The Australian media industry has received another shock with media analysts Goldman Sachs JB Were claiming dramatic falls in classified advertising in Fairfax’s traditional metro papers for December. What might this mean for life at Fairfax over the next year or so? Read on.
Classified advertising for motor vehicles and real estate had held up in September to November as dealers had to move stock and property — a ramification of the financial crisis. However, in December Goldman Sachs claim that real estate advertising fell. Compared to December 2007 by -35% at the SMH, -49% at The Age and -62% for the Financial Review.
As could be expected with growing job losses, employment ads fell by about 50% in all publications and motor vehicle ads in the SMH by 46% and The Age 62%. Goldman Sachs have a sell on the stock because they believe it is still trading at a premium to global peers, though confusingly having a 12-month price target of $1.80 — higher than the existing share price yesterday of $1.57 — and an even higher DCF value of $2.38.
Macquarie Research, on the other hand, placed an outperform recommendation in early December, also with a 12-month target of $1.84 on a sum of parts basis. Macquarie considered Fairfax cheap in comparison to companies such as TEN despite downgrading their earnings expectations by -10%.
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In contrast Citigroup placed a sell/medium risk in early December with a much more humble target price of $1.41 per share.
Are you confused? Why would Goldman Sachs publish such dramatic advertising declines, a sell notice and then place a higher enterprise value? If they are right on the advertising then why are the other brokers not urgently readjusting their earnings and price predictions?
A major reason is that Fairfax is no longer solely reliant on the big three metro papers. They now only form 20% of the business. These days Fairfax actually makes more profits from its regional and community papers, which are less effected by declining national advertisers and classifieds than metros.
The New Zealand publishing interests make a comparable contribution to the Australian metros but are similarly exposed to the economic downturn. The online business is the shining light even though growth has been halved to about 10-15% and in 2009 it is expected to earn more than metro or NZ publishing.
The really scary thought is that so far Australia has been protected from the worst of the international crisis with stronger banks, job losses limited, retail sales still positive in November and GDP not yet negative. If the Goldman Sachs classified advertising figures are correct for December and they were to be continued in the first half of 2009, then Fairfax will need to make more substantial job losses and downsize the newspaper businesses or it may breach its debt covenants.
If Australia is to experience a decline in GDP then the resultant dramatic fall in advertising revenue combined with the huge debt levels of most of the major players could cut a swathe through the whole media industry.