Fairfax restructure highlights Domain
The restructuring 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 for the media group.
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 [will] conduct in the future," Fairfax chief executive Greg Hywood told analysts on Thursday.
No one is questioning the importance of splitting out Domain as a stand-alone business, and placing other transactional businesses like RSVP and Stayz into another called Digital Ventures. Analysts have said it is a good way of highlighting the value that has been hidden from the market by Fairfax's previous structure, and 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 entire Fairfax group is at present valued at $1.4 billion.
Commonwealth Bank analyst Alice Bennett put a valuation of $415 million on Domain, based on what estimates it has been able to make on limited information, and valued the other transactional business at $256 million. Despite an "overweight" recommendation, CBA 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 break-up of the group down the track, or the sale of Domain and other transactional businesses, Mr Hywood made it clear this week that the focus right now is on immediate benefits of the restructure to the group.
"Break-up 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 down the track if needed.
While Domain and Digital Ventures 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.
He has promised more detail on significant cost cuts in June after a review is conducted of the new business units.
"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-out and redundancy program."