FXJ

Fairfax Media Limited (FXJ) has a $5.40 share price target and an upgraded Buy 2 recommendation from Australian share market analyst UBS. Share price weakness leads to upgrade to Buy 2 call: Fairfax's share price has retraced sharply since reaching a 2007 high of $5.39 in early May. they attribute much of this weakness to the perception that now, with John B Fairfax as 14.6% shareholder, the group is a less likely target. Notwithstanding, fundamentally, they view the stock as cheap and are therefore upgrading our rating to a Buy 2. Forecasts incorporate Rural Press: Their forecasts include Rural Press from 1/5/07. Compared with the $35m in synergies suggested at the time of the merger, we are incorporating ~$67m of synergies, as detailed in our report on 6/2/07, of which around 70% could be achieved in FY08. They continue to believe there will be medium term upside to Fairfax's estimate of synergies, but do not expect any guidance until at least the AGM in November. As well as lower paper prices: Their forecasts incorporate a 7% decline in newsprint prices for FY 08, driven by a combination of some weakness in the US$ price, but moreover, the strength in the A$/US$ exchange rate. They have also included the impact of the decline in NZ corporate tax rate from April 2008, the cover price increase at the Sun-Herald and the current A$/NZ$ exchange rate. Their target price for Fairfax Media remains $5.40 which is derived as an average of our dcf, sum of the parts and P/E on an '08 basis.

Fairfax Media Limited (FXJ) has a Neutral 2 broker call and an increased $5.40 share price target from sharemarket analyst UBS. The analyst has observed that the FXJ merger proposal with Rural Press approved by vote. The Fairfax-Rural Press Scheme of Arrangement was comfortably passed at the Rural Press shareholder meeting today. Assuming court approval on April 23rd, RUP and RUPDPs cease trading at the close on Tuesday 24th April. As per the analyst's report of early February, whilst Fairfax and Rural Press have estimated synergies of at least $35m [$31m in cost and $4m in revenue], UBS has estimated this could be as much as $67m (in synergies) [$52m + $15m] which equates to around 2.5% of the combined group cost base and 0.5% of the combined revenue. This is before the assumption of any broader operating improvements under the new management team. With the strengthening US$, the '08 paper price outcome may prove better than our current forecast of a 1.7% decline. The impact of a maximum 7% decline would be a further incremental $13m or 1.5% to combined group EBITDA. The analyst's forecasts for Fairfax Media Limited (FXJ) have been upped by ~6-7%, ~1% pt relating to the stronger NZ $. Their valuation has increased by 40 cents to $5.25, while their target price has been lifted from $5.00 to $5.40. Their valuation is derived as an average of our sum of the parts, P/E and dcf on an '07 basis, while their target price effectively rolls this forward to '08.

Fairfax Media (FXJ) is "one of the cheapest media stocks in the sector" according to market analyst Macquarie Research Equities. The proclamation of the new media rules is a game changer for media in Australia. In short, the change allows players to move to two-media-to-a-market, which the anlayst believes will be a significant value driver in the future, and will leave players who do not amalgamate at a relative competitive disadvantage. The advantages of moving to the two-to-a market model for
media include:

1) Cross-promotional synergies – ie the ability to promote the print product on TV, and the TV product in print.
2) Revenue synergies – PBL has proved that selling two media (magazines and TV) does not have to be on a discounted, bundled, basis. Put simply, a reduction in the number of owners of advertising outlets can only be positive for revenue growth (pricing power).
3) Other finance and administration savings, as well as group buying advantages.

Additionally, and specific to newspapers, the analyst believes these companies are about to reap the benefits in advertising dollars of the significant on-line presence – not just in Australia but probably industry-wide. The analyst rejects comparisons of media deals in the US at 9.6x Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) as being irrelevant. The markets in which those companies operate do not allow cross media ownership, so multiples are depressed because the operators which are best equipped to run two media to a market are legislatively prohibited from doing so, unlike Australia, from Wednesday. With this in mind, one of the cheapest media stocks in the sector is FXJ, especially with the RUP merger, which the analyst estimates injects around 50c/share of value into FXJ and underpins a valuation for the company of $4.71/share. Once the merger is completed, FXJ will be trading at around 11.4x 2007 EBITDA (pro-forma, inclusive of $35m in synergies, at $4.98/share). The market analyst have included a break-up valuation on the company which shows that even this is conservative. Adding a 20% takeover premium takes the valuation to $6.42/share.

The analyst retains Fairfax Media as their key recommendation for exposure to sector consolidation. The analyst believes that the benefits of owning two media to a market will be a compelling value driver going forward, with the on-line option implicit in the FXJ business also significantly presently underpriced.

Shares analyst UBS have a look at which shares Outperform when the Australian dollar rises. The analyst: The obvious way to measure a share's currency sensitivity is to look at its EPS sensitivity. However, the shares analyst note that this ignores what else is going on when the Australian dollar (A$) is rising.

Fairfax Media (FXJ) have a Neutral 2 share trading recommendation and a price target of $5 from analyst UBS. Fairfax reported sales revenue of $1017m (4.1%,UBSe $1038.5m), EBITDA of $270.6m (+2.9%,UBSe$272.9m), normalised NPAT of $121.4m (+2.7%,UBSe $121.7m) and DPS of 10 cps (UBSe 8 cps). Management had previously guided to low single digit EBITDA growth. Australian Publishing EBITDA was down 2.1% (UBSe -5%) as slow ad markets, particularly in NSW, combined with the impact of higher newsprint prices. Rel to UBSe, revenues were around $10m lower, but offset by lower costs. Conversely, NZ profits were well short of UBSe, with NZ$90.3m of EBITDA, down 8% cf UBSe a 2% decline. The 2.4% decline in ad revenues the key driver. Online revenues (ex TradeMe) grew by 43.7% (UBSe +43%) and EBITDA grew 42% to $17m, margins remaining constrained by business investment. TradeMe's contribution was NZ$23.3m on an estimated revenue base of NZ$35m, slightly ahead of UBSe. The analyst expect much of the final NZ$50m installment will be paid this half. The analyst's 12-month target price is $5.00, which is set between the average of our DCF, sum-of-the-parts and P/E of $4.70 and our LBO-based valuation of $5.25. On a like basis, and incorporating our estimate of synergies, the RUP merger would add ~30c, or 6%, to our valuation.