News Corporation

Australian Equity Strategy Update provided by Australian stockmarket analyst Macquarie Research Equities.

Model Portfolio Update

Reducing Energy - Preference For Diversifieds:

We remain overweight diversified resources (where valuations appear reasonable), and have moved energy down from benchmark to underweight, as we believe valuations in the sector are looking stretched, as is the oil price in our view.

Accumulating Banks:

News Corporation will re-enter the S&P/ASX indices – 50, 100, 200 and 300 on Friday 15th June. Macquarie Research Equities analysts estimate that this will equate to approximately 12.26 million shares (average daily volume of NWS shares is approximately 2.64 million). In addition to this positive catalyst, they have revised their earnings forecasts for FY08 and have subsequently upgraded their valuation target following a recent trip to visit News Corporation's (NWS) international operations in Italy, the UK and the US. They believe that very strong growth numbers into FY08 will ultimately drive the stock price closer to their valuation of A$39.49. The stock is currently trading at $28.30, representing an almost 40% discount to their target price. As a result of the trip, they have made a number of adjustments to our earnings forecasts and valuation for News Corporation. They have downgraded their EPS for FY08 by -6.7%, so that EPS growth is now forecast to be 25.4% in FY08. The analysts' EBIT growth forecast is now 19%, compared with 21% previously in FY08, so that EBIT for FY08 is forecast to be US$5,335m. However, these downgrades are dwarfed by the lift in the valuation arising from the roll-over to FY08 forecasts, which amounts to a 6% lift in the valuation of NWS voting stock to A$39.49 (translated at the spot AUD/USD exchange rate of US84¢). News Corporation is now more than A$10 below the analysts' sum-of-the-parts valuation, as concerns about the Australian dollar and acquisitions by the company overshadow the much more important story of growth in earnings and cashflows. For the past three years, News Corporation has grown EPS at a compound rate of 25.3% pa. Catalyst: Strong growth from a number of divisions will drive share price performance going forward, combined with continued capital management initiatives.The rising Australian dollar (which renders the US$ earnings stream of News Corporation less valuable) is clearly hurting the stock price of News Corporation. But they believe that very strong growth numbers into FY08 will ultimately drive the stock price closer to the analysts' valuation of A$39.49.

News Corporation (NWS) have an upgraded 12 month share price target of $37.31 from market analyst Macquarie Research Equities. The price target upgrade comes to reflect the valuation accretive share-exchange transaction (at the current A$ exchange rate of US80c). The analyst have found nine reasons as to why this media company is a long term buy. The suite of drivers for NWS remains considerable, with cable programming on track for 25% growth year-on-year in FY07, considerable valuation upside from the group's internet properties, and ongoing capital management driving additional EPS growth. With these growth numbers, excellent balance sheet, inclusion on the S&P ASX 200 at around 70bp on 15 June (rising to 130bp in March), an internet presence first through MySpace and now the joint venture with NBCUniversal, NWS is still the standout buy for fundamental reasons in the universe of Australian media stocks. Tomorrow, 3 April, News Corporation will hold a shareholder vote on the share exchange transaction with Liberty Media. As a reminder, the proposed share exchange transaction will take the form of a swap of the Liberty shareholding for:

(1)The NWS holding of 38.4% in DirecTV.
(2)Three regional sports networks.
(3)Cash of ~US$587m, subject to a working capital adjustment.

Considering the stock has fallen 7% in recent months, now could be an opportune time to position yourself ahead of what looks to be shaping up as a pretty impressive year for NWS shares.

The exchange is a good deal for both NWS and Liberty shareholders (especially given the positive taxation implications for both companies). For NWS, Liberty is removed on EPS and valuation accretive terms. Most significantly, perhaps, it sets up the company for 34% FY08 EPS growth. The share-exchange transaction is around 9% EPS accretive and adds incrementally to an earnings growth outlook dominated by cable network programming.

In summary, the analyst sees:
(4) DirecTV swapped-out. Positive, as it removes the one-way platform and reduces the share count by 16% via the share-exchange tx with Liberty.
(5) Capital management continues. US$3.4bn authorised stock repurchase delivers a further incremental boost to what was already a strong EPS growth outlook for FY07 and (6) FY08. With NWS net debt at ~US$6bn, the company remains very conservatively geared and the potential for further capital management remains.
(7) Cable business to double over three years. This is driven by uplift subscription rates across the Fox cable platform including FOX News, Fox Entertainment and Fox Sports, as well as the launch of FOX Business News channel, with the launch of the Fox Big TEN channel.
(8) Film remains healthy as DVD sales leverage theatrical success of FY06.
(9) Fox Interactive Media/MySpace. A growing centrepiece (with significant user base growth, valuation upside). By way of illustration, the US$900m Google deal will start contributing in earnest from FY08 onwards (US$50m in FY07, US$250m in FY08, US$300m in FY09, up to FY10, at which point the deal may be extended). Additionally, the News joint venture deal with NBC Universal (a rival TV/movie producer) may be a strategically important move.

News Corporation, Inc. (NWS) have a Buy 1 share trading recommendation and an increased price target of $27 from analyst UBS. The analyst has commented that the share buyback is an important catalyst for News Corp shares. Television Weakness as Anticipated; Expect 2H07 Improvement Revenue grew 17.7% to $7.84 billion (UBSe $7.23 billion), operating income grew 24.3% (12.2% excluding $99 million redundancy charge in F2Q06) to $1.14 billion (UBSe $1.10 billion) and adjusted EPS grew 19.0% to $0.26 per diluted share (UBSe $0.25) led by strength at Filmed Entertainment and Fox Interactive Media (FIM) as well as improvement at Sky Italia. Television saw weaker performance as anticipated driven by MyNetworkTV and Cable Network operating income lagged expectations on expense timing. The analyst expect improvement at both segments in the second half of fiscal 2007 on improved ratings at the FOX Broadcast Network, a rebound at STAR on key programming and a reversal in expense timing at Cable Nets. FIM revenue grew 70% in the quarter to $125M led by MySpace, which saw revenue triple year over year. Management noted that FY07 FIM revenue is pacing ahead of $500 million guidance (UBSe $531 million). Further, management implied that segment revenue could double in FY08 (approximately $1 billion in revenue) driven by the MySpace/Google partnership with a 20% segment operating margin target that may prove conservative. The analyst is raising our FY08 FIM revenue estimate to $900 million from $800 million and our operating income estimate to $135 million from $80 million. They have increased our FIM segment valuation to $3.38 billion from $2.0 billion, maintaining our 25x FY08 EBIT valuation multiple. News Corp. has $3.4 billion in capacity remaining under its current repurchase plan, which it expects to employ by May 2008. In addition, the company's DIRECTV swap with LCAPA (expected in Calendar 3Q07) will result in a 16.3% decrease in outstanding shares. The company noted a leverage ratio target of 3.0x (net debt/EBITDA) versus a current 1.2x leverage ratio (below the 2.1x media industry average), which it could move toward over the intermediate term. Note that a 1.0x leverage increase would represent approximately $5.4 billion in incremental repurchases or approximately 7% of existing shares. They view the stock buyback as a meaningful catalyst for the remainder of the year and believe focus will be on cheaper NWS/A shares vs NWS as a current spread of 5.1%. They continue to view NWS/A as our top pick in the entertainment segment. UBS are moving our rating to Buy 1 from Buy 2 on greater visibility driven by organic double digit growth, no material acquisitions expected, and an accelerated return of capital program. UBS are increasing our price target to $27 from $25 given our updated FIM valuation reflecting stronger growth and higher expected profitability and our expectation of full use of the company's existing repurchase program by March 2008, which drives accretion to existing P/E metrics.They view the company's current valuation as attractive versus media peers relative to long-term operating growth prospects. Our price target is DCF based using a 9.3% WACC and 3.5% long-term growth rate.