S AI B U S RESEARCH News Corporation (NWS & NWSA) February 27, 2018

News Corporation: Can News Corp’s Assets Perform

According to their Maximum Potential? Neutral

We are initiating coverage on News Corporation (NWS & NWSA) with a Neutral rating and a fair value target share price of $14. News Corp offers investors a 1.5% dividend yield, a dividend coverage ratio of 1.57X based on its trailing 12 month adjusted free cash flows, an 18% discount to its book value and a liquid balance sheet (its cash balance is nearly 85% of its combined debt and retirement benefit liability balances). We agree with Warren Buffett’s conclusion that News Corp is one of two diversified media companies that have an assured future due to its ownership of Dow Jones & Company, the publisher of The Wall Street Journal, Barron’s and other vital products and services geared towards financial professionals and wealthy individuals. However, we can only rate News Corp as a neutral at this time based on its low returns on investment capital (5%) and its recurring pattern of “non-recurring charges”.

Source: Morningstar Direct and our Estimates

The six most attractive catalysts for investing in News Corp’s stock are as follows:

• Strong double-digit revenue and adjusted EBITDA growth from its digital real estate services subsidiaries

• Solid 3.7% revenue growth from Dow Jones & Company due to increased circulation revenues and growth in professional fees from Dow Jones Risk & Compliance

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• News Corp’s liquid balance sheet ($1.6 Billion in cash is 85% of its combined gross debt and retirement benefit liability balances) gives it more flexibility with its free cash flows than its peer group

• Growth potential at its Australian subscription video services (3% Adjusted Revenue Growth in H1 2019 plus further growth from the launch of its new Kayo Sports platform)

• Revenue stability at its Book Publishing division (4.85% compounded annual growth since 2013 due to new releases and contributions from its 2015 acquisition of Harlequin)

• News Corp’s share price is at an 18% discount to its book value

Source: News Corp’s FQ2 2019 Report

The four most prominent challenges News Corp’s investors must consider are as follows:

• Revenue declines from legacy print media products and News America Marketing

• Frequent impairment charges ($2.6 Billion in the last three years) since its 2013 spin-off from 21 st Century Fox (FOXA)

• News Corp’s News & Information Services division’s Adjusted EBITDA Margin is significantly below that of other diversified news media companies

• Foreign currency headwinds from a strong U.S. Dollar offsetting growth in its U.K. and Australian operations

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News Corporation is the largest diversified print media company as measured by market capitalization. News Corp acquired Dow Jones & Company in 2007, which gave it control over The Wall Street Journal, Barron’s and Dow Jones’s suite of consumer and professional finance information products and services. News Corp’s fasted growing division is its digital real estate services division, which consists of majority ownership of two digital real estate companies (Move and REA Group). News Corp’s Book Publishing Division consists of HarperCollins and its various subsidiaries, which collectively comprise the second largest consumer book publisher in the world. News Corp’s Subscription Video Services division includes ownership of the Australian News Channel, Fox Sports Australia and a 65% stake in Australian pay television operation Foxtel. News Corp also owns and operates other diverse regional and national media operations in Australia, the United Kingdom, Ireland and the U.S.

Source: Morningstar Direct

Executive Co-Chairman Rupert Murdoch established News Corporation in 1980 as a holding company for the Murdoch family’s diverse news media operations. News Corporation separated itself into two media companies (21 st Century Fox) and the new News Corp in 2013. 21 st Century Fox consisted of legacy News Corporation’s film and television operations whereas the new News Corp contained the publishing and Australian broadcasting assets. The Murdoch family still retains 40% voting control over both companies. Robert Thomson serves as CEO of News Corp since its 2013 spin-off from legacy News Corporation and previously served as Managing Editor of The Wall Street Journal from 2008 to 2013. Rupert Murdoch and his two sons Lachlan and James serve on the board. High profile non-family board members include former New Hampshire Senator Kelly Ayotte, former Spanish Prime Minster José María Aznar and former New York City Department of Education Chancellor Joel Klein.

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News Corp’s recent earnings report shows its financial performance meets our expectations. News Corp’s revenue adjusted for the impact of acquisitions, divestitures and currency fluctuations grew by 3.55% in H1 2019 on the strength of 11% revenue growth from Digital Real Estate Services, 6.2% revenue growth from its Book Publishing division and 3.7% revenue growth from Dow Jones. Dow Jones’s Risk & Compliance business generated 26% revenue growth in the recent quarter, which represented the seventh straight quarter of 25%+ growth. Reported revenue and EBITDA grew by 21.5% and 26% respectively due to the aforementioned organic growth performance trends as well as incremental contributions from its April 2018 consolidation of Foxtel. We expect that the management changes at Foxtel and Fox Sports Australia as well as the new sports streaming product Kayo Sports should help it generate the 5% revenue growth we are targeting from its Subscription Video Services division during the 2019-2025 periods.

While we rate News Corp as a Neutral, we believe Lee Enterprises (LEE) still offers a more attractive total return investment opportunity to investors in the news media industry than News Corp. Although News Corp’s has a strong revenue trend and balance sheet than LEE, LEE’s steady digital revenue growth and balance sheet deleveraging offers greater potential for PE expansion than investors can expect from News Corp. We also noted the following areas where LEE actually outperformed News Corp:

• LEE’s Adjusted Enterprise Value to Adjusted EBITDA minus CapEx of 5.3X is half of News Corp’s 10.9X

• LEE’s ROIC of 17.55% is higher than News Corp’s 5%

• Even though LEE relies more on the out-of-favor sector of the media industry (regional and community news media print operations) than News Corp, LEE’s adjusted EBITDA Margin of 21.55% greatly exceeds the 12.32% of News Corp’s consolidated operations and the 8% from News Corp’s News and Information Services division

• LEE has been profitable on a GAAP reported income basis over year over the last five years ($149 Million since the beginning of FY 2014) whereas News Corp reported $1.77 Billion in losses since then due to various “non-recurring impairment charges”

We are initiating coverage of News Corp as a Neutral. We like its healthy, liquid balance sheet and we expect continued growth from its digital real estate, subscription video services and Dow Jones operations. However, News Corp’s low ROIC, frequent “non-recurring impairment

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charges” and slow organic growth trends prevent us from giving it a rating higher than Neutral. We would interested in seeing how the company would take shape once Rupert Murdoch cedes control of the company to his son Lachlan , perhaps News Corp would shed money losing assets such as the New York Post.

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DISCLOSURES

Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. This report is confidential and may not be distributed without the express written consent of the original author and does not constitute a recommendation, an offer to sell or a solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential private offering memorandum.

Investments may currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed in this letter for any reason. The author hereby disclaims any duty to provide any updates or changes to the information contained here including, without limitation, the manner or type of any of the investments.

All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and all of the subject securities or issuers. The research analyst is not registered with FINRA, and may not be subject to FINRA rule 2711 restrictions on communicating with the subject company, public appearances, and trading securities held in the research analysts’ account. No part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. The analyst responsible for the production of this report certifies that the views expressed herein reflect his or her accurate personal and technical judgment at the moment of publication.

Under no circumstances must this document be considered an offer to buy, sell, subscribe for or trade securities or other instruments.

Disclosure: Analyst covering this company is long LEE.

RECOMMENDATION SCALE

INVESTMENT RATING DEFINITION Stocks expected to be 20% underpriced relative to its intrinsic value and whose total STRONG BUY return is expected to significantly exceed the market index benchmarks. Stocks expected to be at least 10% underpriced relative to its intrinsic value and ACCUMULATE whose total return is expect to exceed the market index benchmarks. Stocks expected to be fairly priced relative to its intrinsic value and whose total NEUTRAL return is expected to closely track the market index benchmarks. Stocks expected to be slightly overpriced and to either potentially see a small, AVOID incremental decline in its price to converge with its intrinsic value or expected to appreciate at a slower pace relative to the market index benchmarks. Stocks expected to be strongly overpriced and to potentially see a rapid decline in STRONG SELL price to converge with its intrinsic value or expected to significantly underperform relative to the market index benchmarks. Relevant benchmarks: In North America, the relevant benchmark is the S&P 500 Index

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