Credit Suisse Believes 21st Century Fox Investors Are Discounting Payback Potential Of HULU And STAR India Assets

• Twenty-First Century Fox Inc FOXA shares have plunged 18 percent in the last six months.
• Credit Suisse’s Omar Sheikh maintained an Outperform rating for the company, while raising the price target from $34 to $38.
• The gap between Fox’s asset value and the equity market valuation of the company has been widening, Sheikh stated.

The disparity between Fox’s asset value and its equity market valuation has been widening due to the company’s ownership of businesses that are not making a meaningful contribution to the income statement, analyst Omar Sheikh said.

Following years of investment, investors seem to have forgotten about the potential payback from Hulu and STAR India. Sheikh added that these two businesses could generate “meaningful profitability” by 2020, estimating EBITDA contributions of $1.5bn from Hulu and $883m from STAR India. Moreover, the visibility on this trajectory “will become more apparent over the next twelve months.”

Investors seem to be focusing on disruption in the domestic video ecosystem, which has been exerting pressure on Fox's shares.

The analyst believes that the group's domestic networks, which contributes 60 percent of EBITDA, are well-positioned to generate 8-10 percent EBITDA growth per annum over the next five years, “despite the ongoing slow shrinkage in the pay TV universe, driven by the pricing power of the core content offering of the cable networks and a recovery in broadcast.”

“We estimate the combined value to Fox of Hulu, STAR, Sky and Shine/Endemol is just under $25bn, which drives our TP upgrade to $38 (from $34),” the Credit Suisse report noted.