The earning season is getting underway and FXJ is a bellwether for the media landscape. It is no secret that the newspaper industry has been undergoing structural changes as advertising dollar shift from print to online.
John Oliver made a great piece on the philosophical basis that a strong journalism industry is a key tenor of a strong democracy. The reality is Fairfax is not as bad as the US newspapers, it is still very much in transition towards digital.
- Net profit down 7.6% to $132.5 milion or 5.7 cents.
- Final dividend of 2 cents per share with total year dividend at 4 cents at 70% payout ratio.
- $1.1 billion non cash write off on legacy print media business
- $74 million in on market share buybacks over the last 12 months
Ostensibly the business is treading water. However the segment revenue and EBITDA segment above shows the new growth engine like Domain and Stan are not yet able to pick up the weakness in the loss ad revenue from the mastheads and Community media.
Overall circulation looks alright but did not offset the fall in print revenues. Total FY17 revenue is tracking 8 to 9% below last year.
Domain.com.au – all eys on spring selling
There is no doubt that domain.com.au like realestate.com.au (ASX REA) is leveraged to the real estate market. The management is trying to expand the website into a broader ecosystem rather relying on real estate listing as key source of earnings. We agree with the strategy and looks more favorable verses realestate.com.au strategy of focusing on development project advertisement.
The downside is that domain is 2nd in the market where in our experience internet businesses has a habit of winner takes all. After all once Ebay on the online classified war, no one cared who was number 2.
We are cautious with the residential real estate market going forward. Median capital city prices are near record highs, rental yield and interests rates are near record lows. The latest real estate financing figures shows that while the sector is still churning along, we are conscious that we are closer to the top for this cycle than the bottom.
FY17 performance is dependent on the performance of the broader market and a pick from the low July start as result of the federal election.
FXJ moonshot, Stan.
Google carved out a piece of its business informally called moonshots. The goal of moonshot is to recognize that there are long shot bets and most of the time it will not payoff. We see the Stan business from a similar perspective. In Australia Kogan (ASX KGN) is another company that has similar portfolio of long shots that may or maynot payoff.
One question we have is what is the end game for its the 18 month old Video on Demand Service – Stan. It looks like it is replicating Netflix with a focus on original programming. However originals are expensive and the Australian market does not have the scale and depth to payoff any investments.
This means that international licensing would be critical for its success but there is a limited scope in developing widely marketable shows in Australia. We see it as a hail merry in limiting the extend of Netflix penetration. If it succeeds it could present it self as a major player in replacing the free to air networks and Foxtel. If it doesn’t, it will be another write off.
Despite numerous industry challenges faced by FXJ ASX, fundamentally the business owns the best media assets in Australia. Despite the cyclical slow down in real estate, domain is an asset that is worth alot more on a standalone basis verses its current position within the group. The group on otherhand need domain to smooth the transition from print to digital in print publishing. Just try to imagine what the financials look like without domain.