Wall St Speaks Out on Twenty-First Century Fox Inc - David Bank, RBC Capital Markets

Key points All Eyes On FY16 EBITDA Guide Heading Into EarningsKey factors include level of investment in India supporting longerterm growth such as Kabaddi league timing of studio PampampA Ice Age 5 and Independence Day 2 majority of Box Office in FY17 but PampampA spend in FY16 sustainability of Domestic RSN and FS1 affiliate fee growth content spend and ratings at Fox Broadcast Network We believe investor quotoverunderquot is 70bn and is quotdoablequot Additionally we hope to get further color on the sustainability of affiliate fee growth and operating leverage gains in IndiaAdTech Likely Key To Longterm Monetization StrategyJames Murdoch is an industry thought leader on how technology could drive lower ad loads and higher engagement and CPMs than the current linear TV ecosystem affords Recently acquired TrueX is a digital quotharbingerquot for this giving consumers a choice on how to view ad supported content normal interstitial ad load or two minutes engaging with an upfront advertisement It provides advertisers a more engaged consumer and more granular data and the media owner materially higher CPMs While integration into linear TV settop box is years away management could use this as a factor in migrating content to IP streams and monetizing itDon39t See Any MampampA Elephants On The Horizon Believe FOXA Is A Better Seller Than Buyer For SkyThe 39 Sky ownership stake is incongruous to FOXA39s typical desire to own quotall or nonequot so we see FOXA as likely a buyer or sell over the longterm With no obvious quoturgencyquot to resolve Sky expressed we see resolution later rather than sooner Since synergies in panEuropean platform are expected to materialize driving value longerterm we suspect that if FOXA isn39t a buyer nearterm it39s likely a sellerSupport for Buyback with Potential for UpsideWe see no reason to expect a change in FOXA39s previous net leverage targets 25x30x gross leverage 23bn of cash Given current leverage 29x cash balance 9bn and FY16 free cash flow management provided guidance in 4QF14 that FY16 working capital usage would normalize capacity to maintain the buyback at the current pace 6bn is ample with potential for upside As such we are increasing our FY16 buyback estimate to 6bn from 5bnValuationOur valuation methodology derives a 39 price target for 21st Century Fox To reach our price target we average our EPS multiple DCF and sumoftheparts valuationWe apply an EPS multiple of 17x to our CY16 in the context of 3year EPS CAGR estimated to be in that range We apply an Effective Total Company CY16 EBITDA multiple in our SOP analysis of 13x in the context of 3year EBITDA CAGR estimated to be in that rangePrice target impediments A decline in advertising expenditures could materially affect 21st Century Fox39s operating results 21st Century Fox39s business has significant exposure to overall advertising expenditures An adverse change or decline in overall advertising expenditures could negatively affect many of the company39s business unitsThe loss of carriage agreements presents risk Several of 21st Century Fox39s businesses depend heavily on the carriage of the company39s channels on multisystem operators MSOs A loss of these carriage agreements could adversely affect both affiliate and advertising revenue which comprise a substantial portion of the company39s total revenueThe loss of sports programming rights presents risks The sports rights contracts among 21st Century Fox and various sports leagues all have finite time periods and are offered for renewal when expired however risks exist that these contracts may not be renewed on similarly favorable terms or that 21st Century Fox may be outbid and lose the rights entirely A loss of one or more significant sports contracts could negatively affect the companyamp8216s operating resultsGrowth in piracy could threaten 21st Century Fox39s business 21st Century Fox39s business depends heavily on the protection of its intellectual property A significant growth in the distribution of the company39s intellectual property by others without proper authorization or compensation piracy could materially affect the company39s operating resultsAll values in USD unless otherwise notedPriced as of prior trading day39s market close EST unless otherwise statedFoxA Price Target USD 3900Link to Full Research Report including Required Disclosures and Disclaimeramp160

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Wall St Speaks Out on Twenty-First Century Fox Inc - David Bank, RBC Capital Markets

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