Morningstar | Domain's Pain Lops 5% off Fairfax Media's Intrisic Assessment. See Updated Analyst Note from 14 Oct 2018
We cut our fair value estimate on Fairfax Media by 5% to AUD 0.71 per share. The revision is due to a 10% downgrade to our Domain fair value estimate to AUD 2.80 per share--a change which flows through to our Fairfax intrinsic assessment due to its 59.4% interest in the property classified and advertising entity.This follows Domain's surprisingly weak trading update for the first four months of fiscal 2019, suffering a sharp slowing in real estate turnover and an associated drop in new listings. For more details, see "Domain FVE Cut to AUD 2.80 on Lower Real Estate Turnover but Long-Term Thesis Unchanged," published Oct. 15, 2018 by our technology analyst.
The disappointing trading update does not change Domain's crown jewel status within no-moat-rated Fairfax's structure. It remains a key attraction for Nine Entertainment, as the free-to-air TV operator advances the proposed merger with Fairfax. However, buoyant market expectations have been dashed, at least for the time being, with collateral impact on Fairfax stock price. Indeed, shares in Fairfax are now trading at a 6% discount to our revised fair value estimate. Further, the recent premium to its intrinsic stand-alone valuation has evaporated, due to the recent slump in Nine's stock price, as more than 95% of the proposed merger consideration for Fairfax shareholders is in Nine shares.
The pendulum of investor sentiment has swung from excessive optimism regarding the proposed Nine merger, to one of greater caution around the cyclicality of the combined entity's businesses. It is possible that the pendulum could continue to swing to excessive pessimism levels, as investors start ruminating on the structural threats awaiting both Fairfax and Nine, even if they successfully merge—an issue we delved into in "Nine and Fairfax Muscle Up to Enter the House of Pain: Urge to merge has strategic merits, but structural headwinds are here to stay", published Sept. 17, 2018.
Fairfax Media is engaged in the publishing of news, information and entertainment, advertising sales in print and digital formats, and radio broadcasting. Co.'s segments include: Domain Group, which is engaged in real estate media and services business; Metropolitan Media, which is engaged in metropolitan news, sport, lifestyle and business media; Australian Community Media, which is engaged in newspaper publishing and online for all Australian regional, community and agricultural media; New Zealand Media, which is engaged in newspaper, magazine and general publishing and online for all New Zealand media; and Radio, which is engaged in metropolitan radio networks in Australia.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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