I first came across NZME [NZX:NZM] when I was in Europe. It was the subject of a special situations report, suggesting the company’s share price could offer a bargain for global investors.
NZME was selling at multiples you’d pay for a smaller, private business — not a listed $80m+ group owning the country’s main national newspaper and leading network of radio stations.
Since then, the dividend has been reduced to repay debt, the share price has tanked as low as 37.5c, and many investors are wondering if the company has a future.
It didn’t help when the Commerce Commission blocked the proposed merger between NZME and Stuff. They were against putting the country’s major journalistic content in the hands of one provider.
The slide in traditional media has happened much faster than many expected. NZME has gone from a dividend cash cow to more of a speculative investment. And there are many questions:
- Can the company stem the bleed from its print revenue?
- Will the business grow digital channels fast enough to replace that revenue?
- Are any investors still seeing value and potential in this business?
- Is there any further opportunity to consolidate (with Stuff)?
A possible breakthrough for NZME
Well, some answers are starting to come through. And they may change the investment case for NZME. Because, whatever way you look at it, the share price is showing some value with a P/E (price-to-earnings ratio) of around 9, and a P/B (price-to-book value) of just 0.3.
Of course, the valuation of some of the media assets might be questionable in this new media environment. But the Herald is starting to show green shoots, with their new Premium online business now reaching 15,000 paid subscribers (as of 30 June). And the actual decline in revenue across the group is not dissimilar to some large power companies.
In the last half-year result to 30 June 2019, the decline in revenue to $181.1m was only 4% down on the previous.
Usefully, the business is reducing net debt. Some $8.1 million was paid down in this period. The reduction of debt should help improve profits as it reduces interest cost.
It is interesting to note that some large investors are seeing value in NZME.
At the end of October, the company announced that Spheria Asset Management had increased its holding in NZME from 8.83% to 10.28%.
Spheria are based in Sydney. Their stated investment philosophy is ‘to purchase securities where the present value of future free cash flows can be reasonably ascertained and the security is trading at discount to their intrinsic value.’
This week, any discount on NZME became more interesting.
The sale of Stuff to NZME from Nine Entertainment could be back up for discussion. And to get it over the regulatory line, there is talk of a ‘Kiwishare’ model, where the media and editorial functions are ring-fenced and separated out to ensure independence.
This could answer the Commerce Commission’s key concern on journalistic monopoly.
A way forward for NZME
NZME has made disclosure on the media reports as follows:
‘NZME confirms that it is in discussions with Stuff’s owners Nine and has put a proposal to the Government regarding a possible transaction. However, NZME notes that these discussions are preliminary and stresses that no decision has been made in relation to any potential transaction. There can be no certainty at this stage that these discussions will result in any transaction.’
It seems to me there should be some support from the government now.
Local media revenues are being cannibalised by big global players such as Facebook, Netflix and Google. Even smaller players like The Guardian are stepping in to cover Kiwi news.
It’s not in the national interest to see local media companies struggling. It threatens news coverage across the board. An NZME–Stuff merger would help create a strong enough group to keep reporting local. And with more of a financial moat to address the structural decline of traditional media.
The bottom line
But it remains to be seen whether NZME can resurrect its share price, even with Stuff. A purchase of Stuff may push restoration of the dividend even further out.
For now, NZME appears to be a speculative investment since there are so many unknowns. But for this reason, it provides some rare value on an otherwise pricey exchange. And by the looks of things, we could be nearing the bottom of the downside, with upside ahead.
As I write, the share price is climbing again.
Simon Angelo owns shares in NZME [NZX:NZM]