Investors should dump shares in Fairfax Media amid concern that the digital arms of the company’s top news mastheads are faltering, says one of Australia’s leading media analysts.
In a grim report on Australia’s oldest media company, Citi media analyst David Kaynes warns that Fairfax’s flagship titles – The Sydney Morning Herald, The Age and The Australian Financial Review – have “no future if digital revenue continues to decline”.
“Given the levels of competition these sites now face, this is only going to get harder in our view,” Mr Kaynes asserted in the report.
“Not only are they competing with the websites of the other newspapers, there are also news sites for all of the TV broadcasters, international newspaper sites that have recently entered Australia, specialty sites (eg. AFL.com.au) and perhaps the biggest threat is social media where news apps are becoming virtual gatekeepers to all of the news sites.”
According to Mr Kaynes, the value of all Fairfax newspaper titles is less than zero if the cost of shutting down the company’s print operations – estimated at $335 million – is accounted for.
“We do not see any improvement in sight for its core regional and metro newspaper businesses with the shut down costs, in our view, likely to exceed any future earnings,” he said in the report.
Fairfax reported a net loss of $893 million for the year to the end of June after it wrote down the balance sheet value of its Australian newspapers by $1 billion.
An even more worrying feature of the result was that revenue derived from digital news operations is also believed to have fallen.
“In our view, if this trend cannot be turned around quickly, then none of Fairfax’s mastheads would have a viable future, in any form,” Mr Kaynes said in the report.
Some mystery surrounds the financial health of the digital news arms because the company moved to tighten financial disclosure in its latest financial accounts.
Sell, sell, sell…
Mr Kaynes is recommending that investors offload Fairfax’s ASX-listed stock, which closed down 1 cent to 80 cents on Tuesday.
He sees more pain ahead for shareholders, arguing that the share price could fall to around 70 cents.
Long-term investors are sitting on big paper losses – in November 2006, the company’s shares were trading at $4.50.
Fairfax’s battle for survival would be extremely dire if it was unable to tap profits from its real estate advertising arm, Domain.
While Domain accounted for only 18 per cent of revenue in 2016, it is the company’s fastest-growing business and the most profitable.
Domain generated a gross profit of $127 million last year and is valued at more than $2 billion by Mr Kaynes.
A shrinking empire
Despite the performance numbers pointing to a business in decline, Fairfax’s board is maintaining an upbeat commentary when communicating with shareholders.
The latest annual report contains a string of claims about how shareholder value was boosted in the last financial year.
“We are growing shareholder value by engaging audiences, communities and businesses, and monetising a range of business models.”
Such commentary is difficult to reconcile with the company’s financial performance over the past decade.
At the end of June 2016, Fairfax directors valued the company’s total assets at $1.64 billion – a heavy discount to the 2015 valuation of $2.82 billion.
When liabilities such as loans and unpaid invoices were deducted from these assets, the net value of the company’s stable of media and digital assets stood at only $1.03 billion.
That’s around half what they were worth last year when directors measured the net value of the businesses at $2.06 billion.
Based on disclosures made in previous financial accounts, Fairfax is worth about one-fifth of its value a decade ago when its net assets were reported at almost $5 billion.