Stock of the Day – Fairfax Media (FXJ)

Fairfax media founded in 1841 and with 10,631 employees is one of the largest traditional media businesses in Australia and New Zealand. It publishes 240 regional, rural and community publications, has nine radio licenses in Queensland and South Australia and metro newspapers in Sydney, Melbourne and Canberra. Flagship mastheads include, the second most read metro newspapers: The Sydney Morning Herald, The Age and the national financial journal The Australian Financial Review.

Fairfax remains slow to adopt the new media environments and is being outpaced by changes in digital media landscape as advertisers continue the online migration. We think the introduction of digitized subscription services will fail to stem the revenue loss as audiences seek alternate free news content from sources such as google or the government funded Australian Broadcasting Corporation. For the last decade Fairfax has been struggling to transition from a newspaper print publisher to become a digitized content provider. The internet has stripped away once large revenue streams form print classifieds which have mainly gone to three internet sites, realestate.com.au, carsales.com.au and seek.com.au. Fairfax has been slow to innovate and respond to the growing audience reach form online channels and is now seen as desperately trying to reinvent itself by cutting costs, simplifying the business and moving to a digitized media platform.

The progression of FXJ’s online real estate business Domain stood out in the 1H results it reported Revenue +29% and EBITDA +50%. Fairfax reported a strong 1H2014 result with net profit after tax from continuing operations up 47.8% to AUD 86.4 million despite revenue continuing to fall down 7.4% to AUD 964.7 million. We take a divergent view from the market and expect returns will continue to weaken as revenue growth from digital division is unable to compensate for the ongoing weakness across the print business.


FXJ  Daily Chart  (Source - Thomson Reuters)

 

We associate very high uncertainty with the stock reflecting the inherent operating leverage of this print media company which is reliant on the cyclicality of the advertising expenditure. We expect Fairfax will remain in an extended state of restructure and process simplification as it cuts operating costs to support a declining revenue base. We believe over the long term the profitability of the company will remain on a downward trend as the company continues to evolve to digital medium. We will review this stock at a later date to take stock of any changes.

 

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