Fairfax shareholders keen for news on Domain and paywalls

There is a great deal of anticipation for the investor day of Fairfax Media, owner of The Age and The Sydney Morning Herald.

The stock has moved out of the top 100 index and a new group of shareholders has waded into the market, lifting the group's shares almost 60 per cent in seven months.

Shareholders will be eager to find out the long-term ownership structure of the online real estate business Domain and details of the plan for paywalls for online content in July.

In early April, Fairfax management announced a restructure of the group, with Domain being separated from the rest of the operations. This has raised expectations that Domain will be spun into a separately listed vehicle, with Fairfax retaining a controlling stake. This should unlock the true value of the strongly growing Domain business.

Domain has close to a 30 per cent share of the online real estate market and is the second-largest player behind REA Group. Domain generates about $80 million in revenue and analysts' EBITDA forecasts range between $6 million and $40 million. The multiple should be about 12 times, meaning Domain could be worth anywhere between $84 million and $480 million. Given that Fairfax has a market capitalisation of $1.5 billion, this is not insignificant.

Possibly more important than Domain is the performance of the newspaper assets, as advertising revenues drops. In July the company will follow in the footsteps of other media groups and introduce a paywall for editorial content. This seems to be working on international brands such as The New York Times but is untested in Australia.

Possibly a sleeping issue is the performance of the group's regional publishing assets, which contribute about 40 per cent to Fairfax's EBITDA. These newspapers have weathered the financial battering caused by the move to online better than their metropolitan peers. If there are emerging signs that the regional operations are starting to structurally falter, it could be a disappointment to investors.

Webjet

The internet travel booking group's shares have toppled 20 per cent to $4.25 in six weeks, a big turnaround from earlier in the year when investors clambered to participate in a capital raising by the company to buy the Asian operations of Zuji.

When the shares were climbing I wrote that earnings growth did not justify the share price. The stock is still trading on a 2013 price-to-earnings multiple (PE) of 23 times. With domestic economic activity stuttering, analysts and investors fear Webjet's full-year 2013 results could disappoint.

However, Webjet generates about 80 per cent of its revenue from domestic travel and accommodation bookings. A lower dollar means it is more expensive to travel offshore, forcing people to book domestically. If the company can avoid a further downgrade to earnings leading into June 30 and the dollar keeps falling, then 2014 could be a much better year.

High multiples

With the slew of earnings downgrades of late, the natural reaction from investors is to duck for cover in stocks that have performed strongly in recent years on the back of robust earnings.

But when everyone is doing it, it normally results in a handful of companies becoming incredibly expensive, and that is a dangerous situation. Domino's Pizza has risen 44 per cent in the past year and trades on a 2014 PE multiple of 27 times, about double the industrial market. Gaming machine-maker Ainsworth Game Technology has leapt 160 per cent in 12 months but now trades on about 28 times this year's earnings, as investors anticipate another profit upgrade.

Similarly, shares in hospital operator Ramsay Health Care have jumped 75 per cent in a year and now trade on 22 times 2014 earnings. The daddy of them all, REA Group, sits on a multiple of 32 times next year's profits.

If there is an operations glitch or the market turns bearish, the PE ratios of these stocks could easily contract by 40 per cent.

matthewjkidman@gmail.com

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