Investment implications
News Corp’s strong FY22 will be quickly forgotten as weakening global economies begin to weigh on consumer confidence. The company is performing well but our preferred sector exposure is Nine Entertainment (NEC).
The Dow Jones business delivered another stellar performance in FY22. Excluding the extra week of trading in the year, revenue increased 9% aided by digital subscriber growth of 14%. As a consequence, EBITDA for this segment increased 25% on adjusted basis, or 30% including Investors Business Daily, Oil Price Information Systems (OPIS) and CMA all acquired during the year. Dow Jones had its highest advertising revenue since 2017 with digital and print advertising contributing. Digital advertising now represents 59% of total advertising revenue. Total average subscriptions to Dow Jones’ consumer products (Barrons and The Wall Street Journal) reached 4.9 million with 82% of the total being digital.
In Digital Real Estate, Move revenue increased 11% in FY22 but fell 5% in 4Q22 after adjusting for the extra week impact. Move revenue tends to track competitor Zillow’s Premier Agent revenue which is being guided to decline by 20% in the 3 months to September this year. The US housing market could therefore squeeze Move’s earnings for FY23f as costs are rising. REA’s earnings reported yesterday showed a similar pattern of a strong FY22 but susceptible to a softer housing market in FY23f.
Foxtel enjoyed a much better FY22 as growth in Kayo and Binge subscribers helped to offset the steady ~10% annual decline of Foxtel residential subscribers. Streaming made up about 20% of total subscription revenue in FY22 and will get a boost from a price rise of A$2.50 at Kayo in May and A$2 for Binge from July. Revenue and earnings in FY23f for Foxtel will be modestly positive in AUD terms but flat in USD. A key concern will be the uncertainty of some of Foxtel’s major content supply deals (HBO and ESPN) and AFL costs could also increase in FY25/26 when the current deal expires.
News Corp Australia contributed US$109 million EBITDA to the News Media segment for FY22. News UK contributed US$54 million. News Media overall enjoyed a much better year as circulation and subscription revenue increased 8% and advertising revenue lifted 14%.
NWS had completed about 23% of its US$1 billion share buyback as at 5 August with US$770 million remaining.
Investment view
It may surprise some readers to know that advertising constitutes just 17.5% of NWS’ revenue compared to 49% back in FY13 (Figure 2). The addition of Digital Real Estate combined with the growth in digital subscription has transformed the company and arguably made it more resilient to periods when economic activity ebbs. That does not make it immune to such times, but it has improved the quality of the company’s earnings.
NWS is in good shape but is facing a period of softer economic conditions that will particularly impact Digital Real Estate earnings. The shares still look cheap on a valuation basis, even with a chunky corporate discount applied, but we see a better opportunity in NEC.
Risks to investment view
Digital subscription growth may not be as robust as expected. Advertising markets may become more difficult if the economy does not grow or consumers spend less.
Recommendation
We have reduced our recommendation to Hold.
Figure 1: FY22 Result
Figure 2: NWS Revenue
Figure 3: NWS Digital Subscribers
Figure 4: Foxtel Subscribers
Figure 5: Segment Revenue
Figure 5: Segment EBITDA
