Newsletters - Asset Value Investors

AGSS

News Corp • Q2 June 2024

Whilst the current structure was established in 2013, News Corp’s relevant history dates back to 1952, when a 21-yearold Rupert Murdoch returned to Australia from Oxford to take over what was left of his father’s newspaper business, which had been much diminished by death duties and taxes. From this he built one of the most dominant media empires of the 20th – and indeed 21st – century, amassing vast wealth and notoriety in the process.

Today we believe that News Corp is one of the most misvalued and misunderstood companies in our investment universe, trading at a 40% discount to our estimated NAV. The NAV is principally comprised of the following assets: a 62% listed stake in REA Group (41% of NAV), the Australian real estate classified marketplace, and unlisted assets Dow Jones and HarperCollins accounting for 39% and 9%, respectively.

In particular, Dow Jones is a crown jewel asset that has successfully evolved the Wall Street Journal into a thriving digital consumer business, whilst both organically and inorganically building a high-quality Professional Information business that warrants a premium multiple, reflective of its sticky growing revenues, high margins, and minimal capex requirements. The 2021 acquisition of OPIS for $1.1bn marks a step-change in the importance and materiality of Dow Jones’ Professional Information business. Despite improved disclosure and impressive margin expansion, the value and quality of this business is misunderstood by the sell side and ignored by the market.

Indeed, we certainly do not believe these attractions are captured in News Corp’s current valuation, with the company trading at a 40% discount to our estimated NAV. Adjusting for the stake in REA, the stub trades at an implied value of $5.1bn, or approximately 4.7x next year’s EBITDA. We estimate that Dow Jones alone is worth ~1.6x the implied stub value and note that the New York Times at 18x and Info Services peers which trade between 19-28x.

Management have become increasingly vocal about the undervaluation and dissatisfaction with the sum-of-the-parts discount at which it trades. As CEO Robert Thomson described on the last earnings call, the company is engaged in “serious introspection about structure…[and] how to fully monetize a precious, prestigious portfolio that has an obvious growth trajectory. That is indeed not an evolution, but a revolution”. There are numerous potential forms this could take, but the most obvious and tantalising relates to the stake in REA Group, which accounts for a whopping 68% of News Corp’s market cap.

At current prices, the market is seemingly ascribing a low probability to “a revolution”, with significant upside if management do indeed take concrete and tangible steps to unlock value. Combined with strong operating and earnings momentum, prospective returns appear attractive. Moreover – and this is key – the attractive underlying nature of the NAV means that we can afford to be patient and makes time our friend. All told returns from NAV growth and discount narrowing appear attractive.

AGT

News Corp • Newsletter March 2024

We started building a position in News Corp last year and wrote it up in the April 2023 newsletter, highlighting the deeply discounted valuation and the overlooked quality and prospects for Dow Jones generally, and its Professional Information Business (“PIB”) specifically. In recent months we have added to the position such that it is now our largest position (6.7% of NAV). In February, News Corp reported a solid set of results which have seen the shares rise +8% subsequently. For the quarter ending December 2023, group EBITDA (which includes the consolidated stake in REA Group) increased by +16%, some +12% ahead of consensus expectations.

Results showed the strong continued evolution of Dow Jones (37% of NAV), where revenues grew +4% and EBITDA +17% as margins expanded +320bps to 27.9%. The key driver here was PIB, where revenues grew +13%, led by Dow Jones Risk & Compliance and Dow Jones Energy. We argued last year that that these assets were overlooked by the market and misunderstood by the sell side, who carried Dow Jones at derisorily low multiples in their sum-of-the-parts (“SOTP”) models, and for whom the ramp up in margin and evolution of business quality was missed. The margin impact is coming through and investors – aided by improved disclosure – are starting to appreciate the attractive nature of these sticky, largely recurring and high margin revenue businesses. We note that sell side analysts have started to increase the multiple at which they carry Dow Jones in their SOTP models, but the prospects and value of these businesses remains overlooked by many. Indeed, we certainly do not believe these attractions are captured in News Corp’s current valuation, with the company trading at a 38% discount to our estimated NAV.

Adjusting for the stake in REA, the stub trades at an implied value of $5.4bn, or approximately 4.7x next year’s EBITDA. We estimate that Dow Jones alone is worth ~1.6x the implied stub value and note that the New York Times at 15x and Info Services peers which trade between 19-29x. Management have become increasingly vocal about the undervaluation. As CEO Robert Thomson described on the last earnings call, the company is engaged in “serious introspection about structure…[and] how to fully monetize a precious, prestigious portfolio that has an obvious growth trajectory. That is indeed not an evolution, but a revolution”.

AGT

News Corp • Newsletter April 2023

Over the last few months, we have built a position in News Corp – the Murdoch family-controlled holding company.

Whilst the current structure was established in 2013, the relevant history dates back to 1952, when a 21-year-old Rupert Murdoch returned to Australia from Oxford to take over what was left of his father’s newspaper business, which had been much diminished by death duties and taxes. From this he built one of the most dominant media empires of the 20th – and indeed 21st – century, amassing vast wealth and notoriety in the process.

Today we believe that News Corp is one of the most misvalued and misunderstood companies in our investment universe, trading at a 52% discount to our estimated NAV. The NAV is principally comprised of the following assets: a 62% listed stake in REA Group (36% of NAV), the Australian real estate classified marketplace, and unlisted assets Dow Jones, HarperCollins and Move accounting for 37%, 13%, and 8%, respectively.

In particular, Dow Jones is a crown jewel asset that has successfully evolved the Wall Street Journal into a thriving digital consumer business, whilst both organically and inorganically building a high-quality Professional Information business that warrants a premium multiple, reflective of its sticky growing revenues, high margins, and minimal capex requirements. The 2021 acquisition of OPIS for $1.1bn marks a step-change in the importance and materiality of Dow Jones’ Professional Information business. The value and quality of this business is misunderstood by the sell side and ignored by the market.

We estimate that Dow Jones alone is worth 2.5x News Corp’s stub value. The stub trades at just 3.1x EBITDA, with EBITDA expected to grow at high single-digit to low double-digit rates in the years ahead. This compares to the S&P Communication Services sector median multiple of 10.1x, the New York Times at 16.7x and Information Services peers at 22.3x.

Management is highly aware of, and dissatisfied with, the current valuation. Although not consummated, the recent proposed sale of Move (8% of NAV) indicates a willingness to make structural changes to unlock value, with multiple potential levers. These include the sale of Move, a monetisation of Foxtel, increased disclosure at Dow Jones – or, most tantalisingly, some form of value unlock at REA Group, which accounts for 75% of News Corp’s market cap. Whilst timing is uncertain, the attractive underlying nature of the NAV means that we can afford to be patient and makes time our friend. Returns from NAV growth and discount narrowing appear attractive.