News Corporation's Fall Disappointing

While one quarter does not a year make, News Corporation's NWS 38% fall in fiscal 2020 first quarter normalised EBITDA to USD 223 million was still disappointing. Management was at pains to highlight the negative impact of currency movement (USD 13 million), a settlement payment from exiting the Sun Bet joint venture in the U.K a year ago (USD 48 million) and tough prior-year comparison in Books (USD 18 million). However, even allowing for these, EBITDA still slumped 20% with weakness in Subscription Video and Digital Real Estate particularly pronounced, and the corporate cost line lifting another USD 10 million.

We are willing to attribute the poor result to the vagaries of quarterly reporting, especially amidst the current market uncertainties in Australia and cyclical malaise in the housing space affecting Move and 61.6%-owned REA. Our near-term EBITDA forecasts are cut by around 5%, but minimal changes to our longer-term estimates mean our fair value estimate remains at USD 14.50 (AUD 21.00 at current exchange rate).

Management's reiterated commitment to simplifying no moat-rated News is encouraging. The global video advertising business, Unruly (bought in September 2015 for USD 90 million with further 86 million contingent consideration), has now joined News America Marketing as a candidate for sale. Such a move adds credibility to management's promise to liberate the value of its individual assets currently buried within the company's complex structure. Perhaps other noncore assets such as The Wireless Group (bought in September 2016 for USD 285 million), Storyful and Sky News may be the next to be subject to a "strategic review."

Investor anticipation of this simplification strategy has led to a solid rally in News' stock price this year to-date, with the shares now trading at only a modest discount to our intrinsic assessment. It is now a waiting game for management to deliver on the strategy and reveal what it intends to do with any sales proceeds.

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