Underlying Picture remains Attractive
Fairfax Media (ASX:FXJ) swung to a loss in FY18, with the statutory numbers impacted by significant items. The underlying picture was more positive however and we continue to like the growing digital contribution. The Australian Metro Media business has turned around nicely over the past couple of years. The pending $4.2 billion merger with Nine Entertainment is a game changer, which should see the combined entity strengthened considerably.
We expect the deal to get the green light from regulators and with some shareholders calling for a better offer, we continue to recommend holding the shares at this juncture.
FY18 snapshot
FY18 statutory revenue declined 3.1% year-on-year to $1,687.9 million, while revenue from continuing businesses decreased 2.8% to $1,684 million. There was a solid contribution from the Domain business (of which Fairfax owns 59.45), with revenues up 11.5% and a strong performance from digital subscriptions across the portfolio. This was offset by declines at Australian Metro Media, Australian Community Media and overall from New Zealand Stuff business, despite strong digital revenue growth in that segment.
Fairfax’s performance is increasingly being driven by its digital sources, with revenue from them accounting for 28% of the total in FY18.
Group expenses from continuing businesses declined approximately 3.6% to $1,408.9 million, despite continued investment in growth initiatives at the Domain and Stuff businesses. Group underlying EBITDA came in at $274.2 million, up 1.2% from a year earlier. Underlying net profit after tax (NPAT) excluding significant items of $124.9 million was down 12.4% year-on-year. That equated to underlying earnings per share of 5.4 cents, also down 12.4%.
Source: Fairfax Media (ASX:FXJ)
Significant items summed to $188.7 million, largely relating to non-cash impairment charges at Australian Community Media and Stuff, along with restructuring and redundancy charges. This led to the company reporting a statutory loss of $63.8 million, swinging from a profit of $83.9 million in the prior corresponding period.
Fairfax will pay a final dividend of 1.8 cents per share, 50% franked, bringing total dividends to 2.9 cents per share, 68.95% franked. That marks a pay-out ratio of 54%.
Looking at key segments and Domain Group saw revenue increase 11.5% to $357.3 million, as digital revenue growth of 20.2% to $278.9 million more than offset a 12.6% decline in print revenues to $77.1 million. As digital becomes a larger part of the revenue mix, we expect overall revenue growth at Domain to tick up. Domain is the jewel in the crown for Fairfax Media and along with other digital assets such as video-on-demand service Stan, are key attractions for the Fairfax / Nine merger.
Domain posted EBITDA of $117.6 million for FY18, representing 3.9% growth as the EBITDA margin slipped 2.4 percentage points to 32.9%. Margins in the print business improved, with the focus there on containing costs, while the margin in the digital business declined as the company invests in growth, which we expect to pay off down the road.
Source: Fairfax Media (ASX:FXJ)
The Stan joint venture with Nine is performing solidly, with the active subscriber base expanding to 1.1 million active users. The subscription proposition is underpinned by exclusive deals with the likes of Starz, MGM and Showtime, content rights with global studios and some investment in original local productions. Subscriber growth, combined with the first price increases since launch of the offering over three years ago led to subscription revenue jumping 72%.
The year to June concluded with a revenue run-rate of about $120 million. Revenue growth easily outpaced the increase in operating costs, resulting in a “50% reduction in EBITDA losses between Q1 and Q4 FY18.” The business is expected to be break even by 2019. We believe it can maintain its positioning as the number two player in the local market behind Netflix.
Source: Fairfax Media (ASX:FXJ)
Fairfax’s traditional media assets have historically had a very low valuation ascribed to them and a plank of our original investment these was that a turnaround was possible by taking costs out and leveraging strong brands and a loyal customer base to digital offerings.
That was on show in the FY18 results.
The company’s Australian Metro Media segment, which includes The Australian Financial Review, The Sydney Morning Herald and The Age, was the strongest performing division in the group from a growth in EBITDA perspective. Total revenue declined 6.1% to $490.2 million, but digital subscription revenue grew approximately 9%. Advertising revenue benefitted from improved second half digital performance, supported by the Google programmatic ad sales partnership and a moderation in print declines. Costs fell 7.5%, with savings from staff, technology and print production. Segment EBITDA increased 8.3% to $53.1 million as the EBITDA margin increased by 1.4 percentage points to 10.8%.
That marked was the second straight year of earnings growth, with net paid subscriptions across the three major Metro Media titles rising to 313,000, up from 236,000 in the previous year. CEO Greg Hywood noted the success of the transformation program, which showed that print media is far from ‘dead,’ with businesses needing to adapt to a changing landscape. We expect the division to flourish further following the merger with Nine.
Australian Metro Media segment results:
Source: Fairfax Media (ASX:FXJ)
Discussing the Metro Media business, the Fairfax CEO stated, “For the past six years we have taken this business through radical change. We have reached the point where we can see a strong future for the business.”
The Australian Community Media segment on the other hand continues to face some stiff headwinds, with regional titles impacted by the drought. Fairfax reduced expenses by 5.7%, but revenue was down 8.8% to $351.4 million, with some impact from the closure of unprofitable mastheads. Segment EBITDA slumped 21.6% to $57.2 million. Nine CEO Hugh Marks has reportedly indicated the merged company may look to exit the regional business post-merger.
Finally, the New Zealand Stuff business, which includes the websites business and New Zealand newspapers among others, saw total revenue decline 7.5% to NZ$301.4 million, although digital revenue was up about 21%. Expenses edged down 3.9%, while EBITDA fell 27.1% to NZ$40.5 million. That was impacted by a loss from some one-off items.
Fairfax holds a 54.5% shareholding in the ASX-listed Macquarie Media, which has the number one radio stations in Sydney and Melbourne. Revenue ticked down 0.3% to $136.6 million, but underlying revenue was up about 4% excluding disposals and one-time items.
A 1.7% decline in expenses helped EBITDA edge up 3.3% to $32.6 million.
Fairfax provided a brief trading update, saying revenues in the first six weeks of 1H19 have been about 5% below last year. Domain, Metro Media and Macquarie Media generated revenue growth, while events revenue was impacted by timing changes and Stuff revenue was down on the closure of loss-making publications. Australian Community Media continues to be impacted by the drought. Cost-savings initiatives across the group continue to be a focus.
Turning to the charts, and recent results have added to an already strengthening technical picture for Fairfax Media, and following the takeover approach. On the daily chart, prices have pushed further above dynamic support at the 200-day (green line) and 50 day (red line) moving averages. In-turn, an upward rotation in the share price above prior resistance sighted between $0.77 and $0.81 has also transpired. This is made up of the 50% and 61.8% Fibonacci retracement levels respectively. A move above the 78.6% Fibonacci retracement at $0.86 highlights the strength of recent momentum.
On the monthly chart, resistance was respected at the 61.8% Fibonacci retracement of $0.92 as represented by the red set of retracements in November 2017, and this is likely to remain formidable near-term. This led to a short-term correction to evolve, which now appears to have terminated. Significant structural support has formed at the 38.2% Fibonacci retracement around $0.67.
Summary
Fairfax Media is trading on around 16.7 times forecast June 2020 earnings, with a prospective yield the same year of roughly 3.4%.
Although the company swung to a loss in FY18, the statutory numbers were impacted by significant items. The underlying picture was more positive and we continue to like the growing digital contribution. The Australian Metro Media business has turned around nicely over the past couple of years. The pending $4.2 billion merger with Nine Entertainment is a game changer, which should see the combined entity strengthened considerably.
We expect the deal to get the green light from regulators and with some shareholders calling for a better offer, we continue to recommend holding the shares at this juncture. Fairfax Media (ASX:FXJ) will remain held in the Fat Prophets portfolio.
Disclosure: Fairfax Media (ASX:FXJ) and Domain Holdings Australia are held in the Fat Prophets Global Contrarian Fund (ASX: FPC). Both companies are also held in the Fat Prophets Concentrated Australian and Small/Mid-cap managed account portfolios.
