Talking Point – Fairfax Limited (FXJ, $1.14, Mkt Cap $2,633m) – Revised Bid From TPG Capital – BUY, PT $1.25.
Event:
·Revised bid from TPG Capital. We reiterate our positive view on FXJ and retain our PT of $1.25.
Analysis:
·We believe there is further upside to the FXJ share price for the following reasons: 1) the revised offer is at the low-end of the $1.20-$1.25 initial range (5 cents upside), 2) it is possible that there may be interest from additional suitors in the near-term (no doubt Macquarie as adviser has been sounding out parties, recently), 3) as a sweetener to the deal, it is plausible that TPG Capital may offer a 2 cent dividend, that would be declared in August, at full year results.
·Based on the above, we can see upside to the FXJ share price of c.10% within a short holding period, for relatively limited risk.
·Our investment thesis, post FXJ’s recent corporate update, is reiterated below.
·We value total Domain operations at $2.3 billion, including premium plus listings ($800m), property market leads opportunity ($360m) & legacy operations ($1.1bn). With price increases (+20%, 1stJan), increasing premium listings penetration and possibly improving national footprint, all bodes well for upgrades to Domain’s earnings down-the-track.
·Digital ventures and untapped verticals. Likely hidden gems include: motoring, SVOD, travel, food, health, baby, jobs, et al. An immediate focus is new cars (Drive/112 JV), Stan, Events/conferences & travel (not to mention monetizing Street Talk appropriately).
·One day print advertising will stabilize: We await the day there is a moderation in the decline of print advertising (to c.1-2%), but it is not likely in the next 6 (or 12 mths). FXJ again reiterated that they will look to cut costs in Metro Media (c.$30m) enabling earnings stability over the next 2-years.
·We would expect further cost outs in FXJ’s NZ operations and an increased focus on monetizing stuff.co.nz’s audience through transactional business models in select vertical markets. With investment likely required, it would not be a surprise to see a JV occur in some form down the track, along with agreements from industry participants to reduce costs.
Earnings, Valuation & Recommendation:
·On a sum-of-the-parts basis, we value FXJ at $1.25 per share.
·We maintain our recommendation on FXJ as BUY.
FXJ Price at posting:
$1.14 Sentiment: Buy Disclosure: Held
