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

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On 7/1/15, James Murdoch Became CEO--We expect continuity in operating and capital allocation discipline with a focus on the evolving ecosystem.

Key points:

All Eyes On FY16 EBITDA Guide Heading Into Earnings--Key factors include level of investment in India supporting longer-term growth (such as Kabaddi league), timing of studio P&A (Ice Age 5 and Independence Day 2 -- majority of Box Office in FY17, but P&A spend in FY16), sustainability of Domestic RSN and FS1 affiliate fee growth, content spend and ratings at Fox Broadcast Network. We believe investor "over/under" is ~$7.0bn and is "doable". Additionally, we hope to get further color on the sustainability of affiliate fee growth and operating leverage gains in India.

AdTech Likely Key To Long-term Monetization Strategy--James 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 "harbinger" 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 set-top box is years away, management could use this as a factor in migrating content to IP streams and monetizing it.

Don't See Any M&A Elephants On The Horizon, Believe FOXA Is A Better Seller Than Buyer For Sky--The 39% Sky ownership stake is incongruous to FOXA's typical desire to own "all or none" so we see FOXA as likely a buyer or sell over the long-term. With no obvious "urgency" to resolve Sky expressed, we see resolution later rather than sooner. Since synergies in pan-European platform are expected to materialize driving value longer-term, we suspect that if FOXA isn't a buyer near-term, it's likely a seller.

Support for Buyback with Potential for Upside--We see no reason to expect a change in FOXA's previous net leverage targets (2.5x-3.0x gross leverage, $2-$3bn of cash). Given current leverage (~2.9x), 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 $5bn.


Our valuation methodology derives a $39 price target for 21st Century Fox. To reach our price target, we average our EPS multiple, DCF, and sum-of-the-parts valuation.

We apply an EPS multiple of ~17x to our CY16 in the context of 3-year 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 3-year EBITDA CAGR estimated to be in that range.

Price target impediments:

A decline in advertising expenditures could materially affect 21st Century Fox's operating results. 21st Century Fox's business has significant exposure to overall advertising expenditures. An adverse change or decline in overall advertising expenditures could negatively affect many of the company's business units.

The loss of carriage agreements presents risk. Several of 21st Century Fox's businesses depend heavily on the carriage of the company's channels on multi-system operators (MSOs). A loss of these carriage agreements could adversely affect both affiliate and advertising revenue, which comprise a substantial portion of the company's total revenue.

The 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 company‘s operating results.

Growth in piracy could threaten 21st Century Fox's business. 21st Century Fox's business depends heavily on the protection of its intellectual property. A significant growth in the distribution of the company's intellectual property by others without proper authorization or compensation (piracy) could materially affect the company's operating results.

All values in USD unless otherwise noted.

Priced as of prior trading day's market close, EST (unless otherwise stated).

FoxA: Price Target: USD 39.00

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