What is SOTP investing?

After ending what was his fifth engagement(!) in 2023 you would excuse Rupert Murdoch for feeling glum. Although this may not be the case, however, due to the recent performance of the News Corp share price. The market has finally awakened to the hidden asset value in the Murdoch conglomerate, and we, along with Rupert, have made strong returns from this. Although, in terms of dollar value, Rupert has likely outpaced us here.

After undertaking a sum-of-the-parts (SOTP) analysis on News Corp, the Oracle Advisory Group Emerging Companies Portfolio has seen a strong appreciation in the share price since our purchase. Closing the gap on what we believed, and still do, was a discount between intrinsic value and market value. With success in News Corp, we have taken this approach to a new position in the portfolio, EVT Limited led by patriarch Alan Rydge.

SOTP Investing

Firstly, what is SOTP investing?

SOTP investing, sometimes known as break-up value analysis, involves dissecting a conglomerate's various business segments and valuing them separately. By valuing each component individually, investors can uncover hidden values that may be obscured when evaluating the company as a whole. It is here where we can often find $1 of value trading for 50 cents. We aim to buy this $1 for 50 cents, with the view that the market will pay full price in the future.

So why does this discount to value occur? It is likely due to what the market calls a conglomerate discount. With many operating businesses in different sectors, a conglomerate structure can result in inefficiencies, lack of management focus and difficulty managing diverse business operations. Due to these factors, the market will assign a lower valuation to the conglomerate as concerns about the complexities and potential challenges associated with overseeing a diverse range of businesses.

Although, we must note that not all conglomerates are traded at a discount. The prescribed multiple given by the market will depend on the perception of management competence and the outlook for the businesses owned within the entity.

We like to allocate a small part of the portfolio, between 5-10%, to SOTP investing with the view that the discount to value will close within 1 to 2 years.

Recent SOTP Investments

We have held News Corp for just over a year now and in that time the investment has returned greater than 60% for the portfolio. We entered this position with the view that the company was grossly undervalued given the quality of assets they owned. This includes their newspaper business with quality brand names such as The Wall Street Journal, The Australian, The Daily Telegraph and The Times (UK). They also own the book publisher Harper Collins and pay TV provider Foxtel. However, the jewel in the crown is their stake in REA Group, the owner of realestate.com.au.

We could easily value their stake in REA Group as it is a listed entity, however, the other businesses aren’t listed so we need to find a reasonable multiple for each segment. When finding a reasonable value for individual segments we need to think about how this business would trade if it was a standalone listed company, or another way to look at it is how much would someone buy this business for.

While I won’t go through each business within News Corp and how we valued it, I will briefly discuss Foxtel. The legacy Foxtel broadcast business, of providing pay TV channels via satellite or cable is a dying industry. However, Foxtel has done a commendable job in offsetting this through their new offerings of Kayo and Binge. These two streaming platforms have been growing subscribers since their launch and provided a new revenue stream for the business.

With Foxtel making around $540m in earnings before tax, depreciation and amortisation (EBITDA), we can use this number to come to a full valuation of the business. Multiplying Foxtel’s $540m in EBITDA by 5, as we assume someone will pay 5 times EBITDA for the business, we get a $2.7bn valuation for Foxtel. I note that News Corp only owns 65% of the business, so their share is $1.75bn.

So how do we know this multiple is right? Well looking at recent media reports, Foxtel is planning to list as a separate entity. These same reports are estimating a valuation for Foxtel of $3bn. So, our valuation looks to be in the ballpark.

By performing a similar process with each News Corp business, and adding the REA value, we still believe that the conglomerate trades at a 31% discount to their asset value.

EVT Limited – Our new addition

At the start of this year, we decided to take a position in another SOTP investment. That is EVT Limited, which is one of the oldest listed companies on the ASX. The company owns the following businesses: The Rydges and QT Hotel chains, Event Cinemas, Cinestar Germany and Thredbo Ski Resort.

While the theory of our EVT investment is similar to that of News Corp, EVT also has a large property portfolio backing a major part of their current market valuation.

As of writing the current share price implies that EVT is trading at an enterprise value lower than the value of the company’s property portfolio. Now, there has been concern that commercial property prices are on the decline, but EVT had the majority of their portfolio valued in 2023 and realised a 20% gain on the portfolio. Which we believe is due to the diverse and unique nature of the portfolio.

EVT have acquired a vast property portfolio over the past four decades, through their four operating businesses.

The jewel in the crown is a block of properties that the company owns on George Street in the Sydney CBD, which includes the State Theatre and the old Gowings building that has been transformed into a QT Hotel.

Being able to buy the company at the value of their property portfolio gives us potential upside through the market ascribing little value to the operating businesses.

Value can be realised for shareholders in multiple ways and Alan Rydge the founder and Chairman with a 40% stake in the company, is highly incentivised to unlock this value.

One example is to sell off their Australian cinema business Event Cinemas. It is being reported that competing cinema chain Hoyts received a $700m bid from private equity last year. The current owners of Hoyts knocked that back as they are looking for a $1bn sale price. Considering Event Cinemas is the largest chain in Australia, we can assume a reasonable sale price of $700m.

There is also an opportunity for the group to sell off their German cinema business, Cinestar. They entered a deal to sell in 2019 for the value of $350m, however, COVID ruined the deal. With this business now making 22% higher operating margins than they were in 2019, we believe they could now achieve above the original $350m asking price.

Using the operating profits from the Hotel’s segment, we believe the company could achieve greater than $500m for the sale of this business.  

Another way to increase value is through the sale of their George St block. Each property owned on that block is valued as an independent asset. If the company were to sell the entire block to one buyer, they could achieve a combined price that is substantially above the carrying value of each of the properties currently valued independently.  

So, with the Chairman, who owns 40% of the company, announcing that they are reviewing the best way to unlock value for shareholders we can see a strong upside in EVT with the downside limited by the value of the property portfolio.

Written by Jack Magann
Emerging Companies Portfolio Manager
Oracle Investment Management

Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.