A much improved second half year saved News Corporation’s blushes to the point where the share price has overcompensated, in our view. We lower our recommendation to Sell.
FY23 result. EBITDA fell -15% to US$1.42bn on a -5% change in revenue and negative impacts from foreign currency movements. By division, Dow Jones delivered a strong 2H23 taking full year EBITDA to US$494m +14% on the previous year. Digital subscriber growth at The Wall Street Journal has stuttered in 1H23 but added 239k subscribers in 2H23 to end the year at 3.4m.
Challenging macro conditions, supply chain pressures and currency headwinds forced NWS to clamp down on costs. Despite the difficult conditions, NWS reported its second highest profitability in its history with Dow Jones the key factor.
The year also marked the first time that digital accounted for more than 50% of revenue prompting CEO Robert Thomson to note that “momentum is surely gathering pace in the age of generative AI, which we believe presents a remarkable opportunity to create a new stream of revenues, while allowing us to reduce costs across the business.”
Foxtel has accumulated over 2.8m paying subscribers to Kayo and Binge as Foxtel Now dwindles to obscurity. Residential Foxtel subscriber numbers remain sticky at 1.3m. The growth in streaming (Kayo and Binge) (has bumped Foxtel total subscribers to over 4.6m in a highly competitive market. Higher sports programming costs (AFL, NRL, Cricket Australia) and entertainment programs dragged on divisional EBITDA which was reported at US$347m in FY23.
Digital Real Estate Services EBITDA fell 20% to US$457m in FY23. A solid result from REA Group was diluted by lower real estate revenues at MOVE. We have been anticipating potential corporate activity with regard to MOVE (a possible divestment) but this has not happened.
We similarly hoped there could be some change to the corporate structure of the company itself that might (partially) unlock the implicit corporate discount attached to the stock. This remains another sticking point as Rupert Murdoch edges deeper into his 90s.
Investment View
Dow Jones continues to demonstrate its value to the group and still has much further to go in terms of subscriber growth and earnings. At just over one-third of group EBITDA in FY23, Dow Jones was the biggest contributor to group earnings this year, surpassing Digital Real Estate Services.
The share price has been on a run recently to the point where the PER is nudging 33x FY24E. This is too rich, in our view, so we have lowered our recommendation to Sell on valuation grounds.
Risks to Investment View
Digital subscription growth may not be a 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 from Hold to Sell.
Figure 1: NWS FY23 earnings
