OneRoof Review And Digital Transformation Will Shape Future Outlook

Key Takeaways

• Strategic review and digital transformation could unlock value, enhance efficiencies, and improve net margins.
  
• Expansion in digital audio, podcast, and platform initiatives drives future revenue and earnings growth.
  
• NZME faces financial instability amid challenging conditions, relying on digital growth while grappling with declining print revenue, increased costs, and economic recession impacts.

Catalysts

Engages in the integrated media and entertainment business in New Zealand.

• The strategic review of OneRoof, including potential separation and external capital raising, could unlock significant value and accelerate revenue growth opportunities. (Revenue and earnings)
  
• The focus on digital transformation, with a new board member specializing in digital acceleration, is expected to enhance operational efficiencies and improve net margins. (Net margins)
  
• Expansion of digital audio and podcast revenue by leveraging partnerships and increasing audience engagement supports future earnings growth. (Earnings)
  
• Cost containment and structural efficiencies, such as the reduction of community newspaper products and restructuring, are expected to lower operating expenses and improve net margins. (Net margins)
  
• Audience growth via digital platforms, with initiatives such as enhanced digital subscriptions and new video streaming propositions, is projected to drive increased digital revenue and profitability. (Revenue and earnings)

NZME Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NZME's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.6% today to 5.4% in 3 years time.
• Analysts expect earnings to reach NZ$19.7 million (and earnings per share of NZ$0.1) by about May 2028, up from NZ$-16.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from -12.6x today. This future PE is lower than the current PE for the AU Media industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

NZME Future Earnings Per Share Growth

Risks

• Despite a digital transformation strategy, NZME reported a net loss after tax of $16 million, which includes a noncash impairment adjustment, signaling potential financial instability that could affect future earnings.
  
• The difficult trading conditions have led to decisions such as the closure of community newspapers and reductions in staffing, reflecting challenges in maintaining or growing revenue streams.
  
• The economic environment in New Zealand has been challenging, with the country slipping into recession, impacting consumer confidence and business operations, and potentially affecting NZME's advertising revenue.
  
• Higher selling and marketing costs, especially in supportive services like OneRoof, indicate increased expenditure pressure, which could negatively impact net margins if not offset by sufficient revenue growth.
  
• The continued decline in print advertising and reliance on digital transformation is a double-edged sword; while digital platforms show growth, traditional revenue streams are diminishing, balancing the overall earnings trajectory.

Valuation

• The analysts have a consensus price target of NZ$1.165 for NZME based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$362.6 million, earnings will come to NZ$19.7 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of NZ$1.07, the analyst price target of NZ$1.16 is 8.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.