Investment Matters

Bright and shiny things

As briefly mentioned in last week’s Investment Matters, the split of Domain from the Fairfax Group was implemented last Thursday, 16-Nov.  Shareholders were overall very slightly better off (as at 16-Nov-17) through owning the two parts, as compared to the whole.

What is interesting is the value attribution between Fairfax and Domain. 

It is important to note that Fairfax retained ownership of 60% of the shares in Domain post the demerger – which also means effective control.

Market caps

 

Source: First Samuel, IRESS (utilising share prices as at COT 16-Nov-17)

[Please note that market capitalisation = # of shares on issue * share price.]

As can be seen in the depiction above, Domain’s market cap is larger than that of Fairfax’s post-merger.

It certainly appears that the financial engineering that Fairfax attempted wasn't that successful.  Shareholders have received little overall value increase post the demerger.  It seems that this is because the Fairfax businesses, excluding Fairfax’s 60% ownership of Domain, have an ascribed value of only $406 million.  This is ~19% of the market cap of Domain.

The businesses Fairfax owns are city-based and national newspapers (including The Age/SMH, AFR), regional newspapers, various New Zealand newspapers and websites including Stuff.co.nz, and radio licences (metro including 2UE Sydney, 3AW and Magic 1278 Melbourne, 4BC and 4BH Brisbane, and 6PR Perth).

Valuation

Looking at the valuation on an EV/EBITDA basis:

Source: Fairfax Scheme Implementation Booklet, IRESS, First Samuel

[Please note: EV = enterprise value, EBITDA = earnings before interest, tax, depreciation and amortisation.  EV/EBITDA is a good way to measure the value of a company, and do comparisons that take out the impact of capital structure.  Low EV/EBITDA = cheap, high EV/EBITDA = expensive.]

Although First Samuel’s Investment Team does consider Domain’s EV/EBITDA multiple of 22.1 to be on the high side, we note that:

  1. Domain’s closest competitor and comparative is Realestate.com.au.  It's FY-17 EV/EBITDA multiple is 27.0x (source: company reports, First Samuel);
  2. Domain is a low capital intensity business which, generally speaking, justifies a higher valuation multiple; and
  3. Domain is considered likely to grow its earnings and dividends at a higher rate than say the traditional Fairfax businesses.

And if we break Fairfax (post-merger) up into the 60% Domain holding, and non-Domain businesses (transcribing the 22.1x EV/EBITDA multiple of Domain.com.au to Fairfax’s holding):

Source: Fairfax Scheme Implementation Booklet, IRESS, First Samuel

The traditional Fairfax businesses are being valued at a very substantial discount to Domain, or even generally.

Why?

The value disparity between Domain and the traditional Fairfax businesses seems too high.  Why?  Who really knows, but we consider it likely that there is an attraction to what is seen as modern and new-world – an attraction to what is bright and shiny – without full consideration of investment fundamentals and value.

Conclusion

Bright and shiny things garner attention; the recent case being Domain.  We expect that, with time, the valuation disparity between Domain and the other Fairfax business will lessen (but not equalise).