Analysts glimpse silver lining in the Fairfax cloud
The restructure of Fairfax Media announced this week is expected to accelerate two trends, the rise of its highly valued digital businesses, and the grinding down of costs in its traditional publishing business in lock-step with print revenues.
Analysts are split on how these two diverging trends will play out.
The merger of all of Fairfax's Australian publishing businesses into one group played second fiddle in Thursday's announcement to the pre-eminence given to the digital businesses and the only Fairfax classified business to establish itself online, Domain.
"We believe we now have the right structure for the business we have today and for the business we conduct in the future," Fairfax chief executive Greg Hywood told analysts on Thursday.
No one is questioning the importance of splitting off Domain as a stand-alone business, and putting other transactional businesses such as RSVP and Stayz into another called Digital Ventures.
Analysts say it is a good way to highlight the value hidden from the market by Fairfax's previous structure, which kept the focus on its reliance on the ebbing "rivers of gold" that was print classifieds.
"Fairfax has some valuable online assets, which we believe are materially undervalued in the current price," said CIMB's Fraser McLeish, who has an Outperform rating on the stock with a 92¢ target price.
The point of comparison he, and other analysts, make is the $3.7 billion valuation of Domain rival, Realestate.com.au.
"We estimate that Domain is 30 to 60 per cent the size of REA, based on key operating metrics such as unique audience, time on site and number of listings," Mr McLeish said.
The Fairfax group, owner of The Age and The Sydney Morning Herald, is valued at $1.4 billion.
Commonwealth Bank media analyst Alice Bennett put a valuation of $415 million on the Domain business and valued the other transactional business at $256 million. Despite an Overweight recommendation, Commonwealth Bank has a more modest price target on the stock of 66¢.
A more detailed report on Domain's operational and financial metrics is expected at an investor day presentation in early June.
While analysts speculated on a potential breakup of the group, or the sale of Domain and other transactional businesses, Mr Hywood made it clear this week that the focus is on immediate benefits of the restructure to the group.
"Breakup did not come into any thinking around this, we are just focused around operational efficiencies and performance around this," Mr Hywood said.
He did concede that it gave the company options later if needed.
While the Domain and Digital Ventures units highlight the promise within Fairfax, Mr Hywood's confirmation that the 9 per cent revenue decline experienced for the first six weeks of this year has continued highlights the challenges for the publishing business, which still provides 75 per cent of revenue.
"The board has finally accepted the hard facts the media landscape has changed for good and the organisation needs to drastically redefine its cost structure to adapt to a significantly lower revenue base," Morningstar analyst Tim Montague-Jones said.
"We expect the appointment of divisional heads to start a process addressing which products must be championed and which are to be closed. Following this assessment we expect there to be a significant cost cut and redundancy program."