits.
A key factor in the result was a broad increase in revenue, particularly from digital real estate and digital subscription revenue in Dow Jones. Digital real estate revenue jumped 47% over the same period last year boosted by REA's acquisition of Mortgage Choice and REA India, plus a small FX contribution. In the USA, Move's core real estate revenue grew 39% and was well ahead of its competitor Zillow Premier Agent. Moves market share remained stable at 30% but earnings slipped in the quarter as cost growth outpaced revenue growth.
Subscriber growth at Dow Jones continues to grow but at a slower pace than recent quarters. The Wall Street Journal subscriber base increased 19% in the year to September, not far off the New York Times growth rate of 21%.
Foxtel subscriber trends were weaker in 1Q22 as broadcast subscriber numbers fell 118k although this was distorted by a 72k decline in commercial subscribers due to lockdowns in NSW and VIC, which should recover. Residential subscriber numbers continued to fall away by 46k in the period. This trend is being partially offset by growth in Kayo and Binge subscribers although the latter faces a key barrier on whether Foxtel can retain the HBO content when the current licensing agreement expires at the end of 2023. Foxtel has not yet reached a point where streaming revenues have offset falling broadcast revenues but NWS has repeated guidance that Foxtel's cost base will remain flat in FY22f.
An IPO of Foxtel may be difficult to achieve as there is a high degree of uncertainty on the medium to long term outlook for the business. Foxtel has reduced its capex profile to around 4% of sales, but the market will probably need a very modest price for a float to be successful, if that is the direction the company wishes to take.
Investment view
NWS has done significant work to improve its digital businesses and has successfully transformed the company by doing so. A much greater degree of transparency has also allowed the market to understand the detail of the changes and this has been a welcome departure from the past.
Earnings growth may be at risk if the post-pandemic economic recovery falters.
NWS has made some incremental acquisitions that further enhance the existing businesses without compromising the balance sheet. In fact, the US$1 billion share repurchase should provide further price support to an already well-performed share price so far this year.
In our view, a PE rating over 40x FY22f eps justifies a continuation of our Hold recommendation.
