Let’s get digital
Shares in Fairfax Media (ASX:FXJ) have risen slightly since our last review, after a fairly subdued reaction in the wake of what we considered to be a solid half year result in late February. Sentiment has though picked up more recently, and also as management painted an upbeat picture at a presentation last week. An accompanying trading update revealed a slight dip in revenues, although we see this being more than compensated by higher margins as the company continues to transition towards digital channels.
Speaking at the Macquarie Australia Conference Fairfax CEO Greg Hywood talked about the “new phase” that the publisher was entering, with a focus on growth, and with some tough decisions having been made in recent years.
He said that “Fairfax Media (ASX:FXJ) is now a modern portfolio of Domain, publishing and investments. Each is explicitly focused on driving growth and building value by leveraging our competitive strengths of quality content, premium brands, data and insights and large audiences.” We certainly go along with this, and have backed the company’s ability to transition and translate underlying brand value into sustainable earnings growth.
We have made much of the company’s ability to ‘move’ with the times, and indeed the demerger of Domain has been part of that process. The CEO also noted that “In the face of that profound industry disruption, setting ourselves on the path of originating commercially viable new media has proven correct… While this model has lower revenue than in the past, it is more sustainable and valuable, featuring multiple business models and diversified revenue streams.“
While many have bemoaned the decline in traditional print media, we have focussed on the digital growth opportunities at Fairfax, and not just at Domain, but also at other core units, including Stan. Given the disruption faced by the sector, media companies have to ‘adjust’, and Fairfax has certainly done this.
The point is made that between 2012 and 2018 newspaper industry advertising revenue as a percentage of the total Australian advertising pie has gone from 23% to 8%. This is equivalent to a $300 million average annual reduction in industry revenues. Over the same time, Fairfax (ASX:FXJ) has grown shareholder value by $1.6 billion (considering market cap, the Domain separation and buybacks).
Source: Fairfax Media (ASX:FXJ) Investor Presentation
Part of the transformation has been a cost out story, and also a decreasing reliance on ‘traditional’ channels. In the last four years, digital and other non-print revenue has grown as a percentage of Fairfax’s total business from 23% to 39%. Costs have also been taken out ($500 million annualised savings to date), leading to a reduction in debt of close to $1 billion, and all while strong branding has seen total paid subscribers rising. The company’s masthead publications The Sydney Morning Herald, The Age, and The Australian Financial Review, now have digital subscribers totalling 283,000.
Source: Investor Presentation
Domain has also been a big part of this value add, and we see this delivering much more in the way of shareholder gains in the year ahead. The strategy to date has been successful, with Domain’s relative market share of listings penetration growing to 95%, and 84% of revenues digitally driven.
Source: Fairfax Media (ASX:FXJ) Investor Presentation
Other investments are also tracking well, including the 50% owned video-on demand platform Stan.
The business has proven to be a highly successful disruptor itself and only stands behind Netflix in the space. Subscribers have grown to around 930,000 in just over three years. We see this business being a significant earnings contributor down the track, and as scale continues to build.
Elsewhere, value has also been built at the 54.5% owned radio broadcaster Macquarie Media. The merger of Fairfax Radio Network and Macquarie Radio Network has also delivered a margin uplift from 16.4% to 23.7%.
Trading update
At the presentation, management gave a brief trading update, reporting that overall revenues in the first 17 weeks of FY18 H2 were around 1% below last year.
The company updated that Domain total revenue was up 13%, while digital revenue climbed 21%.
Australian Metro Media, Community Media and Stuff (New Zealand media) saw weakness but revenues art Macquarie Media were up around 4%.
Still, as management have noted, the necessary transition that the company is undergoing may see a slower growth rate in revenues, but with earning benefits coming in the form of higher margins. This is also while costs continue to be taken out. This includes the closure of 28 newspapers in New Zealand after the country’s Commerce Commission knocked back a merger between Fairfax’s unit across the Tasman and NZME. The decision has been appealed and will be heard in June, although we would be surprised to see an about face.
Turning to the charts, and with reference to the daily, prices have nudged above overhead dynamic resistance evident at the 200-day moving average (green line) of $0.74. This is in encouraging, and a sustained break above this indicator would bolster the short-term technical outlook. In-turn, an upward rotation in share price towards the next band of resistance sighted between $0.77 and $0.81 would likely be on the agenda. This is made up of the 50% and 61.8% Fibonacci retracement levels respectively, as represented by the red set of retracements.
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. This has led to a short-term correction to evolve, and should this continue, support is indicated at the 50% Fibonacci retracement of $0.59, followed by an additional layer sighted at the $0.50/$0.52 region. This is made up of structural support (horizontal solid-blue line) and the 61.8% Fibonacci retracement (blue set of retracements) respectively.
In the grand scheme of things, the broader uptrend remains in play, despite the softness in price-action that has been apparent of late. For this reason, we would categorise the recent period of weakness as being healthy. Therefore, once this pause in trend is complete, we expect the longer-term bulls to reassert upward pressure, and thus steer the prevailing direction of Fairfax.
Summary
Shares in Fairfax Media (ASX:FXJ) have risen slightly since our last review, after a fairly subdued reaction in the wake of what we considered to be a solid half year result in late February. Sentiment has though picked up more recently, and also as management painted an upbeat picture at a presentation last week. An accompanying trading update revealed a slight dip in revenues, although we see this being more than compensated by higher margins as the company continues to transition towards digital channels.
An accompanying trading update revealed a slight dip in revenues, although we see this being more than compensated by higher margins as the company continues to transition towards digital channels.
Source: Fairfax Media (ASX:FXJ) Investor Presentation
With Fairfax Media’s shares currently trading at 13 times FY19 earnings and with a prospective dividend yield of 6%, we remain favourably disposed to Fairfax. We see an ongoing transition to digital as helping to leverage some great brands, with ongoing growth in margins and earnings.
Accordingly, Fairfax Media (ASX:FXJ) will remain firmly held in the Fat Prophets portfolio. For Members with no current exposure to the company’s shares, and with a medium to long-term timeframe, we recommend the stock as a High Conviction buy.
Disclosure: Fairfax (ASX:FXJ) is held in the Global Contrarian Fund (ASX: FPC), as well as the Fat Prophets Concentrated Australian and Small/Mid-cap managed account portfolios.
