Standouts from results season
It’s not very often that traditional media companies have a good story to tell at earnings season. Usually, the most positive thing most of them can salvage from their results is something along the lines of revenue declining more slowly than last year or they’re about to embark on another round of cost savings.
This makes Fairfax Media’s latest interim profit announcement a standout. The company announced that its net profit in the six months to the end of December trebled to A$84 million from the year before. The big pick-up was because the year before it wrote-down the value of its newspaper business, which dragged on profit.
So perhaps underlying profit — which strips out one-off items such as write-downs — is more significant. This rose 6.1 per cent to A$84.7m.
Of particular interest was Fairfax’s decision to spin off its property listing arm, the Domain Group, because it points to how the company hopes to survive and perhaps even thrive in the future.
The Domain Group consists of printed property listings, which appear in the Fairfax newspapers, as well as a website which is growing strongly.
Fairfax plans to establish the business as a separate company and give its existing shareholders scrip in the spun-out business. It will retain 60 to 70 per cent of the business itself.
The company hopes investors will ascribe a higher value to Domain when it is a separate entity because it won’t be exposed to the risk of a legacy and declining print newspaper business. Commentators expect this business would be worth about A$2 billion.
To build a business of that value over the past few years is a great achievement. Once Domain is sold, Fairfax will continue to try to create new revenue streams. The company has a host of other ventures — an events business, weather site Weatherzone and online dating sites RSVP and Oasis. It also owns newspapers in New Zealand.
In particular, Fairfax is pinning its hopes on its Drive car listings business and Stan, its TV streaming service.
Stan is a joint venture with Channel Nine and already has over 700,000 subscribers. The company says it’s on a “clear path to profitability” and expects it to start producing cash next year.
This is Fairfax’s strategy, to grow new businesses that can leverage off its existing media business, ultimately reducing its reliance on traditional advertising revenue, much of which has gone to online sites such as Google and Facebook.
The latest earnings illustrated how much traditional media assets are declining. The company’s metro media segment — which includes the Sydney Morning Herald, the Age in Melbourne and the Australian Financial Review as well as its digital ventures and life and events arms — continues to decline, with revenues sliding 8 per cent and operating profit (earnings before interest, tax, depreciation and amortisation) slumping 12 per cent.
Nonetheless, the metro media segment is still earning money for the company, with an operating profit of A$32m.
In fact, after signalling last year that the closure of its printed newspapers was imminent, Fairfax has decided there is at least some life left in print, with chief executive Greg Hywood saying the company will continue producing hard copy newspapers for some years yet.
But, of course, Fairfax is preparing for the end of print by diversifying its revenue streams.
What will emerge will be a very different company from the old newspaper business.
It will also be much smaller. Investors welcomed news of the Domain sell-off when it was announced last week, pushing the shares up about 8 per cent to A94c.
That’s good news for shareholders,
What will emerge will be a very different company from the old newspaper business.
but we shouldn’t forget that a decade ago shares in the company were trading at more than A$5.
Good news for miner
Another standout result from the earnings season was for iron ore miner Fortescue Metals Group, which trebled its net profit to US$1.2b.
The company also announced a A20c dividend, up from A3c a year ago.
The strong earnings are thanks to a rise in iron ore prices. But they are also due to a relentless cost-cutting drive by Fortescue that has made it one of the lowest-cost iron ore producers and let it take maximum advantage of strong resources prices.
It has been able to reduce the cost of mining iron ore in the Pilbara region from more than US$34 a tonne in 2014 to US$12.54 in the most recent quarter.
The Fortescue share price is up more than fourfold in the past year. These returns, however, are a reward for the brave. A year ago Fortescue was burdened with heavy debt and the iron ore price was languishing.
At that point, Fortescue shares didn’t look like such a good bet at all.