Australia | Sep 01 2006
By Greg Peel
There were no surprises in the Fairfax (FXJ) result, but almost as one the brokers declared that the stock will struggle in the short term. However, they were once again in chorus in declaring Fairfax’s value to now be based on the expansion of its online services.
There is no way around it – print media is on the decline. While the mid (such as myself) to older generation will still enjoy the pleasures of reading a broadsheet newspaper each day, the younger generation is an online generation, preferring to access news via the net, or mobile phone, or PDA etc.
With the decline of circulation comes the decline of advertising, and particularly classified advertising which is the backbone of the daily rag. Even I will be happy to admit that online classifieds are far more user friendly than scouring a newspaper. It is also notable that letters to the Sydney Morning Herald have recently bemoaned the fact that Greater Union cinemas no longer deign to advertise movie sessions in the paper, and calls have been made to boycott the group.
I doubt whether Greater Union really cares.
Fairfax management have not stood by idly as the world has changed around them. Fairfax’s new media division, Fairfax Digital, is growing at a rapid clip. The division was unfortunately launched during the earlier tech boom, and suffered in the subsequent crash, but now it is really getting its act together.
Brokers tell much the same story, so we’ll take the UBS figures as an example.
Fairfax Digital (not including recent NZ acquisition Trade Me) reported FY06 revenue growth of $96.4m (+76%) and EBITDA of $24.3m (+268%), in line with the analysts’ estimates. Revenue growth accelerated in the second half by 84%, but costs were catching up as well – some 74%. Trade Me contributed a further $7.7m to EBITDA and remains on track to meet company targets of NZ$45m in the year to March 07.
This is all very exciting, and three out of ten brokers are holding a Buy rating on Fairfax by virtue of its new media prospects. The rest of the pack has focused more on the short term effect of falling advertising in old media. They are all on Hold, with ABN Amro moving to Hold today, despite being very positive about Fairfax Digital.
The average target price currently stands at $4.33. Fairfax closed yesterday at $4.04.
The other important factor to consider with Fairfax is its appeal as a takeover target once cross-media and foreign ownership laws are relaxed. Fairfax has long been considered a jewel in the crown of the Australian press, such that one Kerry Packer would have gone to the grave ruing that he was never allowed to get his hands on it.
For more analysis of investment in a new media world see “Media Advertising – The Future Is Very Big” (Sell & Buy-ology, 23/08/06).