Good Write Up From The Boat Fund - Mar Qtrly

We added NZM to the portfolio over the February reporting season.  NZM demerged from APN News & Media (APN) mid last year and is dual listed here and in NZ.  NZM is a publishing and media business that operates some of New Zealand’s most recognised publishing, radio and digital brands focusing on news, sports and entertainment.  The company reports on a calendar year basis and most recently provided results for CY16.  In NZD, the company generated revenue of $407.4M, EBITDA of $71.9M, and EPS of 14.2 cents.  The company also paid 9.5 cents in dividends. Our investment in NZM is a straight up value play.

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NZM operates several traditional and new media assets.  Print accounted for 59% of CY16 revenues (with a 6% decline in revenue in CY16), Radio and Experiential accounted for 28% of revenue (with a 4% decline in revenue in CY16) and Digital & E-commerce accounting for 13% of revenue (growing at 9%).  The company noted that across H2 CY16 declines in Print and Radio assets softened due to various initiatives.  We have modest expectations of flat earnings as digital and radio assets offset the decline in earnings of the print division.  There remains upside opportunity if the company can return the declining radio division to growth, stabilise the decline in print and continue the current rate of growth in the digital assets.
The current valuation afforded by the market, in our view, ascribes a low probability to such scenario.  Significant upside risk is also present if a proposed merger with Fairfax’s New Zealand assets is ultimately approved.  The proposed transaction would see NZM acquiring additional trading revenue in the order of $350M and EBITDA of $60M in exchange for a cash payment of $55M (all NZD) and 41% of the enlarged groups equity to FXJ.  There would be an opportunity to recognise considerable cost synergies from the expanded group cost base of circa $25-30M.

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Whilst the NZ Commerce Commission has issued a draft determination late last year that it expects to decline the proposed merger, it has now delayed its final decision on the merger twice with a final decision now expected on 2 May 2017.  If the merger is declined, we understand NZM and FXJ are likely to appeal the decision. We think the current share price factors a low probability of the merger succeeding.  If the deal is eventually approved (either initially or via appeal) we see substantial upside in the share price.  If the deal does not proceed then we think the current business remains undervalued in any event.  Based on FY17 estimates NZM trades on a 5.5x PE, 3.5x EV/EBITDA multiple, and 13% dividend yield.

D-Day tomorrow for the merger, but in any case these guys are suggesting that the current business is undervalued anyway