We believe news media company APN News & Media Limited (ASX: APN) represents compelling value post demerger of its NZ assets. APN recently moved to spin off New Zealand Media and Entertainment (NZME) and raise $180 million through an entitlement offer to shareholders. Following the demerger of NZME, APN also plans to sell its regional newspapers, leaving the company to focus on the growth of its two best-performing assets: radio and outdoor advertising. APN post demerger is left with two growth businesses that constituted 84% of pro forma financial year 2015 earnings before interest, tax, depreciation and amortisation (EBITDA). Over the last five years, APN subsidiary Australian Radio Network (ARN) has consistently outperformed its competition and grew revenue 9% in the first quarter of calendar year 2016 and 5% in 2015. The outdoor advertising subsidiary Adshel delivered 17% overall revenue growth in 2015.
Following the proposed demerger, NZME will focus on the continued integration of publishing, radio, and digital brands and is likely to merge with Fairfax’s New Zealand operations by the end of 2016. The demerged entity is projected to have revenues of $803 million and earnings of $141 million.
We believe APN’s decision to spin off NZME makes sense as there is limited operational overlap between APN and NZME. We think the market will attribute a higher earnings multiple to the APN business post demerger as the market focuses on the quality of the assets and strategic importance of the remaining businesses.
Shareholders are scheduled to vote on the demerger and a share consolidation In June and given the market’s positive reaction (APN shares climbed 11% following a four-day trading halt on the announcement), we expect this to be approved.
We expect the company will grow its net profit by close to 10% this year, which puts it on a price to earnings (PE) ratio of 8.5 times.