It’s because of the mining boom. It’s the fallout from the global financial crisis. It’s the ill effects of globalisation. Or the internet revolution. Financial deregulation. Whatever the reason for it, some of Australia’s biggest icons are at fire-sale prices. This week we analyse four sold-off Aussie icons in a two part series.
Fairfax family abandons stake
Take Fairfax for instance, the owner of Australia’s most prestigious newspaper, The Sydney Morning Herald, which has framed our conversation and our culture for some 180 years. Its shares are now trading at just $0.84, down 42% in the past year and 83% over the past five years. Take a look at Fairfax’s 5-year share price chart below. It’s a weeping willow of a stock.
Over the past month, the remaining Fairfax family holders have abandoned the company – John B. Fairfax sold his final 9.7% stake in his beloved company for a dismal $900 million loss, and just this week his son Nicholas quit the Fairfax board.
At its most recent AGM Fairfax Media chief executive Greg Hywood blamed Europe, volatile equity prices, weak real estate prices and a nervous consumer for the company’s ills. ‘In Australia and New Zealand, consumer confidence levels remain subdued with consequential impact on most advertising categories but particularly retail and residential real estate,” he lamented.
It’s true that the internet revolution has altered the way that people read news. Australian newspaper circulation continues to fall, down 3.5% just in the three months to September 30, compared to this time last year. The weekday edition of The Sydney Morning Herald experienced a 7.2% drop in circulation, and is now below 200,000 readers.
The news media has always been a hot commodity for wealthy business owners. Owning the media, or the country’s mouthpiece, offers unparrelled power across all fields from economics, politics, business and entertainment. Rupert Murdoch’s News Corporation is a case in point. The Australian newspaper has rarely been in the black, but that’s hardly relevant to the media mogul.
At the end of the day, wealthy business owners don’t give a hoot whether or not Fairfax is a gravy train. The value of the company lies in its deep conversational ties with the Australian public, its brand name, its history and reach. And for this reason, investors should keep an eye out on Fairfax over the coming year, particularly if its shares continue to slide further south.
As Fairfax shares sink lower, the chances of a takeover bid grow. And this is especially the case now that the latest batch of Fairfax stock went to institutional investors. Clearly, some 50 institutional investors who bought in don’t think that the company is going under.
So what do the brokers reckon?
Macquarie has an underperform on Fairfax, and notes that the company’s Trade Me IPO will enable Fairfax to pay back some debt and reduce its interest rate burden. However given ongoing structural difficulties, earnings will remain under pressure for some time, the broker thinks.
Citi also has an underperform and a price target of $0.95, which is higher than its current share price.
Just recently Clive Briggs, RBS Morgans told TheBull that it continues to trim its Fairfax earnings expectations. “Although the stock is very cheap, trading conditions are weak. Advertising revenue in the past six months has been softer than usual. Conditions will eventually improve. But at this point, we regard FXJ as a short term trading sell.”
While the brokers are hardly bullish, investors with a eye to the long term may see things differently.
Macquarie Bank reinvests itself
Macquare Bank has been slaughtered by the global credit crunch. Its shares have fallen by 35% from their lofty heights of $41 back in February this year and are down 71% over the past 5 years. Shares currently sit around $24.
Macquarie today faces a very different trading environment. The big growth numbers are getting scaled back and a more conservative business model focussing on annuity-style businesses such as wealth management and corporate & asset finance is being put into place. Since the GFC, Macquarie has shed its infrastructure management business, and also keen to sell Macquarie Airports for the right price.
There’s talk that Moody’s may downgrade Macquarie’s credit rating due to protracted weakness in the financial sector, and the rise of global competitors in its capital markets business. Moody’s argues that Macquarie’s capital markets businesses is leveraged to an upturn in global financial markets and if this doesn’t eventuate the group may face challenges in maintaining its traditionally strong capital coverage.
Just yesterday Standard & Poor’s downgraded Macquarie Group’s credit rating by two notches to BBB, which is just two notches above junk-bond status. It is Macquarie’s exposure to complex and volatile markets that has the rating agency worried, although it is heartened by Macquarie’s attempts to reduce its reliance on equity market earnings.
Citi says that credit downgrades impact funding costs – however it shouldn’t affect Macquarie’s earnings too badly, with Citi continuing to place a buy on the stock.
BA-Merrill Lynch has a price target of $33. The broker see value from its annuity-style income such as its fund management division and thinks that provided its funding sources prove sustainable, the stock is a buy.
On the other hand, JP Morgan sees too many uncertainties on the horizon to be bullish, such as the bank’s proposed $800m share buyback. It rates the stock a neutral, a downgrade from a buy with a $28.59 price target. The broker is bearish since Macquarie faces the prospect of yet another weak half year ahead.
The biggest risk with buying Macquarie stock is its exposure to equity markets globally via its stockbroking, investment banking and capital markets trading businesses. Unless the market pulls off a sustainable rebound, Macquarie will be forced to slash costs further. Staff, already down by 468 employees over the 6 months to September 2011, will be the first to go – impacting staff morale further in what was once termed the Millionaires’ Factory.
But for investors thinking about the outlook for Macquarie in 5 years’ time, will its share price be higher than it is today? That’s the million dollar question.
Read Part 2 of Aussie icons at fire sale prices by clicking here
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