Analysts glimpse silver lining in the Fairfax cloud
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."
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Fairfax merged all its Australian publishing businesses into one group, spun Domain out as a stand‑alone digital business, and grouped other transactional sites such as RSVP and Stayz into a new unit called Digital Ventures. Management says the aim is to highlight digital value and drive operational efficiencies across the group.
Analysts say the restructure highlights valuable online assets that were undervalued under the old structure. They point to Domain’s growth metrics and compare it with Realestate.com.au’s $3.7 billion valuation, estimating Domain could be roughly 30–60% of REA based on audience, time on site and listings.
Different analysts offered different valuations: Commonwealth Bank media analyst Alice Bennett put Domain at about $415 million and the other transactional businesses at about $256 million. CIMB’s Fraser McLeish views the digital assets as materially undervalued and has an Outperform rating on Fairfax with a 92¢ target price; Commonwealth Bank has an Overweight view with a 66¢ price target on the stock.
No. CEO Greg Hywood said breakup or sale was not part of the thinking behind the restructure — the immediate focus is on operational benefits. However, the new structure does give the company more options in the future if needed.
Publishing still supplies about 75% of Fairfax’s revenue and has been under pressure: management reported a 9% revenue decline in the first six weeks of the year. Analysts say the board needs to drastically redefine the cost structure, and that significant cost cuts and redundancies are likely as parts of the business are assessed.
Analysts expect Fairfax to appoint divisional heads who will decide which products to champion and which to close. Morningstar and others foresee a significant cost‑cutting and redundancy program following those assessments to align costs with a lower revenue base.
Fairfax is expected to provide a more detailed report on Domain’s operational and financial metrics at an investor day presentation scheduled for early June.
The restructure could help unlock hidden digital value and make Fairfax’s growth prospects clearer, but investors should weigh that against ongoing declines in print publishing revenue and likely cost‑cutting actions. Analysts’ views differ — for example, CIMB has an Outperform rating with a 92¢ target, while Commonwealth Bank is more modest with a 66¢ target — so monitor upcoming Domain metrics and management’s cost‑reduction progress.
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