Company Overview: Twenty-First Century Fox, Inc. is a media and entertainment company. The Company's segments include Cable Network Programming; Television; Filmed Entertainment, and Other, Corporate and Eliminations. The Cable Network Programming segment produces and licenses news, business news, sports, general entertainment, factual entertainment and movie programming for distribution. The Television segment is engaged in the operation of broadcast television stations and the broadcasting of network programming in the United States. The Filmed Entertainment segment is engaged in the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media, and the production and licensing of television programming around the world. The Other, Corporate and Eliminations segment consists primarily of corporate overhead and eliminations, and other businesses.
 

FOXA Details
 
Despite some headwinds, Twenty-First Century Fox Inc (NASDAQ: FOXA) seems to be having an above industry average subscription based revenue growth profile at the back of strong mix of sports and news content, while the footprint in terms of global channels and digital distribution continues to expand.

Decent EBITDA growth: FOXA had delivered an EBITDA growth of 9% year on year (yoy) during FY17 boosted by 8% global affiliate fee rise coupled with 5% rise in global advertising revenues. The group reported an income from continuing operations attributable to shareholders of $3 billion this year or $1.61 per share, while adjusted EPS reached $1.93 this year, which is a rise of 12%. The group managed to deliver a top line rise of 2% in the fourth quarter of 2017 boosted by double-digit growth of cable networks segment.
 

FY17 performance (Source: Company reports)
 
Solid cable network and domestic channels performance: The group delivered a cable network segment’s EBITDA rise of 19% yoy to $1.44 billion in the fourth quarter of 2017 while revenues rose 10% on a yoy basis. The Domestic cable revenue enhanced 10%, boosted by accelerated affiliate fee growth of 10% while advertising enhanced 6%. The affiliate fee performance was driven by the renewal of two major affiliate agreements coupled with the advertising rise on the back of better ratings and pricing at Fox News. EBITDA of domestic channels surged 22% on a yoy basis. International cable revenues surged 11% during the quarter boosted by 9% rise in affiliate revenue coupled with 9% growth in advertising revenues, driven by STAR’s current year broadcast of the ICC Cricket Champions Trophy. International EBITDA enhanced 6% on a yoy basis driven by contributions from FNG International which were partially offset by decline in contributions from Star on the back of the rising Champions Trophy costs.
 
Ongoing pressure in TV segment: Television segment EBITDA fell 5% on a yoy basis to $137 million during the fourth quarter for 2017. Falling Lower advertising revenues due to decline in primetime ratings, including comping against the final season of American Idol and a softer local advertising market, led to the weakness. Film segment delivered an EBITDA loss of $22 million during the fourth quarter of 2017 as compared to $164 million in profits a year ago. Moreover, the group witnessed lower TV library contributions from international markets. The group is not broadcasting the Super Bowl in fiscal 2018. The group is also expecting one less additional NFL divisional playoff game and it's an off-cycle political year. Moreover, the group is not expecting an epic seven-game World Series nor any local station revenue from spectrum use, both of which were in fiscal 2017.
 
Built a diversified business: The group built a diversified base having a portfolio in cable, film, broadcast, pay TV and satellite assets. The group has 28 full power broadcast television stations, which comprise 11 duopolies, in the U.S.; and of these stations, 17 are affiliated with the FOX Broadcasting Company (“FOX”), nine affiliated with Master Distribution Service, Inc. (“MyNetworkTV”), one is affiliated with both The CW Television Network and MyNetworkTV and one is an independent station. Their new digital MVPD market has won more than 2 million subscribers at domestic market.Their Comcast Xfinity is an on-demand ad free viewing experience with access to more than 30 current and back library FX and FX's Originals for just $5.99 a month. The group launched Fox Plus and Fox Premium in Europe, Asia and Latin America. In India, their Hotstar crossed 1 billion minutes of watch time in a single day during the fourth quarter. Hotstar watch time surged 300% as compared to the prior corresponding period.
 
Strong Cricket portfolio: The group’s Star Sports, Cricket portfolio is very strong. They are on track to achieve $500 million profit of EBITDA by next year. The Star India has won the VIVO Indian Premier League's (IPL's) Global Media and Digital broadcast rights for the five-year period from 2018 to 2022. The also group made a consolidated bid of INR 16,347.50 Crore; and this win represents the solid competitive edge the group has in the fast-growing market. On the other side, the broadcasts of Super Bowl LI and the Major League Baseball (“MLB”) World Series were successful in leading to the most watched baseball game in a quarter century. This enhanced the Fox Sports broadcast viewership by over 25% as compared to the earlier year driving a 20% rise in television segment contributions.
 

Financial Parameters (Source: Company Reports)
 
Outlook: The group expects their cable networks’ positive momentum to continue for FY18 and forecasts that every quarter of the year would show at least high single-digit domestic affiliate fee growth. The growth would be underpinned by locked-in contracts. As per their International performance, they forecast a solid revenue growth, boosted by Star advertising which would continue to drive their market leading organic ad growth. But on the cable network cost side, the group forecasts over mid-single-digit expense growth from the core operations. On the other hand, the group has two new sports agreements to the roster, especially the Big Ten and the Argentine Football Association, as well as is broadcasting the next cycle of the World Cup, which would bridge FY 2018 and 2019. These new sports events would also lead to rising overall expense growth to the high single-digit range. The group expects the segment reported expense growth by over two percentage points. They expect to continue their double-digit retransmission consent growth as well as the ad revenue impact of the new sporting events. The Segment expenses are forecasted to be flat as compared to the prior year, given the low single-digit core growth and the impact from the new World Cup and Big Ten broadcasts offsetting the absence of the Super Bowl. With regards to the Film segment, management believes that they have a promising line up of television series and film releases. This segment also made inaugural investments into mobile game development post the acquisition of Aftershock. 
 

Dividend Growth (Source: Company Reports)
 
Stock performance: The shares of FOXA edged slightly lower (0.8%) in the last one year (as on November 02, 2017) on concerns of declining TV advertising revenues. On the other hand, the group generated a solid cash flow generation during FY17, and delivered $3.4 billion in cash from operations less CapEx, which is a 22% rise against the same period last year. The group holds $6.2 billion in cash and only over $20 billion in debt. The group intends to acquire Sky PLC if approved by British regulators in the first half of 2018. They offered $15 billion to acquire the rest of the 61% of Sky PLC. The capital allocation makes the group well positioned to fund the Sky acquisition. The group is diversifying their portfolio and targeting for growth areas in Media. Investments in their core video brands which are witnessing solid domestic affiliate fee gains, reaching 10% for the most recent quarter, is a key aspect to note. The group’s Fox News Channel was the most watched basic cable network during FY17 and achieved the highest-rated quarter ever in 24-hour viewership. While headwinds on soft NFL ratings and risk around Sky transaction prevail, strong performance for domestic Cable Networks from affiliate renewals and growth in virtual MVPDs coupled with renewed momentum at STAR India, gives a long-term opportunity for earnings growth. We give a “Buy” recommendation on the stock at the current price of USD 25.98 , ahead of the first quarter of 2018 results to be released on November 08, 2017.
 
FOXA Daily Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.