Fairfax rally leads upbeat media outlook

THE media sector's annus horribilis appears to be easing in time for Christmas, with Fairfax Media leading a rally on Thursday.

By InvestSMART · 14 Dec 2012

By InvestSMART ·
14 Dec 2012

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THE media sector's annus horribilis appears to be easing in time for Christmas, with Fairfax Media leading a rally on Thursday.

Brokers finally found something to like in the embattled industry.

Shares in Fairfax, the owner of The Age and The Sydney Morning Herald, rose more than 11 per cent to 54?, after Commonwealth Bank Equities analysts upgraded their valuation of the stock from 43? to 59?. The broker raised its earnings assumptions for Fairfax's real estate classifieds. "The key change in our assumption is around the strength of Domain's print margins, which we estimate at 30 per cent versus its digital margins at 35 per cent," said CommBank media analyst Alice Bennett.

APN shares also posted a double-digit rise - up 10 per cent to 31.5? - while Seven West Media rose 3 per cent. Ten has also managed to recover most of the ground lost after its recent capital raising priced at 20? a share, closing at 26?.

"There does seem to be a solid improvement in sentiment towards companies like Fairfax," said Allan Gray portfolio manager Simon Mawhinney. The investment firm owns substantial holdings in Fairfax and APN. Mr Mawhinney was cautious about predicting a turnaround in the sector, with many stocks still trading significantly below where they started the year and with no signs of recovery in advertising.

"In terms of the advertising market it's not clear if we've found the bottom," he said. "It is incredibly difficult to make a prediction like that."

Commonwealth Bank said News Corp, Fairfax, Seven West Media and Southern Cross Media remained its preferred stocks in the sector, with the struggling Ten network its least preferred.

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Frequently Asked Questions about this Article…

Why did Fairfax Media shares rally and what triggered the upbeat media outlook?

Fairfax rallied after brokers — led by Commonwealth Bank Equities — upgraded the stock and raised earnings assumptions for its real estate classifieds. That broker support and stronger sentiment toward the media sector helped lift Fairfax shares.

How big was Fairfax's share price increase during the rally?

According to the article, Fairfax shares rose by more than 11% during the rally, reflecting renewed investor interest following the broker upgrade.

What did analysts say about Domain's print margins versus digital margins?

CommBank media analyst Alice Bennett estimated Domain's print margins at around 30% versus its digital margins at about 35%, and said that change in margin assumptions drove part of the valuation upgrade.

Which other media stocks also gained in the market rally?

APN shares rose about 10%, Seven West Media increased roughly 3%, and Ten recovered much of the ground it had lost after a recent capital raising, according to the article.

Is the advertising market recovering and does that mean a sector turnaround?

The article notes improving sentiment but cautions that the advertising market recovery is unclear. Allan Gray portfolio manager Simon Mawhinney said it’s difficult to say if the sector has found a bottom, so a full turnaround isn’t guaranteed.

Which media stocks did Commonwealth Bank name as preferred and least preferred?

Commonwealth Bank said News Corp, Fairfax, Seven West Media and Southern Cross Media were its preferred stocks in the sector, while the Ten network was its least preferred.

What should everyday investors take away from the recent media sector rally?

Everyday investors should note the improving sentiment and broker upgrades but remain cautious: many media stocks were still trading well below their levels earlier in the year and advertising recovery remains uncertain, so it’s sensible to consider fundamentals and risk before acting.

Did any investment managers comment on the sector outlook in the article?

Yes — Simon Mawhinney of Allan Gray said there appears to be a solid improvement in sentiment toward companies like Fairfax and APN, but he warned against assuming a clear sector recovery given ongoing advertising weakness.