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Funds Funds

MFS Intl Diversification R6

As expected, this fund of funds added MFS International Large Cap Value MKVHX as the sixth fund on its roster in 2020 after holding the same five funds during for its first 16 years. MFS International Large Cap Value uses a value process, while the five original funds (MFS Research International MRSKX, MFS International Intrinsic Value MINJX, MFS International Growth MGRDX, MFS International New Discovery MIDLX, and MFS Emerging Markets Equity MEMJX) use blend or growth disciplines. The 2020 expansion makes this already diversified fund even more so.

The processes of the six underlying funds are sound and complementary, and provide this fund with an edge. Steven Gorham and David Shindler of MFS International Large Cap Value look for strong fundamentals and attractive valuations as Gorham previously did with other managers at MFS Value MEIKX. The team at MFS International Intrinsic Value seeks sustainable competitive edges and other strengths. The teams at MFS International Growth, MFS International New Discovery, and MFS Emerging Markets–which previously or currently have comanagers in common–all use the same valuation-conscious quality growth discipline. The team at MFS Research International seeks fundamental strengths and reasonable valuations. And though MFS International Large Cap Value doesn’t have an Analyst Rating and thus no Process Pillar rating, MFS Value MEIKX has a Process score of High, while four of the five of this fund’s five long-time funds have Process ratings of Above Average.

Gorham and Shindler are seasoned and skilled. Gorham has a solid record as comanager on a value-oriented global fund as well as strong record a comanager at MFS Value, and Shindler has succeeded as a comanager on a U.K. large-cap strategy. The teams of the other five funds are also strong.

The Fund’s Approach

MFS International Large Cap Value MKVHX was added as the sixth strategy on this fund of funds’ roster as expected in mid-2020, and its weight was raised to its target allocation of 15% during the second half of the year. The weights in MFS International Intrinsic Value MINJX and MFS International Growth MGRDX were lowered to 15% each from 22.5% each. The weight to MFS International New Discovery MIDLX remained at 10%. The weight in MFS Research International MRSKX was lowered to 27.5% from 30.0% during the second half of 2020, while the allocation to MFS Emerging Markets Equity MEMJX was increased to 17.5% from 15%. Steven Gorham and David Shindler of MFS International Large Cap Value look for strong fundamentals as well as attractive valuations (as Gorham previously did successfully with other comanagers at MFS Value MEIKX). The team at MFS International Intrinsic Value seeks sustainable competitive edges and other strengths.

The teams at MFS International Growth, MFS International New Discovery, and MFS Emerging Markets all use the same valuation-conscious quality growth discipline. And the team at MFS Research International looks for fundamental strengths and reasonable valuations. Adding a sixth fund made sense for diversification reasons. The six underlying processes are sound, complementary, and proven, supporting an Above Average Process rating.

The Fund’s Portfolio

This fund of funds added a foreign large-value fund to its roster in mid-2020 to complement the one foreign large-blend offering, two foreign large-growth funds, one foreign small/mid- growth offering, and one diversified emerging market fund it has owned since its 2004 inception. With this addition to its roster, its already quite wide-ranging portfolio has become even more so. It owned 597 stocks and devoted 16% of its assets to its top 10 as of April 2021 versus 536 and 18% as of May 2020. (The typical actively run foreign large-blend fund owns around 80 stocks and devotes roughly 25% of its assets to its top 10.) This fund is also even more diversified by style, sector, and country now. But all six of the underlying funds use distinctive strategies and allow their stock selection to lead to moderate sector and country overweighting’s, so this funds portfolio isn’t so broad that it’s completely bland. Indeed, several of the underlying funds have found a significant number of attractive investments in the consumer defensive sector, so this fund has a 14.1% stake there versus 9.5% for its average peer and 8.6% for the MSCI All Country World Index ex USA category benchmark. It also has a fairly modest stake in the consumer cyclicals sector. This fund has an average market cap of $38.7 billion versus $54.4 billion for its average peer and $46.9 billion for the index.

The Fund’s Performance

This fund of funds has lagged as most international stocks have gyrated their way to big gains over the past 12 months. Its Institutional share class gained 39.6% during the year ending April 20, 2021, whereas the average member of the foreign large-blend Morningstar Category returned 43.7% and the MSCI ACWI ex USA category benchmark gained 43.0%. This fund of funds was slowed by the fact that the two foreign large-growth offerings and one foreign small/mid-growth fund on its roster couldn’t keep up with their bolder rivals. Finally, this fund has also posted superior risk-adjusted returns during the trailing three-, five-, 10-, and 15-year periods. Over the longest period, the Institutional share class has earned a Morningstar Risk-Adjusted Return of 2.3% versus Risk Adjusted Returns of negative 0.2% for both its average peer and the index.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Strength in Notebook Demand Continues to Drive HP as Print Picks Up; Maintaining $23 FVE

Stock market graph with screen

We believe personal computer purchases will contract as more households primarily use smartphones for computing tasks and as cloud-based software upgrades can delay the impetus to upgrade computer hardware. HP’s personal systems business, containing notebooks, desktops, and workstations, yields a narrow operating margin that we do not foresee expanding. The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. Contractual service offerings like HP’s DaaS are alluring to businesses since IT teams can offload hardware management, receive analytics to proactively mitigate computer issues, and pay monthly instead of facing unpredictable large capital expenditures.

HP’s contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing, in our view. HP is combatting the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but we believe competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is late entrant, its movement into printing metals could cause customer adoption. Our largest concern with the printing market is the overall trend of screen reading replacing printed pages, and we do not believe HP’s initiatives can offset the macro trend.

Fair Value and Profit Enhancers

Our fair value estimate for HP to $23 per share. This fair value estimate represents a fiscal 2021 enterprise value/adjusted EBITDA of 5 times and a free cash flow yield of 15%.

ur model assumes that HP’s market segments of personal systems and printing decline over the longer term. Smartphones can be used for most PC tasks and we believe that the computer hardware refresh cycle could grow beyond the historical average of three to four years as cloud-based software updates extend the life of existing hardware.

The printing market, in general, is being hampered by the trend of printing less items for economic and environmental purposes. We surmise that HP may garner some printing growth from its movement into the A3, graphics, and 3D printing markets; however, declines in HP’s historical core printing segments may offset any potential gains. Through fiscal 2025, we expect HP’s gross margins to remain in the high teens while its operating margins oscillate around the mid-single digits.

HP’s Company Profile

HP Inc. is a leading provider of computers, printers, and printer supplies. The company’s three operating business segments are its personal systems, containing notebooks, desktops, and workstations; and its printing segment which contains supplies, consumer hardware, and commercial hardware; and corporate investments. In 2015, Hewlett-Packard was separated into HP Inc. and Hewlett Packard Enterprise and the Palo Alto, California-based company sells on a global scale.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Lowering Harmonic Drive’s FVE but Still See Upside Potential; Wide Moat Remains Intact

We note that our revised expectation of margin expansion is still higher than management’s plan and we currently see upside potential in the low- to mid-teens percent. Throughout calendar 2020, the company’s share price grew significantly as a result of high growth expectations for HDS’ strain wave reduction gears, which serve as vital components for high precision machinery like industrial robots and semiconductor equipment. However, since reaching its peak of around JPY 9,200 at the end of 2020, HDS’ share price has fallen year to date, as the market’s excessively high growth expectations have been corrected.

The medium-term plan, ending in fiscal 2023, implies that operating margin will return to normalized levels in fiscal 2023–at 21.4%, from 2.3% in 2020. We believe the plan is conservative, but we also take this into account for our downward revision to our projection. Further, we consider the potential impact of pricing, as management commented that a domestic industrial robot manufacturer (HDS’ customer) hopes to eventually adopt a “two company” supplier policy for small-size reduction gears. At the moment, compared with other manufacturers’ gears, there is a significant pricing premium on HDS’ strain wave reduction gears due to hurdles by other companies in replicating the quality of HDS’ high-end gears. We note that this impact would not be immediate and that despite the likelihood of reduced pricing over the medium/long term, HDS’ wide moat remains intact, as the high-end strain wave gear market is not a “winner take all” market and will likely continue to have high barriers to entry.

Over the medium term, we assume margins will increase from 22% to 25.5% between fiscal 2022 and 2025, compared to 25% to 28% in our previous projection during the same year. Further, we maintain our fiscal 2021 operating margin of 18%, which is also higher than management guidance of 12.7% margin for the same year. We think this is possible, based on higher sales assumptions compared to guidance and after considering its high contribution margin of about 50%. We note that our assumption still implies operating margin of 5 percentage points lower compared to fiscal 2017 levels despite similar companywide revenue levels. We attribute this margin gap between 2017 and our 2021 projection to: 1) higher production-related costs, including increased expenses related to the operations of its new factories in Japan and North America as well as record D&A levels as a result of peak capital investments in 2018 and 2019; 2) increased R&D spending as part of its medium-term plan; and 3) near term rise in costs related to packaging and shipping.

For the current fiscal year, we assume 47% top-line year-on-year growth, which is higher than both guidance and our previous projection (40% and 37% year-on-year growth, respectively), as we expect stronger top-line recovery in Japan/Asia and Europe segments. We attribute this to order improvement in the fourth quarter, which exceeded our previous expectations, and likelihood of further increases in orders/sales throughout the fiscal year from industrial robot and collaborative robot, or cobot, manufacturers in these regions, as factory automation investments in the automobile industry pick up. Fourth-quarter consolidated orders in the Japan/Asia segment more than doubled year on year, and order growth in the Europe segment also turned positive in the fourth quarter with 12% year-on-year growth, after two consecutive declines from same periods of the previous year. We expect these factors will also contribute to margin expansion going forward.

The company’s fiscal 2020 year-end results, ending in March, were in line with our expectations, as companywide revenue remained flat year on year, while operating margin remained low at 2.3%–though this is an improvement from minus 0.5% in 2019. Margins have been impacted by high fixed costs from its newly constructed factories in Japan and North America, where HDS spent in excess of JPY 30 billion or 30% of sales collectively in 2018 and 2019. While the parent entity’s standalone operating margin improved by about 8 percentage points to 10.6%, from strong sales to Japanese industrial robot makers, other key group companies in North America and Europe realized declining operating income from lower sales for mainly non-industrial robot applications (such as for medical, amusement, and service robot industries).

Harmonic Drive Systems Inc Company Profile

Harmonic Drive Systems Inc., or HDS, manufactures and sells precision control equipment and components worldwide. It offers high-precision reduction gears (speed reducers) under the Harmonic Drive brand as well as other mechatronics products such as rotary actuators, linear actuators, and AC servo motors. The company also provides planetary-gear speed reducers under the Accu Drive and Harmonic Planetary brands. Its products are used in industrial robots, semiconductor manufacturing equipment, and other high precision equipment. HDS was founded in 1970 and is headquartered in Tokyo, Japan.

Source: Morningstar

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

Jackson Square Large-Cap Growth Inv

Longtime manager Daniel Prislin has also announced that he will retire at the end of 2021. Jeff Van Harte and comanager Prislin have comanaged this fund since April 2005, with Chris Ericksen following shortly thereafter. Billy Montana became a comanager in January 2019, having joined the firm in 2014. The team looks for growth of intrinsic value rather than rapid earnings growth

Sensible approach, but stock-picking has been subpar

The team here has applied the same repeatable approach since taking the helm, but it has not translated into consistently strong stock-picking. Some recent tweaks are encouraging, but it’s too soon to tell how enduring these positive results will be. This team of generalists searches for companies undergoing or likely to undergo a fundamental change that will lead to higher growth and a robust business model that generates ample free cash flow. The team is happy to have companies with high earnings, but it must lead to growth in intrinsic value.

The team tries to avoid high-growth companies that are not great businesses or are simply riding a cyclical wave. It looks for firms that can grow their value in a variety of economic environments. It also prefers companies with low capital intensity, which tends to lead to below-average debt/capital ratios in the portfolio.

The approach culminates in a concentrated portfolio of roughly 30 stocks. The team still has an investment horizon longer than most but has made recent tweaks to ensure that it isn’t holding on to names experiencing fundamental deterioration. Recent results are encouraging, but the team still needs to demonstrate it can maintain an enduring edge

A compact portfolio

The team builds a relatively concentrated portfolio of approximately 30 stocks, but it consistently looks worse than the Russell 1000 Growth Index on quality measures such as average returns on invested capital, assets, and equity. Its average debt/capital ratio sometimes looks better, though. While the team takes valuation into account, the portfolio looks mixed on valuation measures. Its average price/book ratio is lower than the benchmark’s, but the portfolio looks more expensive on price/earnings, price/free cash flow, and price/sales ratios. Sector and industry bets are byproducts of the team’s bottom-up stock selection. In March 2021, the team held no consumer staples stocks relative to the bogy’s 4.3% and allocated 49% to tech stocks versus the bogy’s 44%.

The portfolio’s concentration has not contributed to higher active share recently (a measure of a portfolio’s differentiation from its benchmark). Active share was just 70% at the end of 2020, down from 85% in 2016. Large portfolio holdings like Microsoft MSFT and Amazon.com AMZN are also large benchmark constituents, contributing to the lower active share. Indeed, 20 of the portfolio’s 28 holdings were initiated in 2020 or later.

Challenged performance

Stock-picking has been subpar o n this team’s watch. From the April 2005 start of longest-tenured comanagers Jeff Van Harte and Daniel Prislin, theInvestor shares’ 11.3% annualized return through April 2021 trailed its typical large-growth peer and Russell 1000 Growth Index benchmark by 0.5 and 1.6 percentage points, respectively. A couple of bad years weigh on recent results. The fund landed in the bottom of its peer group in 2016. Poor stock picks in the healthcare and consumer cyclical sectors, including names like Valeant Pharmaceuticals VRX and TripAdvisor TRIP, hurt the most.

More recently, the fund struggled in 2019, landing in the worst-performing quintile of the large-growth category. TripAdvisor was again a large detractor. The team has made some tweaks, acknowledging a tendency to hold on to names too long, but it’s too soon to tell how fruitful these adjustments will be. The fund is off to a strong start with this modified approach, though. In 2020, its top-decile 44.1% beat the bogy’s 38.5% return. Losing less than the bogy in 2020’s first-quarter drawdown helped it to that strong calendar-year showing, with new investment ideas contributing the most to outperformance. Indeed, the team bought eight of the 11 top contributing names in 2020 over the prior 18 months.

(Source: Morning star)

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

Fidelity Low-Priced Stock K6

His cool-headedness has been key to its success. As a long-term investor, he looks for resilient companies with staying power and doesn’t chase fads. He tries to avoid firms that lack an enduring competitive advantage, steers clear of those loaded up with too much debt, and scrutinizes their leadership’s integrity and prowess.

The strategy stands out for its sprawling portfolio of 800-plus stocks drawn from across the globe and market-cap spectrum. Once solidly small-cap-focused, it now orients toward mid-caps but distinguishes itself from that category by owning an above-average stake of large caps (34% of assets) and small caps (30%). Its generous helping of European and Japanese firms, which have tended to enhance the strategy’s risk-adjusted returns, also sticks out.

Altogether, foreign stocks regularly soak up more than 35% of the portfolio, typically the highest share in the category. Tillinghast’s partiality for high-quality fare reveals itself through the portfolio’s average returns on equity, which are far higher than the Russell Midcap Value Index’s, and its aggregate debt/capital ratio, which is consistently lower

Focused on the long term.

Manager Joel Tillinghast looks for sturdy, underpriced businesses. Stocks selling for less than $35 or with an earnings yield (12-month earnings per share/share price) at least as high as the Russell 2000 Index’s median are considered to be potential bargains. But his “low-priced” mandate isn’t steered by stinginess. As a long-term investor, Tillinghast wants to own resilient companies with strong profitability, little debt, a defendable market niche, and capable leadership.

He often finds what he thinks are excellent opportunities overseas but reserves serious consideration for foreign markets with democratic institutions and the rule of law.The strategy owned more than 800 stocks at last count, with a large tail of tiny positions. Its huge asset base (more than $41 billion as of April 2021) makes breadth a necessity, as Tillinghast can’t take big positions in the small- and mid-cap names he favors without exceeding ownership limits. In that regard, the fund’s size is a constraint.

Its average market cap is more than triple the Russell 2000 Index’s, but it has remained squarely in mid-cap territory. In recent years, the fund landed in the mid-blend Morningstar Category but most recently moved to mid-value. This doesn’t reflect a change in process but rather where the fund’s holdings have skewed recently

Sprawling but not bland

Despite a sprawling portfolio, the fund has avoided becoming bland or benchmarklike. It has long distinguished itself through a sizable stake in foreign stocks: Its 44% stake as of January 2021 was extraordinary in the mid-cap category, where the average peer invests 2%-4% overseas. Joel Tillinghast works closely with a few analysts who source non-U.S. ideas, including one stationed in Japan, a country that takes up over 9% of assets.

The fund has long favored consumer cyclicals–26% of assets versus the Russell Midcap Value Index’s 13% share–where Tillinghast is better able to find firms with compelling competitive advantages. Its roughly 12% financials stake tends to be below that of relevant benchmarks and peers, driven by Tillinghast’s avoidance of complex banks with leveraged balance sheets. The portfolio usually holds 6% to 10% of its assets in cash, which has acted as a drag on its total returns over the past decade. Comanagers run around 5% of assets, which usually include more than 100 unique names.

Half of that stake is overseen by three sector-based managers, with the remainder split between a quantitatively driven subportfolio and a sleeve featuring global stocks. The crew manages its respective slices with discretion but always under Tillinghast’s philosophical guidance.

(Source: Morning star)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Property

BWP Is a Highly Resilient REIT

It should also get an incremental rental boost from planned upgrades and along with profits from divestments, we expect it to maintain and gradually grow its distributions. There continues to be significant investor demand for warehouse properties. The trust has sensibly not acquired properties at today’s inflated prices. But its strong balance sheet provides it with the flexibility to do so if better opportunities arise.

Key Updates

  • BWP’s defensive and growing distributions are likely to be attractive to investors in the low interest rate environment.
  • The firm’s more than 20-year history in investing in warehouse properties has created significant value for security holders and provides it with the foundation to benefit from Wesfarmers focusing future investments in Bunnings.
  • Although it has not been acquiring properties at current elevated prices, BWP’s strong balance sheet provides it with the flexibility to acquire properties if opportunities arise.

Company Profile

BWP Trust is an Australian REIT focused on owing warehouse/bulky goods retailing properties with relatively large sites and high visibility and access to arterial roads. The portfolio of properties it owns are diversified across most Australian states and are on long-term leases to Australia’s dominant home improvement chain: Bunnings Group. Bunnings is a wholly owned subsidiary of Wesfarmers Ltd. Wesfarmers is a wide-moat, top 10 ASX listed company by market capitalisation. BWP Trust is also externally managed by a wholly owned subsidiary of Wesfarmers and Wesfarmers also owns 24.8% of the units in the trust.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Property

BWP Is a Low Risk REIT

Distribution growth could also be hurt by normalisation of interest rates. The Reserve Bank of Australia and major global central banks plan to keep overnight cash rates low for another couple of years but rising inflation and runaway property prices could trigger an earlier move. Long-term bond yields have already started rising. Australian government 10-year bond yields increased from 0.8% in October last year to 1.6% currently. Regardless of timing, with official interest rates not far above zero and significantly below inflation, the next move is likely to be

up. Rising interest rates should push up the cost of borrowing for all firms, reducing profitability. They should also cause a de-rating of income stocks. But it’s not all bad. Most of BWP’s rents are linked to CPI growth.

BWP’s environmental social and governance, or ESG, risks primarily relate to the environmental impact of its buildings and general corporate governance risks, but we consider these risks to be very low. Therefore, we don’t incorporate ESG risks into our base- or bear-case scenarios, nor do we expect material value destruction from ESG issues to undermine the economic moat. The key risk facing the trust is Bunnings vacating properties for bigger and better sites nearby. But these properties can likely be sold or redeveloped without losing much value. In densely populated areas, the properties could actually have upside potential from redevelopment

Financial Strength

The trust is in a strong financial position. At Dec. 31, 2020, the trust had very low gearing (debt/total assets) of 17.8%, at the bottom of its target gearing range of 20% to 30%. Interest cover (earnings before interest/interest expense) of 8.8 times is also considered conservative. It also has a high investment-grade issuer credit rating of “A3 Stable” from Moody’s Investors Service and “A- Stable” from Standard & Poor’s. Combined with its defensive recurring rental income stream, we believe the trust’s strong balance sheet and investment-grade credit ratings provide it with the flexibility to take advantage of investment opportunities if they present themselves. Average debt duration is relatively short at 2.7 years. But we believe refinancing risk is low given conservative gearing, ample liquidity and defensive earnings.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Shares Technical Picks

“Can Lives Here” Is No Marketing Gimmick for Commonwealth Bank

Amber markets itself as a provider of cheap electricity, which Commonwealth Bank will promote to its mobile banking customers. Little Birdie will help the bank provide rewards and exclusive offers for Commonwealth Bank customers, probably a way of winning back share from the likes of Afterpay. The initiatives will not appeal to everyone, with these product enhancements likely appealing more to younger demographics who in the future become more profitable home loan customers. Generating annual profit north of AUD 8 billion, the bank has the luxury to: 1) invest in new and even unproven products; and 2) respond to consumer preferences.

It’s hard to say if recent investments will lead to material revenue windfalls, but we think the bank’s relatively small investments make sense as it attempts to build more engaged and satisfied customers. Our buy now, pay later analyst expects the market to grow materially over the next 10 years, but the incumbents will lose share, partly due to the major banks rolling out their own offerings. Commonwealth Bank shares are up over 50% in the last 12 months, and while we agree confidence in the earnings and dividend outlook is warranted, shares trade at a 30% premium to our fair value estimate. The fully franked dividend of AUD 4 per share, or 4% yield is likely attracting retail investors, but we caution against chasing shares for income. It is not hard to imagine the share price falling more than AUD 4 in a tough year, or even a month for that matter. Hopefully the earnings share price volatility of 2020 has not already been forgotten.

Commonwealth Bank’s consumer lending business, less than 2.5% of loans but we estimate around 8.5% of operating income, includes credit cards which are being impacted by growth in the buy now, pay later, or BNPL, sector. It’s not a surprise the bank is fighting back. It owns 5% of Klarna (50% of Klarna Australia), has the CBA BNPL offering, and a no-interest card called Neo.

Company Profile

Commonwealth Bank is Australia’s largest bank with operations spanning Australia, New Zealand, and Asia. Its core business is the provision of retail, business, and institutional banking services. An exit from wealth management is ongoing, with the bank still holding a 45% stake in Colonial First State. The bank has placed a greater emphasis on banking in recent years.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Small Cap

Digital Giants Finally Click Like Button on Nine’s News Content

Management projects the deals to propel an AUD 30 to 40 million EBITDA uplift in fiscal 2022 for the publishing unit. Some of this increase will likely be driven by continuing cost cuts and efficiency improvements. However, we believe the bulk of it is from the new content supply deals—juicy high margin arrangements which finally shift the image of the much-maligned and structurally-challenged division to one that can now much better monetise its (albeit still dwindling) journalistic resources.

Our fiscal 2021 earnings forecasts for Nine are largely intact. But we have increased our EBITDA estimates from fiscal 2022 by 6% on average, giving effect to the uplift from the new content supply agreements (up to three years with Facebook, five years with Google), as well as lifting the expected benefits from management’s relentless focus on costs in the publishing business. More specifically, from our fiscal 2021 publishing EBITDA forecast base of AUD 124 million, we now expect fiscal 2022 EBITDA to be AUD 158 million, up from AUD 120 million. Investors and, more importantly, the journalist community will be keenly watching how these digital platform deals change management’s resource and capital allocation to the publishing division in the future. Judging by the 26% premium that no-moat-rated Nine shares are trading at relative to our intrinsic assessment, it appears investors are betting the publishing unit will become an even bigger cash cow that Nine will milk, in order to fund its growth ambitions for the digital-centric units such as 9Now and Stan. On the other hand, competition is intensifying in the digital space, and we prefer to remain on the conservative side.

Company Profile

Nine Entertainment operates Nine Network, a free-to-air television network spread across five capital cities, as well as in regional Northern New South Wales and Darwin. It also owns Australia’s third-largest portfolio of online digital properties, one that reaches more than 60% of the country’s active online audience. The merger with Fairfax combines Nine’s top-ranked TV

network and the second-largest newspaper group, topped with a collection of quality digital assets in Nine Digital, subscription video on demand operator Stan, and Fairfax’s 59%-owned Domain. It ensures the merged entity remains relevant in the eyes of audiences and advertisers.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.