Australia | Dec 08 2008
By Chris Shaw
Last Friday Fairfax Media ((FXJ)) CEO David Kirk resigned immediately, with the company appointing Brian McCarthy as interim CEO at least until a board meeting later this week. At any time the sudden loss of a senior executive is a cause for uncertainty, and investors usually dislike uncertainty, but as Citi points out management upheaval is just one of the issues facing the media company at present.
One of the other major issues is the level of group debt, which is generating an increase in calls from investors for dividends to be cut to repay some of the borrowings. To date the broker notes management doesn’t appear interested in this course of action, as comments at the company’s annual general meeting suggested the current 80% payout ratio would be maintained.
Credit Suisse expects the company to start focusing more on its payout ratio given the management shakeup, especially since lowering the dividend payout would provide a boost to earnings per share at the same time as it strengthened the balance sheet given lower debt levels. It would also allays concerns in the market the group may be forced to sell assets at a down point in the cycle.
Citi is also in favour of the dividend being cut, especially as it notes the company is highly leveraged to to any downturn in advertising such as is currently the case given the weaker economic environment. But the broker also sees risk of further downgrades to consensus forecasts and the potential for asset sales to reduce debt as issues for the company at present. The uncertainty surrounding these matters makes it tough to be bullish on the shares in its view.
Adding to its cautious view, Citi points out its dividend forecast for FY09 of 15c is already 8% below consensus, but risk remains clearly to the downside given the debt issue. There is also significant downside earnings risk, in its view, as the broker is forecasting earnings per share (EPS) of 17.6c in FY09 and 12.1c in FY10, which compares to consensus forecasts according to the FNArena database of 20.1c and 19.6c respectively.
Numbers appear to be coming down to Citi’s level as Macquarie has now cut its EPS forecasts by 12% this year and 10% in FY10 to 18.1c and 19c respectively, while Credit Suisse is still at 21.7c and 22.4c for the next two years.
Even on Citi’s numbers there appears some value in the stock as it is now trading in line with the broker’s valuation. But while the stockbroker has now upgraded to a Hold rating from Sell, the above mentioned uncertainties stop it from turning more positive. Macquarie is a little more optimistic as it suggests while the current environment is tough the company’s earnings base is diversified enough that it will be able to withstand the present challenging conditions.
Overall the FNArena database shows the stock is rated as Buy four times, Hold four times and Sell twice, with an average price target of $2.06. Credit Suisse leads the way with its $2.70 target, while Citi at $1.41 is the low marker.
Shares in Fairfax today are weaker in an overall buoyant market. As at 12.45pm the stock was down 6c at $1.405, which compares to a trading range over the past year of $1.115 to $4.89.