Australia | Nov 11 2009
By Chris Shaw
At the annual general meeting of Fairfax Media ((FXJ)) yesterday, management provided an update on operations for FY10 so far, one that included comments suggesting advertising trends continue to show some signs of improvement. This is consistent with the early stages of a cyclical recovery in the broader economy.
As RBS Australia notes, this means while earnings in the first half of FY10 are still declining the pace of decline is slowing to around 15% for the four months to October compared to the 43% fall recorded in the six months to the end of June. This implies RBS’s earnings forecasts were overly conservative and so have been revised up slightly, the change measuring out at 7% in earnings per share (EPS) terms in FY10 and 3% in FY11.
This puts RBS Australia’s revised EPS estimates at 10.7c and 13.8c for FY10 and FY11, while Bank of America Merrill Lynch is at 9.1c and 13c respectively and Credit Suisse is forecasting 10.3c and 11.7c. Consensus forecasts according to the FNArena database now stand at 9.8c and 12.4c for FY10 and FY11.
In the view of JP Morgan yesterday’s guidance suggests there is limited if any downside to the market’s forecasts for FY10 and this means the focus should turn to FY11, where the cyclical recovery story remains on track. Given this, JP Morgan retains its Overweight rating on the stock, a view shared by Credit Suisse and RBS Australia.
But Deutsche Bank continues to be less convinced in that while the analysts agree with the view advertising markets trends are improving, causing modest increases to its earnings estimates, they believe it is too early to assume earnings will recover by as much as is being priced into the stock at present given the economic environment remains somewhat uncertain.
As well, Deutsche points out the company still has a number of structural issues to deal with such as the loss of key revenue streams to digital media and other platforms, in classifieds in particular. Factoring this in Deutsche doesn’t expect total group revenue to return to 2008 levels until 2013 at the earliest, thus limiting the upside potential of the stock.
What may also be a limiting factor is confirmation from management the dividend payout ratio will be restricted to 20% for the foreseeable future, as the focus remains on reducing the level of debt the group is carrying. Bank of America Merrill Lynch doesn’t see this as being a long-term issue however, forecasting an increase in the payout ratio to 45% by FY11 and a return to the previous level of 80% by FY12.
While Deutsche Bank has lifted its price target to $1.40 from $1.05 post the AGM update this remains comfortably below the current share price, so it sees no reason to shift from its Sell rating given the issues it has identified.
This puts the broker at odds with the market as the FNArena database shows Fairfax is rated as Buy seven times compared to one Hold, one Reduce and Deutsche at Sell. The average price target on the stock is $1.78, up from $1.70 prior to the AGM, with RBS Australia and Credit Suisse most bullish with respective targets of $2.00 and $2.05.
Shares in Fairfax Media today are slightly higher and as at 11.40am the stock was up 3.5c at $1.67. This compares to a range over the past year of $0.795 to $1.895.
