Goldman Sachs JBWere has maintained its “sell” recommendation on Fairfax Media despite the appointment of Brian McCarthy as CEO at yesterday’s board meeting and the board decision to slash its dividend to 80% of what it has been paying out (for the interim at least).
“In our view, FXJ’s board has taken proactive, prudent and appropriate action. However, we have left our Conviction SELL recommendation unchanged.”
The firm said this unchanged recommendation reflected:
Downside risk to earnings: We see downside risk to earnings as a result of cyclical pressures and structural headwinds.
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Macro news flow: Given the GSJBW Economics team’s view, we expect the macro news flow to continue to worsen. In most cases, this has a direct impact on FXJ. For example, this week’s very weak employment data (ANZ Job Ads Series, GSJBW FXJ page count, Seek Employment Index) is clearly negative for FXJ’s employment classifieds (c.10-13% of total sales). 3. Valuation: At 6.7x FY09 EBITDA, FXJ is trading largely in line with its historical floor valuation of 6.6x. However, the stock remains expensive compared with global peers.
Were’s said the Fairfax board’s statement that the company would look to moving back to the full 80% payout ration as soon as possible was too optimistic.
“We revised our FXJ dividend forecasts on 2 December as part of our latest media sector earnings downgrades. We cut our FY09 dividend by 50% to 10¢ (c.50% payout ratio). Clearly, we did not cut hard enough.
“Despite what the company has stated, we believe it is unrealistic to assume a recovery in FXJ’s dividend payout ratio for some time. We say this given: (1) our view on FXJ’s earnings profile; (2) the downside risk we see to earnings; and (3) FXJ’s debt burden.
“As a result, we have cut our dividend forecasts for: (1) FY09, from 10.0¢ to 4.0¢ (payout ratio c.20%); (2) FY10, from 16.2¢ to 8.0¢ (c.40%); and (3) FY11, from 19.4¢ to 18.0¢ (c.80%).”