This ASX stalwart outstripped earnings estimates by 400%

In a world where costs are rising and margins are tightening, at least one ASX company's thriving. And while markets and companies may go through fashions, the secret to this multinational corporation's bumper result will probably be attributed to record revenues from its old-world businesses. Based on these, the biggest beats were among its newspaper and newswire divisions. This is all the more remarkable, given print publications and wire services are commonly regarded as legacy items - almost ancient artefacts - as digital consumption of information is so clearly dominant.

But this company - and of course, we could only be talking here about News Corporation ASX:NWS – also had wins in these areas. The subscriber numbers for three of NWS's flagship streaming services have now, for the first time, overtaken its once-flagship Pay TV offering. In fact, the only drag was its big stake in REA Group (ASX: REA), which in turn had its performance slowed by rising interest rates and a tempered housing market.

News, streaming, pay TV and property are the four key business lines of NWS. In this wire, I take you through the numbers that count plus speak to Claire Xiao of Blackmore Capital. Xiao and the Blackmore team have covered the stock for six years and NWS has featured as a top five holding in its flagship Australian equities fund twice in three years.

News Corporation (ASX: NWS) FY22 KEY RESULTS

• Revenues up 31% to US$10.39 billion
• Net profit up 95% to US$760 million
• EBITDA up 31% to US$1.67 billion
• Cash on the balance sheet down 9% to US$663 million
• End-of-year dividend of 10c/share (flat)
• EPS of US$0.37/share vs US$0.09/share est.

Note: This interview took place on Tuesday 9th August 2022. This stock is a key holding in the Blackmore Capital Blended Australian Equities portfolio. To learn more about it, click here.

What were the key takeaways from this result? What surprised you the most?

Dow Jones achieved its highest full-year revenues and segment EBITDA since its acquisition in 2007, with FY22 revenue +18% and EBITDA +30%. Growth in circulation and subscription revenues (+17%) were underpinned by acquisitions of Investor’s Business Daily (IBD), Oil Price Information Service (OPIS), and Base Chemicals. In addition, digital revenues at Dow Jones represented 75% of total revenues with strong growth in digital subscriptions indicating higher retention rates and stronger margins.

News media has seen a material turnaround over the past two years. FY22 revenue had an uplift of 10% and segment EBITDA improved 320%, driven by growth in digital advertising revenues and record digital subscriber numbers. 

Digital real estate continued to generate strong revenue growth of 25%, with 37% and 11% revenue growth at REA Group and Move, respectively. National residential buy listing volumes were up 2% in the June quarter. Whereas Move’s lead volume declined 39% in the quarter, reflecting continued deceleration in home sales and ongoing inventory constraints in the US.

Overall, News Corp's results beat our own estimates. News media was the biggest surprise for us in the result and it is the single largest contributor to profit improvement across the company in FY22. 

The traditional newspaper business in recent years has faced severe challenges, but it delivered an above-expected performance both in Q4 and throughout the fiscal year underpinned by higher content licensing revenues, digital subscriber growth, and price increases. 

What was the market’s reaction to this result? Was this an overreaction, an under reaction or appropriate?

News Corp’s full-year revenue, EBITDA, and NPAT were all above consensus estimates, leading to a 4% uplift in share price today. Driven by better than expected revenue growth and stronger cost discipline, Q4 adjusted EPS and revenue also beat estimates. Free cash flow was 16% below consensus due to higher capital expenditures.

Would you buy, hold or sell News Corp on the back of these results?

Despite a very strong fourth quarter and full year result, we remain cautious on the short-term outlook of News Corp, given evidence of a slowdown in the global economy and the increased risk around advertising and property revenues for News Corp’s media and digital real estate businesses.

Nevertheless, we continue to hold NWS in the portfolio given the attractive medium-term earnings profile for its digital assets (Dow Jones, REA, Move). Moreover, the timing of further steps to crystalise the significant asset value on a sum-of-the-parts basis provides valuation support for NWS.

Our decision would be more focused on assessing whether there will be a structural change in the macro economy environment and outlook and how the higher rates and inflation will impact the fundamentals. One of the key rationales for us to get out of the position would be for the medium-term earnings profile to enter into a structurally deteriorating stage. Our base case valuation for the stock is around 8.5x (long-term average EV/EBITDA 8.3 times) and it is currently trading at 7.6 times

Are there any risks to this company and its sector that investors should be aware of given the current market environment? 

We have seen moderating consumer discretionary spending as a result of higher inflation and interest rates. Advertising revenue, which is highly correlated to the macroeconomy and GDP, is likely to be softer and face more volatility ahead.

Are you excited or are you cautious about the market in general?

Equity markets have proved remarkably resilient in the face of deteriorating economic data with rising inflation and the United States GDP declining for a second consecutive quarter suggesting that the economy is showing the febrile signs of ‘stagflation’. Offsetting this pessimism was a better-than-expected second-quarter results season for the S&P 500 where earnings are on track to deliver ~9% year-on-year growth and the expectation that US rate rises are closer to peaking.

However, we believe it is still too early to remove the guardrails as the fundamental imbalances impacting the global economy remain prevalent. With this in mind, we further tilted the portfolios toward defensively exposed companies.

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