ASX stock of the day: NZME share price rockets 41% higher as profits jump more than 200%

The NZME Limited share price has rocketed 41% higher after the media company revealed a 217% increase in profits.

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The NZME Ltd (ASX: NZM) share price has rocketed 41% higher after the media company revealed a 217% increase in profits. NZME gave a stronger than expected performance in 1H 2020, having quickly navigated the impacts of COVID-19

What does NZME do? 

NZME, which stands for New Zealand Media and Entertainment, is an integrated media company with a portfolio of newspapers, radio stations, and digital platforms. With its content accessed by more than 3.2 million Kiwis, NZME offers advertisers the opportunity to access its audience via a fully integrated multi-platform presence. 

What did NZME report? 

NZME released its results for 1H 2020 this morning, reporting 5% growth in operating earnings before interest, taxes, depreciation and amortisation (EBITDA) which reached NZ$28.9 million.

Although NZME's operations are deemed an essential service, key revenue streams were significantly impacted by COVID-19. Advertising revenue fell 47% in April, 39% in May, and 23% in June. This led to a 17% decline in segment revenue for the half, which fell to $147.3 million. Operating revenue fell 13% to NZ$157.8 million, including an NZ$8.6 million government wage subsidy during the half. 

NZME took swift action to mitigate impacts of the downturn on profitability and cash flow, contributing to a NZ$24.6 million reduction in operating expenses. This flowed through to a 66% increase in operating net profit after tax (NPAT), which increased to NZ$6.8 million. Statutory NPAT increased by an impressive 217% to NZ$3 million, up from $0.9 million in 1H 2019. 

Although some actions taken in response to COVID-19 were temporary, NZME expects to achieve a permanent reduction in cost base. Costs were decreased by NZ$24.6 million in the first half, with approximately NZ$7 million relating to permanent cost reductions. The annualised permanent reduction in cost base is expected to be NZ$20 million per annum. NZME reduced net debt by NZ$19.5 million to NZ$55.2 million in 1H 2020. Debt reduction is expected to be lower in the second half, however, as net working capital is expected to grow. 

What's the outlook for NZME? 

NZME says it has seen a stronger than anticipated recovery from COVID-19, but remains cautious regarding the future economic environment. Advertising revenue is expected to be down 16% in 3Q 2020 so cost containment remains a focus.

NZME is currently forecasting FY20 operating EBITDA of NZ$60–$63 million. Based on improvement in economic conditions, COVID-19 recovery, and permanent cost reduction, NZME is expecting profit growth in 2021. Based on this outlook and the company's capital requirements, the company advised its board expects to be able to consider a dividend payment after 30 June 2021.  

The NZME share price is currently sitting at 39 cents per share, which is down 21% on this time last year.

Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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