Call me the eternal optimist – and a contrarian. Its tough to do and not a little bit scary. While almost everyone else is slagging off about downbeaten companies and how they have no future, it’s hard to go against the trend and buy shares in these businesses. In this series, I’ll explain why I’ve recently bought shares in three of them.
The reason for all three is one word – turnaround and value. Ok that’s actually two. Turnaround is fairly easy enough to understand. All three businesses have been hit hard by both cyclical and structural challenges to their industries and none were prepared for it. Share prices have followed profits – or lack of – down the drain.
I expect all three to turnaround their fortunes – profits and the share price will hopefully follow. With good brands, and management that appear to have a realistic plan to turn their relevant businesses around, there’s no reason why they can’t become outstanding businesses.
Fairfax Media Holdings (ASX: FXJ) has seen its share price dumped since the GFC. Five years ago, shares were trading over $5 each. They are currently languishing at around 40 cents. That’s a fall of over 90%, following falling profits and a $2 billion plus writedown of its intangible assets.
The company owns several very valuable brands and businesses, which the market is valuing at around $680m (based on market cap). The company is trading on only 4.4 times last year’s normalised profit, and at the recent AGM, the board acknowledged that at some point in the future, it would be a digital only business. Fairfax’s digital revenues rose 20% last year, and the addition of a paywall to access its news websites next year will add to its growing online revenues. The company has several leading Australian web sites, including the number 1 and 3 sites for news, as well as a 51% share in TradeMe Group (ASX: TME) – currently worth around $650 million – almost the whole of the company’s market cap.
Here’s a rundown on the main assets held by Fairfax.
- Web site and print newspapers including, The Sydney Morning Herald, The Age, Brisbane Times, WA Today and the Australian Financial Review – known as the Metro division
- Hundreds of regional newspapers and their relative digital sites
- New Zealand media consisting of newspapers, magazines, publishing and online sites
- Leading Australian websites including Domain (Housing), MyCareer (Jobs), Drive (Cars), RSVP (Australia’s No 1 dating site), Stayz (holiday home rentals), InvestSMART (investing) and Trading Room (finance).
- Broadcasting, which includes metropolitan radio networks and regional radio stations
- 51% of Trade Me, and
- Australian and New Zealand printing operations
Warren Buffett has seen value in regional newspapers, with the majority being virtual monopolies in their regions. Fairfax’s regional newspapers continue to be a major driver of the business. In the 2012 financial year, regional newspapers contributed $153 million to Fairfax’s earnings before interest or tax (EBIT), almost double the second largest – the Metro division.
Of course, the business faces some hefty risks. With net debt of over $900m and $2.5 billion of intangible assets, we could see an equity raising or a sale of assets to repay debt and much more likely, further writedowns of its intangibles, or in a worst case scenario, both. Another issue raised by some is whether the current management team are the right people to drive the business going forward. I expect management to step up and perform. Several large shareholders agitating for change should see to that.
The company has also reported that the advertising market is the worst it has seen – at some point it will turn around, although the company doesn’t expect any improvement before 2015. I’m a bit more confident than the company, and expect an improvement before then.
Lastly, investors in turnaround situations should also keep Warren Buffett’s words in mind – ‘turnarounds seldom turn’.
The Foolish bottom line
Compared to competitors like APN News & Media (ASX: APN), Seven West Media Limited (ASX: SWM) and Ten Network Holdings (ASX: TEN), Fairfax has some excellent assets, and management appears to be making all the right decisions to turn the business around. Just looking at the company’s assets suggests the market may be underestimating the value of its brands – that’s what I’m counting on.
Stay tuned for the next article in the series. I’ll give you a clue – its a retailer with substantial property assets.
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Motley Fool writer/analyst Mike King owns shares in Fairfax. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.