You wouldn’t read about it, but as bad as Fairfax’s results are — they were released yesterday — they’re not as bad as you might think.
Long analysis on the results in The Australian was short on comparisons closer to home: Rupert Murdoch’s Australian arm continues to slash staff and costs across the country in preparation of the separation from the parent company in a few months’ time, and to deal with huge debts taken on to boost its stake in Foxtel and control Fox Sports.
Fairfax’s interim result was miserable, compared to the glory days of six years or so ago, but there was a profit and a small dividend will be paid (1 cent a share, half the previous interim of 2 cents). But some analysts reckon that’s a far healthier position than News Limited, which lags behind Fairfax in making the deep cuts to business (there’s more to come over the next two years at Fairfax). Certainly Fairfax is now financially the strongest of all Australian analogue (TV and papers) media companies after years of drastic surgery and swingeing cuts.
News Ltd is bigger with more assets and newspaper sales, but it has more staff and larger costs (and they’re harder to cut). And the outlook isn’t solid as it contemplates life outside the Murdoch tent. News Corp’s second quarter and half-year reports earlier this month blamed the drop in operating earnings in the publishing business on weak ad and sales revenues in Australia. And News Corp directors continue to warn that up to $US2.2 million in goodwill and intangibles remains at risk in Australia.
Looking at the nitty gritty in the Fairfax accounts for the December half year you would have to say they justify the rebound in the share price to more than 50 cents in the last few months (a 50% rise doubling from the 2012 low of 35c). But more importantly, the troubled metro print business remains profitable (The Australian Financial Review, which continues to struggle with weak sales and low ad shares, reported earnings before interest, tax, depreciation and amortisation of $4 million, up from the break-even effort in the June quarter, but down sharply on the December 2011 half year.)
The value of those deep cuts at Fairfax a year and more ago showed up. The company slashed the value of its newspaper titles by almost $3 billion last year — this year there were none. It has said it would reduce costs by cutting 1900 jobs over three years, closing printing plants and reducing the size of its broadsheet newspapers. In fact, the company says the benefits of those and allied moves are flowing faster than expected and the half-year’s earnings before interest, tax, depreciation and amortisation of $205 million was boosted by $40 million thanks to the earlier cuts. That limited the fall in EBITDA to just 1.4%.
Compared to what we know about the state of News (falling newspaper sales which are boosted by ultra-cheap deals, especially in Melbourne for the Herald Sun) and APN (a black hole and unstable boardroom), Fairfax is starting to resemble an oasis of strength, even though those adventurers in its share register — Gina Rinehart, Mark Carnegie and John Singleton — and the hacks at News Ltd and its managers might think otherwise.
Net debt has been cut to $193 million, which for a company with a turnover of $2 billion a year (and just over $1 billion in the half year) is nothing. That is a big contrast to the $2 billion or more of debt taken on for the silly purchase of Rural Press five years ago and the $2 billion or more borrowed by News Ltd last year to finance the Foxtel takeover of Austar and the deal to grab more of Foxtel (handing over $1 billion to James Packer and $500 million to Kerry Stokes).
The key to Fairfax’s strength now is the $477 million in cash and cash equivalents at the end of December, well in excess of its debt and enough to buy APN (around $190 million) if it wanted to and the Ten Network ($750 million) if it could. Fairfax isn’t that stupid, especially to contemplate Ten which looks more like a troubled fiefdom of the Murdoch family empire than a rational investment. The same can’t be said about News, which will contain billions of dollars in assets, debts and weak revenues and cash flows (especially because it can’t access all of the cash flowing through Foxtel).
The writedown last year at Fairfax cut intangibles to $1.854 billion at the half year and the company also had tax losses of $102 million, down from $122 million a year earlier. There are no antsy bankers worried about debt covenants and willing to leak their concerns to other media to pressure Fairfax’s board.
In fact, the improvement in Fairfax’s financial strength supports the performance of the board, chairman Roger Corbett and CEO Greg Hywood. They took the sensible decision to sell the Trade Me digital business and turn that into cash (and sell other businesses and cut deeply into costs, including staff) and cut debt as quickly as possible.
We can’t say what is happening at News because it doesn’t publish interim accounts. The split in the parent will see more information made available in fuller documentation to be released later this year.
Watch for the nosy miners in the investment community and in the share register to start calling on Fairfax to do a share buyback or look at acquisitions (using the “lazy cash, lazy balance sheet” line). After the experience of the past five years or so, it should not be wasting the money. The cash pile and emerging balance sheet strength (not to mention operational gains in the profits) have given the “gang which couldn’t shoot straight” a bonus chance of survival. Waste this one and it’s curtains.