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NZME Long Thesis

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As I scour the world for opportunity, I’m usually looking at macro themes or misplaced pessimism or some other reason for an asset’s current undervaluation with an eventual catalyst. Sometimes, in that process, I simply stumble upon something that is unusually cheap. Normally I choose not to write about these, because being cheap tends to be boring—especially if there’s no added story. After some urging from friends, I intend to write about more of these situations. As always, the hard analytical work is up to you—I’m merely the messenger regarding the situation.

tpsdave / Pixabay

NZME LTD (NZM: Australia) is one of New Zealand’s largest media conglomerates, operating in print, radio and online. In a typical day, by 9am 73% of New Zealanders have engaged with NZME in some way. Every investor hates print newspapers, but New Zealand is somewhat insulated from the forces that have destroyed US papers as there just aren’t that many other options to get domestic news—especially regional news—as opposed to the tens of thousands of options in the US. As a result, while print subscriptions are declining, overall readership is increasing due to online penetration—leading to a slow decline in revenue with a more constant overall EBIT profile. Meanwhile, radio has been more constant, adjusting for some recent volatility in how sales were organized. I expect other business segments to have a negligible impact on the consolidated business. Overall, I don’t expect anything particularly momentous for this business. Results will probably range between meh and bleh, with a focus on cost cutting to offset future revenue declines—which likely leads to rather stable EBIT. In the end, advertisers in New Zealand have a rather constant annual marketing budget and there are only so many channels to push it through. Given NZME’s market penetration, it’s likely to absorb a roughly constant percentage of this revenue over time.

In summary, this is a somewhat boring cash cow which wouldn’t get my attention except for four unique facts. To start with, at Friday’s closing price of AUD $0.66, the shares change hands at roughly four times cash flow. The company reported earnings on Friday and I was pleasantly surprised at the results. I even bought a few more and I almost never pay up above my cost basis. Secondly, studies have shown that spin-offs tend to out-perform the market both for share-price performance and for operating performance in their first few years. This is because new management has greater control of resource allocation and decision making once removed from the parent. Thirdly, now that the spin-off has completed, the company has increased its dividend and the shares are now trading at a 14.4% dividend yield. 6 cents of that dividend will be paid to you in about 6 weeks, which reduces your total cost basis by almost 9%. With its high dividend yield, NZME is likely to be noticed by an increased investor base whereas the prior dividend rate didn’t scan well. Finally, NZME is in talks with Fairfax NZ over a highly accretive merger. Regulators have issued a preliminary decision to decline this merger over fears of market share dominance. I suspect that their final decision will be the same. However, if they agree to go ahead, the shares are worth a few times today’s quote. Otherwise, I don’t see why NZME with its low financial leverage and high payout ratio, cannot trade for around 10 times cash flow, or more than a double from today’s prices, while paying you a dividend while you wait.

Disclosure: Long NZM AU

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