Earnings Week 1: News Corp, Genworth, REA
News Corp posts weak result as it tries to trim the fat while housing conditions have boosted the fortunes of Genworth and REA Group.
News Corp tidies up
Unruly. Does this spark joy? Apparently not for News Corporation (ASX: NWS), which last Friday ditched the London-based programmatic video marketplace as part of its broader simplification push.
News Corp announced the sale of Unruly to ad technology company Tremor International earlier last month, fetching much less than it paid for it five years ago.
The media conglomerate will receive a 6.9 per cent stake in Tremor, worth around US$25 million ($37 million), after shelling out US$90 million for the platform in 2015.
News is seeking to further simplify the business as negotiations for the sale of its coupon publisher News America Marketing advance.
Morningstar senior equity analyst Brian Han says News Corp's commitment to rationalise its asset portfolio and expose value of units like the Wall Street Journal and property listings businesses Move is a welcome development.
On the whole, News's fiscal 2020 second-quarter result was weak, with normalised earnings before interest, taxes, depreciation, and amortisation (EBITDA) down 5 per cent year on year to US$354 million.
News was staring down the barrel of its third straight quarter of earnings declines across all divisions. Only a 7 per cent cost-cutting drive in its news and information service saved it.
"None of this is a surprise," says Han. "Cyclical headwinds continue to hamper digital real estate services where EBITDA fell 3 per cent to US$118 million, while structural challenges led to a 17 per cent slump in subscription video services EBITDA to US$70 million.
"To make matters worse, the book division became a prisoner of its past success, posting a 28 per cent fall in EBITDA to US$63 million from the record prior quarter, and underlying corporate/unallocated costs grew another US$8 million to US$39 million."
Shares in News Corp have recently closed the discount gap to Han's unchanged US$14.50 fair value estimate ($21.50 at the current exchange rate). Investor are clearly hoping that the company's efforts to streamline the business will deliver.
However, Han thinks the upside potential from the simplification drive is evenly balanced against the downside risk from the current earnings malaise. Today, shares are trading within a range Han considers fairly valued at $21.82.
See the analyst full report: Simple news is the mantra as no good news in earnings
Genworth’s fair value rises as it rides the residential housing revival
Australia's largest lenders mortgage insurer has posted a 60 per cent rise in net profit as improving market conditions, low rates and looser lending conditions draw buyers back to the market.
Genworth Mortgage Insurance Australia (ASX: GMA) recorded a full-year net profit after tax of $120 million on Wednesday, up on the previous year’s $75.5 million. The company's core lenders mortgage insurance (LMI) business recorded momentum particularly in the second half of the year, while investment returns were over 78 per cent higher than 2018, driven by realised gains in its fixed income and equities portfolio.
New insurance written by the company rebounded sharply in 2019, reversing four years of declines. Morningstar equity analyst Chanaka Gunasekera put this down in part to buyer sentiment, but also to the company's new product offerings such as regular monthly premium LMI – allowing borrowers the option to pay premiums in regular instalments instead of upfront.
"New product offerings … as well as risk management solutions appear to be assisting the company to build stronger relationships with lender customers and take market share," he says.
REA should also benefit from listing price increases, James says
The strong result has led Gunasekera to increase his fair value to $3.60 per cent from $3.35.
"We now forecast net earned premiums to grow by a compound annual growth rate of about 5 per cent over the next five years, an upgrade from our previous forecast of about 4 per cent. This drives a modest increase in Genworth’s fair value estimate," he says.
At last close of $3.85, the stock is trading within a range Gunasekera considers fairly valued.
Despite better conditions, Gunasekera doesn't expect a major rebound in housing market conditions. He places the blame on high household debt/income levels and low economic growth.
See the full analyst report: Genworth’s FVE increases on improving housing market conditions
Second-half rebound likely for REA
Property listings provider REA Group (ASX: REA) posted a weak first-half result in line with expectations. Profit from core operations for the six months to December fell by 13 per cent to $152.9 million amid challenging market conditions.
This decline was driven by a 14 per cent fall in national residential listings during the period—including a drop of 17 per cent in Sydney and 16 per cent in Melbourne—while developer project commencements also fell by 30 per cent.
REA Group, which is majority owned by News Corp, runs the property listings site realestate.com.au. REA took an early share price hit following the announcement Friday but approached the close of trading as one of the ASX's stronger performers, climbing 3.19 per cent $117.
But Morningstar analyst Gareth James says the three interest rate cuts by the Reserve Bank of Australia in 2019 should see the real estate market recover and REA return to earnings growth in the second half of fiscal 2020. REA should also benefit from listing price increases and a growing uptake of relatively expensive premium advertisements, James says.
"The performance of the Australian real estate market was a key driver of the first-half result. A 14 per cent decline in national real estate listings and a 30 per cent decline in new real estate project commencements acted as massive headwinds," James says.
"However, we expect these impacts to be temporary and that REA will benefit from population, and associated real estate listings, growth in the long term, in additional to a growing share of the real estate marketing spend."
Today, REA is significantly overvalued, trading at a 46 per cent premium to James’s fair value estimate of $80.
Looking to REA's non-core units, the financial services division, which provides mortgage broking services, was unsurprisingly weak in the first half. Revenue fell 14 per cent and EBITDA down 25 per cent. James expects the division to continue to struggle.
"[We] don't expect it to contribute more than 5 per cent of group EBITDA for the foreseeable future."
James has long questioned the strategy and logic of this division, given the competition and regulatory risk in the sector and the absence of a material competitive advantage. REA will be competing with the likes of Aussie Home Loans and Mortgage Choice. He does however see a strategic benefit for the core Australian listings business, especially with younger renters.
"By fulfilling as many real estate services as possible for its customers, REA Group reduces the risk they will use a competing platform," he says.
"Similarly, we don't expect REA Group's rentals business will contribute a material proportion of group earnings anytime soon, but the engagement with customers while they're renting, and likely young, means they're more likely to use REA Group's services when they're ready to buy property."
See the full analyst report: REA Group remains overvalued despite likely second-half earnings rebound
Other companies reporting in Week 1:
- BWP Trust (ASX: BWP) | Strong property value gains underpin BWP Trust’s first-half 2020 results, FVE unchanged
- Shopping Centres Australasia Property Group (ASX: SCP) | A solid half year for Shopping Centres Australasia, but longer-term outlook remains tough
- Cimic Group Ltd (ASX: CIM) (f) | Cimic's NPAT guidance met but market not happy with BIC exit costs. Our $35 fair value estimate is unchanged.
- ALE Property Group (ASX: LEP) | Coming soon
- DEXUS Property Group (ASX: DXS) | Narrow-moat Dexus makes hay while the sun shines; FVE unchanged.
- Mirvac Group (ASX: MGR) | Mirvac is rebalancing towards passive real estate, but housing remains a driver; FVE unchanged.
See full February Reporting Season 2020 calendar