Upgrading Paramount | Mainfreight & More

26 May 2023

Stock in Focus: Paramount

We’re upgrading Paramount Global to a high-risk buy as the stock hits a ten year low of ~$14.00. The company had a tough quarter — While streaming subscribers hit ~60M, the company’s streaming unit continues to bleed money and the company’s linear TV segment saw less advertising revenue as corporates cut spending. Yet we think there’s a lot of value on offer for the patient investor: the company owns IP such as Star Trek and Yellowstone, in addition to CBS and the publishing powerhouse Simon & Schuster. We took a sum of the parts valuation approach; we looked at the multiples Disney paid for Fox and Amazon paid for MGM; the multiples private equity has paid for TV stations (CBS owns 28 physical stations in addition to the news network); the price Paramount had agreed to sell Simon & Schuster for ($2.2B) and the likely value of the company’s physical assets (including The Ed Sullivan Theatre) & music catalogue. On a very conservative basis, even with the value of assets heavily discounted, we still think the company is worth $16B, which represents a ~60% upside to the company’s current market capitalisation of $9.26B.

We note also today that merchant bank BDT & MSD Partners have invested $125M into National Amusements, the Redstone family’s vehicle for their controlling stake in Paramount. BDT has received warrants to purchase 3.5M shares of Paramount stock at a strike price of $15. This suggests to us that astute bankers are seeing value here too. We think an acquisition would be ideal however note that the Redstone family will have to be paid a hefty premium to give control of their “crown jewel”this is also why the stock trades at a discount; much like the so-called “Dolan discount” at Madison Square Sports.


New Zealand

The New Zealand market (NZX50, -0.1%) was almost flat recovering from larger losses earlier in the session.

Logistics company Mainfreight shares fell -3.3% after reporting its 2023 full-year result, which is a solid set of numbers with revenue up +8% from last year, and net profit after tax growth of 20% to $426.47m.The company said it will continue to invest in growth however deteriorating macroeconomic conditions means the upcoming years will end the company’s 13-year streak of earnings growth.

Fonterra shares rose +4% after revealing a trading update, showing they expect full-year earnings to come in at 65 to 80 cents per share. Unfortunately for farmers, they have reduced their farmgate price forecast the 2022/23 season is now expected to be $8.20 per kgMS, down from $8.30, and the opening 2023/24 forecast is $8 per kgMS. Fonterra said global dairy trade prices have not recovered to the levels required to hold the previous milk price midpoint for this season.  Pacific Edge reported an inline result for the 2023 financial year, with operating revenue rising +58% from last year to %53.1m – however, investors were still left in the dark regarding LCD insurance coverage – which is a high-risk caveat for upside.


Australia

The Australian (ASX200, -1.0%) market continued to decline, as financials and miners the largest contributors to the index continue to slide. Tech was the bright spot extending its recent gains.

Treasury Wines slipped -7.8% after lowering it’ 2023 full-year earnings guidance to US$580m to US$590m, driven by weakness for entry-level premium wine.

On the flipside Costa Group shares rose +6.7% after stating its international segment is set to deliver a record result for the current year.

Noting small office REIT Garda has marked down the value of two of its office towers by 15-20%, signaling further weakness in the office sector. We prefer pure-play industrial REITs & Kiwi Property Group, which we see as undervalued at given the quality of its portfolio.

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