JOHN Fairfax is a company which is a long way from being in the sweet spot. It's caught in an unenviable pincer - a squeeze from the structural migration of classified advertising online, where it is pitched against numerous and canny competitors and a cyclical downturn in advertising. And this explains why its underlying profit fell 3.8 per cent.
The only reason its share price has not reflected this unfortunate situation is that there remain believers (punters) in the market waiting for a takeover. While there is some merit in the view that a liberalisation of the cross-media and foreign-ownership environment would prompt a tilt at Fairfax, the reality is that the only group I understand to have looked seriously at Fairfax wants a bargain basement price and Fairfax is not trading at these levels.
As far as the cyclical downturn is concerned, Fairfax is no Robinson Crusoe. All media companies are suffering from the reality that advertising growth is falling well behind CPI. We have seen it in television and radio and the only exceptions are those, like Seven Network, that are clawing back market share from
rivals.
Indeed, for Fairfax, its performance in the market for display advertising is as good a guide as any as to how it is faring in this tough point in the cycle. And it's doing reasonably well. There were small gains across the market in newspapers in display advertising and healthy gains in display advertising online.
Classified advertising remained pretty ugly but again Fairfax was not helped by external issues. For example, when there is near full employment it's hard to increase advertising for jobs.
If there is a theme to be taken away from the Fairfax profit numbers delivered yesterday it would be that this could have been a lot worse.
The biggest mistake made by Fairfax's previous chief executive, Fred Hilmer, (and there were many) was his inability to protect the near monopolies the company had in most areas of classified advertising (with the notable exception of property - as this was lost to community newspapers before the internet emerged).
Traditional newspaper managements all over the world struggled with this and many, like Fairfax, failed.
For Fairfax's chief executive of 11 months, David Kirk, this is now history and the challenge is damage containment in classified advertising alongside finding more reliable sources of earnings.
Fairfax's deputy chairman, Mark Burrows, gave Kirk a rousing endorsement of his strategy to diversify the group's earnings base from an over-reliance on metropolitan daily newspapers in Sydney and Melbourne and into the internet, particularly in New Zealand, and regional newspapers.
While it might have looked a little self-serving, the fact is Fairfax without these more diverse sources of revenue would now be in an even more difficulty.
Hilmer's decision to invest heavily in New Zealand regional newspapers and Kirk's move to increase that exposure in New Zealand and more recently in regional Australia, where migration to online has been less marked, has saved the company from a far more dire performance.
But even with this diversification, the big assets are the company's core newspaper assets in NSW and Victoria - the states wearing the most economic pain.
And if Fairfax has any forecast on when these micro-economies are going to recover it is not prepared to say. In the first few months of the current financial year Kirk is not seeing any signs of an improvement and to make matters worse, New Zealand is heading in the same direction.
Apart from the bigger plan of broadening the earnings base, the company's only response has been strict cost containment, but input costs like newsprint and fuel have gone against Fairfax and staff cuts have their limits.
Fairfax is pumping dollars into the growing digital business and retaining a healthy expenditure on new ventures.
Kirk appears to have little interest in taking advantage of any opportunities that are presented by changes in the media ownership laws other than the possibility of taking digital spectrum if it becomes available in a commercially viable form.
For the time being Fairfax is a vanilla-flavoured cyclical play but with a twist. The share price does not reflect a company at the bottom of the cycle but one that has a takeover premium built in. It a buyer doesn't emerge investors will just have to wait for the cycle to turn and the advertising dollars to return.
