09 September 2014 Asia Pacific/Australia Equity Research New Media / Publishing & Information Services (Media (AU)) News Corporation (NWS.AX / NWS AU) Rating OUTPERFORM* FORECAST REDUCTION Price (09 Sep 14, A$) 18.60 Target price (A$) 21.27¹ Market cap. (A$mn) 10,929.69 Foxtel price changes a major strategic shift Yr avg. mthly trading (A$mn) 75 Last month's trading (A$mn) 58 ■ Price cuts negative for Foxtel's valuation. The recent Foxtel price Projected return: reductions represent a significant shift in strategy. Foxtel is accepting lower Capital gain (%) 14.4 near-term ARPU in order to shore up its existing subscriber base and drive Dividend yield (net %) 0.69 Total return (%) 15.0 subscriber growth longer term. The move is negative for our Foxtel earnings 52-week price range 20.2 - 17.0 forecast and valuation, but positive for Fox Sports. * Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. ■ Step down in ARPU. We expect the price changes to result in a c12.5% reduction in Foxtel ARPU to A$84 (from A$96 in FY14). We assume 50% of Research Analysts customers 'bank' the A$24 savings on the base price (reduced from A$49 to Fraser McLeish 61 2 8205 4069 A$25) and 50% pay the same but take more channels (lower margins as [email protected] Foxtel will incur more content costs). We model core subscriber growth to Lucas Goode pick up to 5% p.a. over FY15-19F (c8% including T-box, Play and Presto). 61 2 8205 4431 [email protected] ■ Reduce earnings forecasts. We reduce Foxtel's FY15F EBITDA by 17% to A$911mn (versus A$1094mn previously) and FY16F to A$729mn. Our Foxtel DCF valuation (100%) falls to A$5.1bn (vs A$6.2bn previously) on lower earnings and capex for iQ3. We increase our Fox Sports subscriber forecasts and EBITDA to US$141mn in FY15F (10% growth) and US$155mn in FY16F. Our Fox Sports valuation increases to US$1.46bn (vs US$1.17bn previously). ■ Maintain OUTPERFORM. Our NWS target price of A$21.27 is unchanged as the lower Foxtel valuation is offset by increases in Fox Sports and REA (due to higher share price). Our target price is at a 20% discount to valuation to reflect corporate structure and limited disclosure. News Corp has some valuable assets, which we believe are undervalued in the current share price and we see scope for re-rating on continued improvement in operating performance. Total return forecast in perspective Financial and valuation metrics 40% Year 06/14A 06/15E 06/16E 06/17E 30% Revenue (US$mn) 8,574.0 8,857.6 9,064.5 9,405.4 20% EBITDA (US$mn) 842.0 973.4 1,086.6 1,279.7 CS tgt^ Mean^ 10% EBIT (US$mn) 264.0 379.7 498.9 695.3 0% Sh Prc Net income (US$mn) 270.0 306.7 306.8 418.7 -10% EPS (CS adj.) (USc) 46.59 52.92 52.95 72.25 -20% Change from previous EPS (%) n.a. -10.0 -26.3 -20.3 -30% Consensus EPS (USc) n.a. 47.60 57.00 76.40 12mth Volatility* 52wk Hi-Lo IBES Consensus EPS growth (%) -24.5 13.6 0.1 36.5 target return^ P/E (x) 37.0 32.6 32.6 23.9 Dividend (USc) — 10.00 20.00 30.00 Performance over 1M 3M 12M Dividend yield (%) — 0.6 1.2 1.7 Absolute (%) 3.9 2.2 4.6 P/B (x) 0.75 0.74 0.72 0.71 Relative (%) 0.7 -0.6 -3.7 Net debt/equity (%) net cash net cash net cash net cash Relative performance versus S&P ASX 200.See Reference Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against Appendix for a description of the chart. Source: Credit Suisse ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency estimates, * Consensus, mean range from Thomson Reuters DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 09 September 2014 Figure 1: NWS – Financial summary News Corporation (NWS)2013 2014 2015 Year2016 ending 302017 Jun 2013 2014 In USDmn,2015 unless 2016otherwise stated2017 Share Price: A$18.60 9/09/2014 17:36 Earnings 06/13A 06/14A 06/15E 06/16E 06/17E Rating OUTPERFORM c_EPS_SHARESEquiv. FPO (period avg.) mn 578.5 579.5 579.5 579.5 579.5 Target Price A$ 21.27 c_EPS*100EPS (Normalised) c 61.7 46.6 52.9 52.9 72.3 vs Share price % 14.35 EPS_GROWTH*100EPS Growth % -24.5 13.6 0.1 36.5 SOTP A$ 23.65 c_EBITDA_MARGIN*100EBITDA Margin % 9.8 9.8 11.0 12.0 13.6 News Corporation is a diversified media conglomerate. It's activities include newspaper c_DPS*100DPS c 0.0 0.0 10.0 20.0 30.0 publishing, book publishing, cable network programming, subscription television broadcasting, c_PAYOUT*100Payout % 0.0 0.0 18.9 37.8 41.5 digital real estate services & educational content and analytics. FRANKING*100Franking % 0.0 0.0 0.0 0.0 0.0 c_FCF_PS*100Free CFPS c 29.2 82.0 68.7 120.0 148.6 Profit & Loss 06/13A 06/14A 06/15E 06/16E 06/17E c_TAX_RATE*100Effective tax rate % -512.3 141.9 30.1 26.2 29.1 Sales revenue 8,891.0 8,574.0 8,857.6 9,064.5 9,405.4 Valuation EBITDA 871.0 842.0 973.4 1,086.6 1,279.7 c_PE P/E x 27.9 37.0 32.6 32.6 23.9 Depr. & Amort. (548.0) (578.0) (593.8) (587.7) (584.4) PEG PEG x -1.9 -1.5 2.4 615.4 0.7 EBIT 323.0 264.0 379.7 498.9 695.3 c_EBIT_MULTIPLE_CURREV/EBIT x 13.1 21.2 37.0 24.2 18.0 Associates 0.0 0.0 0.0 0.0 0.0 c_EBITDA_MULTIPLE_CUEV/EBITDA x 4.1 3.6 3.8 3.5 3.1 Net interest Exp. 77.0 68.0 78.6 77.5 92.7 c_DIV_YIELD*100Dividend Yield % 0.0 0.0 0.6 1.2 1.7 Other 0.0 0.0 0.0 0.0 0.0 c_FCF_YIELD*100FCF Yield % 1.7 4.8 4.0 7.0 8.6 Profit before tax 400.0 332.0 458.3 576.3 788.0 c_PB Price to Book x 0.8 0.8 0.7 0.7 0.7 Income tax (102.0) (97.0) (138.0) (151.0) (229.5) Returns Profit after tax 298.0 235.0 320.3 425.3 558.6 c_ROE*100Return on Equity % 2.8 2.0 2.3 2.2 3.0 Minorities (41.0) (55.0) (66.6) (81.5) (116.7) c_I_NPAT/c_I_SALES*100Profit Margin % 4.0 3.1 3.5 3.4 4.5 Preferred dividends 0.0 0.0 0.0 0.0 0.0 c_I_SALES/c_B_TOT_ASSAsset Turnover x 0.6 0.5 0.5 0.5 0.5 Associates & Other 100.0 90.0 53.0 (36.9) (23.2) c_ASSETS/c_EQ_COMMONEquity Multiplier x 1.2 1.2 1.2 1.2 1.2 Normalised NPAT 357.0 270.0 306.7 306.8 418.7 c_ROA*100Return on Assets % 2.3 1.6 1.8 1.8 2.4 Unusual item after tax 149.0 (31.0) 0.0 0.0 0.0 c_ROIC*100Return on Invested Cap. % 2.3 1.8 2.5 3.6 4.9 Reported NPAT 506.0 239.0 306.7 306.8 418.7 Gearing (SUM (Net c_BORROW, Debt to Net -c_B_CASH debt + Equity , -c_B_CASH_OPER,% Net Cash -c_B_RESTR_CASH,Net Cash Net c_NET_DEBT_ADJ)Cash Net Cash /Net SUM Cash (c_EQ_SUM, c_BORROW, -c_B_CASH , -c_B_CASH_OPER, -c_B_RESTR_CASH, c_NET_DEBT_ADJ))*100 Balance Sheet 06/13A 06/14A 06/15E 06/16E 06/17E SUM ( Netc_BORROW, Debt to EBITDA -c_B_CASH , -c_B_CASH_OPER,x Net Cash -c_B_RESTR_CASH,Net Cash Net c_NET_DEBT_ADJ)/c_I_EBITDA Cash Net Cash Net Cash Cash & equivalents 2,381.0 3,145.0 3,099.1 3,708.0 4,424.7 c_I_EBITDA/Int Cover c_I_NET_INTEREST (EBITDA/Net Int.) x -11.3 -12.4 -12.4 -14.0 -13.8 Inventories 301.0 310.0 299.9 306.9 318.4 c_I_EBIT/Int Cover c_I_NET_INTEREST (EBIT/Net Int.) x -4.2 -3.9 -4.8 -6.4 -7.5 Receivables 1,582.0 1,454.0 1,576.1 1,612.9 1,673.5 (c_C_CAPEX/c_I_SALES)*-100Capex to Sales % 3.7 4.4 4.5 3.6 3.2 Other current assets 379.0 361.0 361.0 361.0 361.0 (c_C_CAPEX/c_I_DEPR)*-100Capex to Depreciation % 60.6 65.6 67.4 56.1 51.3 Current assets 4,643.0 5,270.0 5,336.0 5,988.7 6,777.7 MSCI IVA (ESG) Rating Credit Suisse View Property, plant & equip.