Monday 11th September 2017
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Master of its own domain
Fairfax (ASX, FXJ) recently released annual figures which were mixed in places, but operating earnings did come in ahead of previous forecasts. The traditional print publishing business remains under pressure, but management’s efforts in controlling costs while steering the direction towards the digital space, is starting to bear fruit. This has all made for the company’s best earnings result in three years, while the upcoming spin-off of the property portal Domain will also unlock substantial value for the business.
It has been an interesting year for Fairfax, with the proposed spin-off of Domain attracting the interest of private equity suitors, who subsequently walked away. Fairfax Chairman Nick Falloon commented that neither was ultimately ‘keen’ on buying the whole business. On that note, the company has since confirmed that they will push through with the spin-off and have already completed the regulatory requirements.
The Domain business has significant untapped value given that sum of the parts (SOTP) estimates from various analysts value the subsidiary between $2.1 to 2.3 billion - compare this with the current market cap for Fairfax Media at $2.2 billion and this basically means the other media and print assets as free. Listing Domain will also lead to a higher price for the subsidiary, as there is a premium for liquidity.
Fairfax plans to retain 60 percent of Domain, with 40 percent to be distributed to Fairfax shareholders. An EGM is set for early November and if approved, trading will commence mid- to late November.
Looking at the recent results, total revenues on continuing businesses came in $1.73 billion, lower than last year by 5.3 percent. Management notes that the declines came from lower print circulation volumes, which is unsurprising given the increasing trends towards digital media. Lower circulation volumes likewise led to reductions in traditional advertising but all print divisions reported substantial double digit growth in the digital space.
On the cost side, the company has continued to make improvements in reducing expenses. Overall, the transformation efforts have reduced expenses by 5.7 percent to $1.46 billion.
At the bottom line Fairfax Media reported EBITDA of $271.1 million, which though lower compared to last year (-4.3 percent year on year) was above the guidance range of $262-266 million. Earnings per share also came in at A6.2 cents compared to last year’s A5.7 cents This was the company’s highest profit in three years and proves that the transformation efforts are now paying off.
Domain remains the standout showing 16 percent total revenue growth year-on-year with Domain digital delivering most of the growth. Management expects FY18 revenue trends to be more closely aligned with 2H17 where Digital revenues continue to push up while Print revenues remain week.
Management also provided Domain Group cost guidance for FY18, with an expectation that costs will grow at 13 percent year-on-year, likely forecasting higher growth in the digital business. Despite the uplift in costs, this is partially offset by a strong start in Domain Digital which reported revenue growth of 26 percent year-on-year.
With Fairfax Media’s shares currently trading at 16.0 times FY18 earnings and 2.5 times book value with a prospective dividend yield of 4.4 percent, we are favourably disposed to an investment in the company. While the reality is that it is difficult to determine what the fair value for Fairfax Media’s publishing assets is given the ongoing potential for further structural change, we are confident that the company’s market capitalisation does not accurately reflect this on a SOTP (sum of the parts) basis.
We believe that Fairfax Media represents an interesting opportunity for investors given the huge value on offer from the upcoming listing of the Domain group this November. While the traditional publishing business remains under immense pressure, it is worth more than Fairfax Media’s current market capitalisation implies.
Disclosure: Interests associated with Fat Prophets declare a holding in Fairfax.
Greg Smith is the Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE
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