Domain's pain lops 5pc off Fairfax's fair value ahead of merger
The fair value estimate of publishing empire Fairfax has fallen following yesterday's surprisingly weak trading update for property listing business Domain Holdings.
The fair value estimate of publishing empire Fairfax has fallen following yesterday's surprisingly weak trading update for property listing business Domain Holdings.
Domain's (ASX: DGH) downgrade flowed through to Fairfax's (ASX: FXJ) intrinsic assessment due to its 59.4 per cent interest in the property classified and advertising entity, says Morningstar equity analyst Brian Han.
Fairfax remains fairly valued despite a 5 per cent drop in the fair value estimate to $0.71 per share. At 11am Sydney time, Fairfax Media was trading at $0.69, after closing down more than 13.55 per cent to 67 cents on Friday.
The downgrade comes amid softness in the Australian property market and a slowdown in housing turnover, compelling Morningstar equity analyst Gareth James to downgrade Domain’s fair value estimate by 10 per cent to $2.80 per share.
Home prices nationally have fallen 2.7 per cent since peaking in September last year, according to CoreLogic. Capital cities have led the losses, falling 3.7 per cent, while regional areas had a 1.2 per cent gain over the past 12 months.
James puts the house price weakness down to several factors, including the relatively high house price-to-income ratio, multi-decade low interest rates, and a tightening in credit following the banking royal commission.
Despite this, Han says Domain's status as the "crown jewel" within Fairfax's structure is unchanged as free-to-air TV operator Nine Entertainment (ASX: NEC) advances the proposed merger with Fairfax.
Doubt cast over the Nine-Fairfax merger
Investment bank Citi cast doubt over the deal yesterday based on the financial terms following the share sell-off on Friday. But Han said it would be risky for shareholders to shun to deal.
"We were entertaining the possibility of an interloper crashing the party and making a play for Nine, or for another player to counter-bid for Fairfax. But no one has come forward," Han says.
"If Fairfax and Nine shareholders shunned the deal now where would that leave them? Going it alone in an increasingly competitive market and against the might of digital giants such as Google, Facebook and Netflix."
Domain remains the "crown jewel" within Fairfax's structure as the merger advances
Han says buoyant market expectations have been dashed by the weaker than expected result, for the time being, which has hurt the Fairfax stock price.
He says the recent premium to Fairfax's intrinsic stand-alone valuation has evaporated because of the recent slump in Nine's stock price – a slump which suggests the market now casts doubt over the deal and whether its anticipated benefits can withstand the structural pressures from digital insurgents.
"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," Han says.
"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 merger.”
In September, Han told shareholders they would be wise to realise their gains "now" as competition from global online rivals is "only going to intensify."
The deal, announced between Fairfax Media and Nine Entertainment Co in July, will be the biggest since Australia's cross-platform media ownership laws were relaxed in October last year.
The new entity would become the nation's largest media player. Nine will hold a controlling 51.1 per cent stake, and Fairfax will own the remaining 48.9 per cent.
Han sees no regulatory hurdles to the deal following the relaxing of media ownership rules, which scrapped the "two-out-three rule" and the "75 audience reach" rule.
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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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