Fairfax Media has been a dog of a stock for some time now. It has underperformed the All Ords by about 50% since mid-2010. But at some point in its slide it has to be undervalued, and it might be approaching that point, especially if a break up is on the cards. Deutsche is looking for the bottom, but can only bring itself to issue a hold, with a price target of 67c:
The relentless decline in group revenues (down 8% in 2H12) is alarming to us, and raises serious concerns about the long term sustainability of the group’s revenue base. In this environment the group is in a race against time to significantly reduce the cost base and transition to alternative revenue streams. Furthermore restructuring initiatives including portfolio and capital management will need to be examined.
The question for investors is whether a break up is on the cards. It looks unlikely that the company will get into a problem on its debt covenants in the next two years, and its EBITDA is almost half its market cap, although earnings per share are forecast to be flat over the next two years. It should be considered undervalued, but the market is unconvinced by the management strategy, to say the least. Deutsche doesn’t like the prospects for a break up:
Given the sharp decline in FXJ’s share price and the weak earnings outlook, we have examined two potential strategic options – 1) the sale of TME and radio and 2) A break-up of the FXJ group by existing management or external parties. The company expects capital management initiatives from the sale of TME and Radio businesses to be earnings accretive in FY13 in the range of 6.3% to 14.1% and also improve the group’s debt profile. In a break up scenario we have valued FXJ at $1.25b or $0.53/share after adjusting our going concern value (SoP). However a break up of the FXJ group would be a complex undertaking with many issues and costs especially in the metro business, which may prove to be prohibitive.
The problem is the lack of a new advertising model. Fairfax is reasonably strong on the content side. The Age and SMH are about to overtake Ninemsn for online traffic. Yet the market is basically valuing the metropolitan mastheads at nil. So the problem is not editorial content, or the choice of platform, it is the lack of an advertisnig strategy for the new world of media. Until that happens, there is no obvious reason to take on the risk.