New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>NZME</h2>
1H19 Result — Slow News Day
We saw little in NZME’s (NZM) 1H19 result that would materially shift investor sentiment either way. Major themes are unchanged: the sharp fall in print persists, NZM continues to do a commendable job lowering costs, and progress in digital initiatives (classifieds, paywall) is incremental, but nowhere near enough for investors to start ascribing any material value. We see little near-term that will shift the market from pricing NZM as a business in structural decline.
What’s changed?
<ul>
<li>Earnings: Changes to our operating earnings principally reflect the adoption of IFRS16. Underlying changes have been modest.</li>
</ul>
Revenue down on structural and cyclical impacts
NZM’s 1H19 revenue, down -4%, reflected both the continued structural decline in print, down -7%, and cyclical softness in advertising spend. A -3% reduction in opex (predominantly labour) provided some insulation; however, the leverage through to underlying EBITDA -15% and NPAT -16% was still considerable.
Once again NZM’s print business was significantly more resilient than the broader market, with its ad revenue down -8% vs. the market -14%. Radio revenue ticked higher (just), still positive given it has been in decline for (at least) the past four years. Digital advertising was soft, down -8%, in line with NZM’s view of the market.
Progress in digital initiatives has been incremental
NZM is focussed on cultivating digital revenues. Its real estate site OneRoof has progressed since its launch in March last year. The audience has grown — weekly unique browsers up +33% in June 2019 vs. Dec. 2018, but the revenue contribution, whilst improving, remains modest at NZ$1.3m vs. 2H18 NZ$0.7m. Revenue from the other classified properties is negligible. In April NZM launched NZ Herald digital subscriptions, and now has &gt;15k subscriber which equates to revenue of c.NZ$3m pa (1H NZ$0.2m). On a run-rate basis these currently total c.1.5% of NZM’s revenue, and make a net EBIT loss of c.NZ$3–4m. They remain a fair distance from the level where investors will start to consider whether they can materially add to value of NZM.
Cyclically improved 2H expected, but structural pressures unchanged
NZM painted a picture of a more positive 2H on the back of cyclically improving advertising demand — to date 3Q advertising bookings are up +6% yoy. For the full year it is targeting the (pre IFRS16) analyst consensus of EBITDA NZ$50m (consistent with our now IFRS16 adjusted forecast). Whilst this would be welcome, we do not expect a cyclical boost will alter the structural decline being priced by the market. The company’s policy changes last year — dividend cut, focus on debt reduction, investment in digital initiatives (and away from cash flow harvesting) — lengthened the period over which investors must consider NZM, not an easy proposition given current declining profile of earnings.&nbsp;&nbsp;&nbsp;
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Investment View
NZM is inherently&nbsp;high risk with a broad range of potential value outcomes dependent on the gradient of the (inevitable) print decline, the resiliency of radio, the company’s ability to structurally lower its fixed cost base, and the success of its digital initiatives.&nbsp;We see little near-term that will shift the market from pricing NZM as a business in structural decline.
</div>
Matt Henry, CFA
matt.henry@forsythbarr.co.nz
+64 9 368 0115

NZME
1H19 Result — Slow News Day
We saw little in NZME’s (NZM) 1H19 result that would materially shift investor sentiment either way. Major themes are unchanged: the sharp fall in print persists, NZM continues to do a commendable job lowering costs, and progress in digital initiatives (classifieds, paywall) is incremental, but nowhere near enough for investors to start ascribing any material value. We see little near-term that will shift the market from pricing NZM as a business in structural decline.
What’s changed?

Earnings: Changes to our operating earnings principally reflect the adoption of IFRS16. Underlying changes have been modest.

Revenue down on structural and cyclical impacts
NZM’s 1H19 revenue, down -4%, reflected both the continued structural decline in print, down -7%, and cyclical softness in advertising spend. A -3% reduction in opex (predominantly labour) provided some insulation; however, the leverage through to underlying EBITDA -15% and NPAT -16% was still considerable.
Once again NZM’s print business was significantly more resilient than the broader market, with its ad revenue down -8% vs. the market -14%. Radio revenue ticked higher (just), still positive given it has been in decline for (at least) the past four years. Digital advertising was soft, down -8%, in line with NZM’s view of the market.
Progress in digital initiatives has been incremental
NZM is focussed on cultivating digital revenues. Its real estate site OneRoof has progressed since its launch in March last year. The audience has grown — weekly unique browsers up +33% in June 2019 vs. Dec. 2018, but the revenue contribution, whilst improving, remains modest at NZ$1.3m vs. 2H18 NZ$0.7m. Revenue from the other classified properties is negligible. In April NZM launched NZ Herald digital subscriptions, and now has &gt;15k subscriber which equates to revenue of c.NZ$3m pa (1H NZ$0.2m). On a run-rate basis these currently total c.1.5% of NZM’s revenue, and make a net EBIT loss of c.NZ$3–4m. They remain a fair distance from the level where investors will start to consider whether they can materially add to value of NZM.
Cyclically improved 2H expected, but structural pressures unchanged
NZM painted a picture of a more positive 2H on the back of cyclically improving advertising demand — to date 3Q advertising bookings are up +6% yoy. For the full year it is targeting the (pre IFRS16) analyst consensus of EBITDA NZ$50m (consistent with our now IFRS16 adjusted forecast). Whilst this would be welcome, we do not expect a cyclical boost will alter the structural decline being priced by the market. The company’s policy changes last year — dividend cut, focus on debt reduction, investment in digital initiatives (and away from cash flow harvesting) — lengthened the period over which investors must consider NZM, not an easy proposition given current declining profile of earnings.&nbsp;&nbsp;&nbsp;

Investment View
NZM is inherently&nbsp;high risk with a broad range of potential value outcomes dependent on the gradient of the (inevitable) print decline, the resiliency of radio, the company’s ability to structurally lower its fixed cost base, and the success of its digital initiatives.&nbsp;We see little near-term that will shift the market from pricing NZM as a business in structural decline.

Matt Henry, CFA
matt.henry@forsythbarr.co.nz
+64 9 368 0115

New Zealand

NZME Limited provides printing and publication services. The Company offers services of newspapers and magazines, as well as commercial printing and specialist publications.

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NZME Limited (NZM AU)

NZME: 1H19 Result — Slow News Day

NZME 1H19 Result — Slow News Day We saw little in NZME’s (NZM) 1H19 result that would materially shift investor sentiment either way. Major themes...

Forsyth Barr

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