NZME, a leading New Zealand media company, is extremely cheap at - a 32% FCF yield, a 13% dividend yield (the highest yielding stock in NZ - as a recent spin the dividend does not appear in a stock screen), and 3.3x EBITDA, for a company that had its earnings (1h16 vs 1h15) up slightly year over year.
The thesis is relatively straight-forward in that the company - which is approx. 62% publishing (traditional and digital), 32% Radio, and 6% e-commerce is just too cheap. I think this idea is much more about knowing that it exists than having a real variant perception. With a committed pay-out ratio of 60-80% of NPAT you get paid to wait while the market re-values the asset.
At 10x NOPAT and 1 year of dividends the stock could conservatively return 2.3x MOIC ($1.29+ per share). Furthermore, the Fairfax merger is not completely dead, which if ultimately pulled-off would be compelling and likely provide additional upside.
Newspaper
NZME owns the number one paper in NZ, the New Zealand Herald, as well as six regional, daily papers, and 23 community papers. In 2015, revenue was 57% advertising, and 35% circulation. Print advertising has trended down mid to high single digits with circulation flattish. Total print revenue was down 4% in 2015.
| Publishing |
2013 |
2014 |
2015 |
| Print Advertising |
179 |
164 |
152.0 |
| Print Circulation |
96 |
98 |
94 |
| Print Other |
12 |
13 |
18 |
| NZME Print |
287 |
275 |
264 |
In general, this business is better than other newspaper businesses around the world primarily because there is less traditional competition within each geography as there is only one major masthead in each region. It was on this basis, that they do not compete with each other to begin with, that they pursued their merger with Fairfax.
Advertising declines have consistently been set-off with operational expense reductions. There is a limit to how far this goes, but current print metrics are improving as print readership and subscriber base grew in 1H16.
Radio & Experiential
NZME, owns 9 major stations across NZ and 40% audience share. They have the most listened to radio station - Newstalk ZB with12% share. They also have 457k registered users for iHeart Radio - which is growing revenue nicely but off a very small base.
The radio business has been in a bit of flux - which could be a source of upside, the traditional industry survey was not run in 2015, which impacted ad sales and NZME moved from selling agency advertising as part of a long-time JV to fully in-house. As of 1H16 agency sales have returned to growth, but total radio advertising revenues were down.
Digital
Across its properties, NZME has the 4th largest unique audience in New Zealand after Google, Microsoft, and Facebook.
The digital segment is compromised of a few different businesses:
Vision, which creates content across their properties; GrabOne (NZ's largest daily-deals site); and they have launched few vertical focused and niche classified sites (Herald Homes, Driven.co.nz).
Digital ex e-commerce has grew almost 30% YoY with strong growth in NZ Herald site.
Model
To be conservative, I bring down EBITDA over $7 million from their current run-rate. While they have continually been able to manage publishing expenses, I imagine there is a limit, while on the positive side their traditional print KPIs have stabilized / returned to low growth and newspaper digital growth has been strong.
Again, EBITDA was slightly up year over year, so I think this is quite conservative.
$60 million EBITDA
- 24 D&A
= 36 EBIT
-6 interest
= 30 EBT
21.3 NPAT
+ 24 D&A
- 14 normalized capital expenditures
= 31.3 FCF
NOPAT = $35 million
10x NOPAT = $350 - $110 net debt / 196 million shares = 1.22 + .07 (1 year of dividends) = 1.29
Risks
Complete newspaper implosion
NZ economy craters
I own this through NZM AU (so you have AUD/NZD exchange rate risk)
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.