With Fairfax share plumbing fresh lows well below $1 this morning (it was once $6.24), the old media behemoth is bracing for some seriously bad news when its first half results are released at 8:30am on Monday. Analysts are expecting a torrent of red ink with predictions of a 25% profit fall — the firm’s hallowed rivers of classified gold starting to resemble a stricken tributary of the Murray Darling Basin.

The Fairfax board met yesterday and the mood was expected to be grim with discussion centering on the firm’s debt load, with a huge $2.3 billion required to be paid back by 2012. Whether FXJ will need to tap the market for fresh funds remains unclear, although judging by Channel Ten’s equity raising debacle this week, that may be wishful thinking. In December, Fairfax chopped dividends to allow its debt to be hived off more quickly.

Fairfax’s $6.3 billion in goodwill could also be written down with former Rural Press assets in the firing line.

Internally, slash-and-burn CEO Brian McCarthy is preparing to wield the axe, with reports claiming the Business and Sport sections of the SMH and Age will soon be merged. The Smage, a cheeky term of derision for the metro mastheads, could soon become a reality.

On the eve of the expected carnage, Crikey thought it prudent to do a ring around of leading media analysts to get the inside word on the future of this once-proud family firm. The news doesn’t look good:

Alice Bennett, Merrill Lynch: We believe FXJ has appealing attributes relative to its peers: an attractive business mix, with less reliance on metros and increased earnings exposure to online and the high-margin rural/regional and specialist publications, and a better circulation record. However, given we expect as advertising downturn in FY09/FY10, we think a cyclical stock like FXJ will fail to outperform at least until we see some sign of a pick up in the real economy.

We believe Fairfax share price outperformance will be limited substantially over the next 6-12 months, as we expect a protracted and deep cyclical downturn.

Risks include a reversal of Fairfax’s impressive circulation gains to declines, a greater than expected structural shift in Fairfax’s classified print revenues to online, a greater than expected deterioration of the Australian economy and ad market looking into 2009, and the NZ recession ending up deeper and more protracted than expected.

Share price target: $1.60

Christian Guerra, Goldman Sachs JBWere: The current economic downturn has revealed the cracks in Fairfax’s diversification strategy, namely: high leverage to cyclical drivers, advertising and circulation. Eighty per cent of earnings remain in businesses in structural decline (i.e. print, radio); and associated high debt levels.

The key issue for Fairfax in FY09, and more so FY10, is to what degree the structural deterioration has inhibited its ability to leverage the market recovery.

The Rural Press acquisition has enhanced the quality of the Australian publishing portfolio, diversifying it both geographically and by mix. However newspapers, regardless of whether they are metro or regional, remain predominantly reliant on advertising revenues. The metro franchises remain in long term structural decline impacted by audience and advertiser fragmentation and the migration of classified advertising online. While Fairfax has taken aggressive steps to reduce the overall costs, we believe this will be insufficient to maintain positive earnings growth.

The market’s focus on near term earnings is also driving acute attention on debt serviceability. Fairfax’s earliest debt maturity is $433m in 2010, with a further $1bn due in 2011.

The more traditional ad market dependent media companies face an even more important issue than the timing of the cyclical recovery — that of structural headwinds. We believe there is a significant possibility than traditional media companies do not fully participate in the broader ad market recovery, despite the recovery of the broader economy.

Share price target: $1.25

John McLeish ABN Amro: We know Fairfax has debt of around $2.4 billion, so it’s higher than you’d want it to be. But in my view they’re a long way from breaching covenance but it in this environment it’s still a big concern.

It’s going to be a tough period for advertising, particularly employment classified advertising. Circulation revenue should continue to hold up, as should the online parts of the business. At a group level you’re going to see substantial revenue declines although there are certain parts of the business that should cushion the blow.

Regional and community newspapers should see revenue fall but the declines should be much less than on the metro titles.

Share price target: $2.25.

Charlie Aitken, Southern Cross Equities: Ever since Network Ten’s failed placement this week, listed media stocks are going to struggle to raise capital and the Fairfax share price will be under immense pressure. You’ve only got to look at plummeting job ads and real estate ads to know that the next half for the firm will be very, very tough.

They’re carrying a huge debt load in a cyclical industry and we know from the past that huge debt loads are a massive problem.

Fairfax are also likely to see goodwill evaporate, especially in the Rural Press parts of the business and Trade me in NZ.

The fact that Channel Ten couldn’t find $300 million was a very bad sign for the listed media sector and the market has already marked down the hasher prices of those with high gearing who potentially will have to come to the market for extra capital.

Fairfax have been brave to this point, claiming that they don’t need to add any extra capital, but there is a where they’ll need to. Obviously investors judging by the share price have too much debt relative to the recession that we’ve now entered.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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