BEST IDEAS 2018, HOSTED BY MOI GLOBAL January 2018
About Culibrk Partnership Culibrk Partnership was started in 2015 to protect and compound Culibrk family wealth. Based in Belgrade, Serbia. Goal is to achieve superior long-term returns while limiting the possibility of a permanent capital loss. Aim to achieve the goal by investing in businesses undervalued due to Mr. Market s: 1) Obsession with the short-term (what is next vs. what is it worth) 2) Confusion by perceived complexity 3) Ignorance of capital allocation and management incentives Position sizing determined by the attractiveness of risk / reward and the likelihood of a permanent capital loss. Typically invest in 10 to 20 companies. No constraints on concentration and cash holding. 2
Results in the first three years Returns 2015-2017 Q1 Q2 Q3 Q4 Full year 2015 16.4% 12.1% -4.8% 5.3% 30.8% 2016-3.3% -1.5% 18.2% 1.9% 14.8% 2017 6.5% 15.1% 6.7% 6.7%* 39.6%* Ten most significant return contributors 2015 18 th December 2017 +19.7% + +8.9% +7.8% + +6.7% + +6.3% + +4.8% + +4.8% +4.3% +3.8% -3.6% + Current portfolio holding * as of 18 th December 2017 3
Discovery Communications is an undervalued cash machine Global cable network trading at a 16% free cash flow yield Loved it at $15 from $20, equity per share should compound at 15+% over five years 2. Declining number of subscribers in the US 3. Overpriced acquisition of Scripps Networks 4. High operating and financial leverage 5. No catalyst Mr. Market prices accordingly: -24% YTD (Dec 18 th 2017); 72% 3-YR underperformance What is Mr. Market missing? Scripps strengthens Discovery strategically and financially Boost to free cash flow from cost savings and incremental revenue from Scripps Upon debt repayments, cash flow to be deployed into buybacks from 2020 Insiders pay attention to what analysts ignore: five bought shares for a total of $13m 4
Why does Mr. Market price Discovery s equity as distressed? Discovery has 58% EBITDA margins in its US business due to: Free distribution of the content via cable, satellite and telecom operators Very high incremental affiliate and advertising margins Non-scripted, reality, personality content where production cost has been stable Distribution evolving towards on-demand and over-the-top Network pricing power diminishing - don t expect price will offset sub declines Bundle here to stay. Operators price data + OTT bundle, to protect value proposition Discovery + Scripps relative value: a low absolute cost per sub and a good ratio of time viewed/cost. Surveys indicate high customer willingness to pay ($1.4 for Discovery ch) Free cash flow from US networks will gradually decline Upside from improved CPM from targeted advertising, Philo, OTT inclusion, global DTC 5
Why are the US subscribers leaving? 2. Declining number of subscribers in the US Subs declining due to the competition for eyeballs (YouTube, Facebook, OTT, etc.). Increasing price of the bundle is not helping TV losing share in younger than 35 (not Discovery key demography) 35-49 year olds watch 3.7hr, 50-64 5.6hr, 65+ 6.8hr/per day 1 35+ are 46% of total population - how far are their habits from an average analyst? EBITDA shortfall from the US networks should be offset by: Scripps acquisition cost synergies International profitability as operating leverage kicks in - not under cord cutting pressure as TV is much cheaper (sports are a la carte) 1 Nielsen Q2 2017 6
Stress testing profitability for US subscriber declines 2. Declining number of subscribers in the US 2012 2017 (p.a.): -1.7% subs, +5-6% affiliate fee per sub, +5-6% ad per sub Stress test 2018 2022 (p.a.): -3% subs, unch affiliate fee per sub, +3% ad per sub => $377m revenue hit by 2022; at 100% m. = 10% of 2017 EBITDA = deal cost synergies Discovery US Networks 2012 2013 2014 2015 2016 LTM 17 2018 2019 2020 2021 2022 Distribution ($m) 1,222 1,294 1,289 1,431 1,532 1,585 1,526 1,480 1,435 1,392 1,351 Advertising ($m) 1,456 1,576 1,605 1,650 1,690 1,705 1,690 1,689 1,687 1,686 1,684 Subs (Discovery channel) 107 106 104 101 99 97 93 90 88 85 82 Affiliate fee per sub ($) 0.95 1.02 1.03 1.18 1.29 1.36 1.36 1.36 1.36 1.36 1.36 Ad revenue per sub ($) 1.13 1.24 1.29 1.36 1.42 1.47 1.51 1.56 1.60 1.65 1.70 Scripps US Networks 2012 2013 2014 2015 2016 LTM 17 2018 2019 2020 2021 2022 Distribution ($m) 663 721 756 800 786 795 771 748 726 704 683 Advertising ($m) 1,554 1,697 1,788 1,852 2,029 2,026 2,025 2,023 2,021 2,019 2,017 Subs (HGTV) 100 99 96 93 92 90 87 84 82 79 77 Affiliate fee per sub ($) 0.55 0.61 0.66 0.71 0.71 0.74 0.74 0.74 0.74 0.74 0.74 Ad revenue per sub ($) 1.30 1.43 1.55 1.65 1.85 1.89 1.94 2.00 2.06 2.12 2.19 Combined revenue ($m) 4,895 5,288 5,438 5,733 6,037 6,111 6,012 5,939 5,869 5,801 5,735 $-377m Revenue change y/y ($m) 392 150 295 304 75-100 -72-70 -68-66 Source: SEC 2012 Q3 2017; 2018 2022 Culibrk Partnership estimates 7
Why did Discovery decide to acquire Scripps Networks? 2. Declining number of subscribers in the US 3. Overpriced acquisition of Scripps Networks (Q1 2018 closing) Financing 70% via sub 4% fixed, 12 year debt; c. 10x EV/EBITDA pre-synergies Scale is the key for upside maximization and downside protection Wide carriage Higher budget per show Lower cost per show per sub Highly rated shows lead to leverage with the operators and higher prices Discovery + Scripps to account for 20% of US primetime; < 10% of the bundle cost Revenue synergies ignored by the market (no guidance; could be $200m+ by 2022): Scripps global roll out - adding new channels/improving existing Discovery channels Leveraging sales team at Discovery Positioned well for discussion with European operators due to the Olympics rights Incremental revenue to be high margin, closing some of the gap vs. US margins Announced cost synergies: $350m annual (5% of pro-forma cost base) 8
Leverage works both ways 2. Declining number of subscribers in the US 3. Overpriced acquisition of Scripps Networks 4. High operating and financial leverage Operational Content production should be seen as a fixed cost Incremental user is very high margin, both on affiliate and ad revenues 1% fall in US subs = 1.8% hit to EBITDA (if affiliate fees and ad pricing are held constant) International operations to start benefiting from Scripps Owning content and being at scale is very important for direct to consumer future Financial Target to decrease leverage from 4.9x to 3.5x Adjusted OIBDA/Net Debt by YE 2019 Buyback currently suspended; to be resumed after Net Debt is < 3.5x Capital allocation crucial for a levered, cash generative business 9
Pro-forma free cash flow generation 2012-2022 Discovery + Scripps 2012 2013 2014 2015 2016 LTM 2017 2018 2019 2020 2021 2022 Revenue ($m) 6,794 8,066 8,931 9,413 9,898 10,173 10,261 10,386 10,523 10,672 10,834 US 5,001 5,403 5,525 5,848 6,156 6,293 6,193 6,121 6,050 5,982 5,916 International 1,692 2,535 3,247 3,420 3,597 3,757 3,944 4,142 4,349 4,566 4,794 Cost of revenue ($m) 1,829 2,388 2,903 3,330 3,625 3,781 3,895 4,012 4,132 4,256 4,384 SG&A ($m) 1,942 2,327 2,457 2,454 2,497 2,584 2,636 2,688 2,392 2,440 2,489 EBITDA ($m) 3,024 3,403 3,505 3,419 3,789 3,792 3,731 3,686 3,999 3,976 3,962 DA ($m) 244 418 458 472 575 550 550 550 550 550 550 Interest @5% 299 355 381 438 482 505 846 736 733 733 733 Tax ($m) 650 967 911 854 883 624 467 480 543 539 536 Tax rate (%) 26% 35% 33% 33% 32% 23% 20% 20% 20% 20% 20% FCF ($m) 1,806 1,761 1,864 1,737 1,882 2,047 1,868 1,921 2,173 2,155 2,144 Price per share 20.4 23.5 27.0 31.0 35.7 41.0 Market cap ($m) 31,885 44,494 34,199 24,605 25,948 14,888 17,122 19,690 20,319 21,061 21,927 Net debt ($m) 4,989 6,790 8,287 11,132 10,702 18,450 16,581 14,661 14,661 14,661 14,661 EV/EBITDA (x) 12 15 12 10 10 9 9 9 9 9 9 P/FCF (x) 18 25 18 14 14 7 9 10 9 10 10 FCF yield % 6% 4% 5% 7% 7% 14% 11% 10% 11% 10% 10% Source: SEC, Bloomberg 2012 Q3 2017; 2018 2022 Culibrk Partnership assumptions 10
Capital allocation 2018-2022 Capital allocation @15% p.a. LTM Q3 2017 2018 2019 2020 2021 2022 Debt repayment ($m) 1,868 1,921 Buyback ($m) 2,173 2,155 2,144 # of shares (m) 74.93 64.61 55.89 Shares outstanding (m) 730 730 730 655 590 534 Price per share ($) 20.4 23.5 27.0 31.0 35.7 41.0 Net debt ($m) 18,450 16,581 14,661 14,661 14,661 14,661 Net debt/ebitda (x) 4.87 4.44 3.98 3.67 3.69 3.70 Market cap ($m) 14,888 17,122 19,690 20,319 21,061 21,927 EV ($m) 33,338 31,470 29,549 34,979 35,722 36,588 EV/EBITDA (x) 9 8 8 9 9 9 P/FCF (x) 7 8 8 9 10 10 Capital allocation @0% p.a. Debt repayment ($m) 1,868 1,921 Buyback ($m) 2,173 2,155 2,144 # of shares (m) 106.52 105.64 105.08 Shares outstanding (m) 730 730 730 623 518 413 Price per share ($) 20.4 20.4 20.4 20.4 20.4 20.4 Net debt ($m) 18,450 16,581 14,661 14,661 14,661 14,661 Net debt/ebitda (x) 4.87 4.44 3.98 3.67 3.69 3.70 Market cap ($m) 14,888 14,888 14,888 12,715 10,560 8,417 EV ($m) 33,338 31,470 29,549 27,376 25,221 23,077 EV/EBITDA (x) 9 8 8 7 6 6 P/FCF (x) 7 8 8 6 5 4 Source: SEC, Bloomberg Q3 2017; 2018 2022 Culibrk Partnership assumptions 11
What will make Mr. Market change his mind? 2. Declining number of subscribers in the US 3. Overpriced acquisition of Scripps Networks 4. High operating and financial leverage 5. No catalyst Passage of time, lack of Armageddon and FCF deployment towards buybacks can be seen as catalysts. Insiders agree Name, Function Date Purchase/Sale Shares Price Value ($) John Malone, Director, 10% owner December 2017Purchase 434,900 19.7 8,588,386 David Wargo, Director Nov, Dec 2017 Purchase 200,000 17.2 3,431,000 Gunnar Wiedenfels, CFO Aug, Nov 2017 Purchase 50,000 20.3 1,017,372 Paul Guagliardo, Chief Commercial Officer August 2017 Purchase 10,000 22.7 227,060 Decker Anstrom, Director August 2017 Purchase 10,000 23.0 230,497 Bruce Campbell, Chief Legal Officer June, Dec 2017 Sale 12,330 24.4 300,699 Kurt Wehner, Chief Accounting Officer June, Dec 2017 Sale 4,746 26.1 123,773 Paul Gould, Director May 2017 Sale 8,832 26.0 229,426 Source: SEC Most of the money I've made in my life has been when other people don't like what's going on. When things are cheap, that's opportunity. John Maloneon Nov 16 th 2017 12
Thank you & feel free to get in touch Please reach out to discuss further stefan@culibrkpartnership.com Quarterly letters and ideas at www.culibrkpartnership.com/results 13