Fairfax Media Limited (FXJ) is an Australian multi-platform media group with a broad range of activities including news publishing, information and entertainment, advertising sales in newspaper, magazine and online formats, and radio broadcasting.

FXJ conducts its core activities throughout Australia and New Zealand. Its major newspaper brands are The Sydney Morning Herald, The Age and The Australian Financial Review.

Additionally, FXJ owns a range of business magazines, websites, and regional and community newspapers.

Organisational restructure

Last week, FXJ announced some changes to its organisational structure in addition to a major shakeup of its leadership team.

Better late than never, the group has recognised the shift from print to digital and is responding seriously to this change.

The Australian publishing businesses will be consolidated under the Australian Publishing Media division in an effort to drive efficiencies and simplify FXJ’s business model.

Also, the Domain and Digital Ventures businesses will operate as standalone divisions. This will allow the group to devote increased resources and management attention to areas of the business likely to drive its future growth.

Advertising weak, but profit rises amid asset sales

In February, FXJ announced a 300% increase in 1H13 net profit to $386.3 million.

The profit jump came primarily on the back of asset sales, including the company’s 51% stake in NZ-based advertising website, Trade Me, as well as its US agricultural media businesses.

The result helped mask a 7% decline in revenue, with FXJ facing a slump in advertising sales across its major divisions amid economic uncertainty.

On a positive note expenses fell 3% on-year, whilst the group says it is on track to achieve $251 million in total savings by FY15.

The balance sheet was also in much stronger shape, with a net debt to equity ratio of just 5.1% at the end of 1H13.

Outlook

In its 1H13 results, FXJ argued that a sustained improvement in consumer sentiment is required to see a turnaround in advertising conditions.

In the first four months of 2013, the Westpac Consumer Confidence Index has risen to its highest level since December 2010. Since last October, consumer confidence has risen 11.5%.

It appears the RBA’s 2012 interest rate cuts are beginning to have a noticeable impact on confidence, leading to improved operating conditions for advertisers and media firms alike.

Taking into account its asset sales, organisational restructure and focus on cost control, FXJ is putting itself in a position where it can be more profitable in a slow growth environment.

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Kingsgate Consolidated (KCN) is a gold miner, operating in South East Asia, South America and Australia. The company’s major operation is the Chatree Mine in Thailand, and it also has the smaller Challenger Mine in South Australia.

Rising cash costs squeezing margins

In late January, KCN revealed a 13.4% slide in 2Q13 gold output relative to the same period a year earlier. Compared to 1Q13, gold output rose slightly by 4%.

Production was affected by the temporary closure of the Chatree North Expansion Plant (Plant 2) and interruptions at Challenger following the establishment of two new mining fronts.

The biggest disappointment with the result was another rise in the group’s cash costs. Cash costs rose 37% from 1Q13 to US$975/oz. However, compared to 2Q12 costs surged 60%.

KCN attributed the cost squeeze to lower ore grades at Chatree and ore sourced from an area of Chatree’s Pit A that was known to have lower recoveries.

The poor 2Q13 production result contributed to a 76% slide in 1H13 net profit to $8.1 million. Revenue was up 10% on-year, however the growth was driven primarily from stronger gold sales. Weaker output from Challenger and a lower realised average gold selling price detracted from the growth in revenue.

Gold prices trending down

The price of gold has weakened noticeably in recent months. Spot gold is trading around 7% below KCN’s 1H13 average realised selling price of US$1676.

The outlook for the precious metal has declined amid signs of weakening physical demand and diminished prospects for further monetary easing. In an example of waning demand, the US Mint sold 62,000 ounces of American Eagle gold coins last month.

This was much lower than the sale of 80,500 ounces in February and 150,000 ounces in January. Holdings in gold-backed exchange-traded funds are also 6.9% weaker in the year-to-date.

Furthermore, with the world economy stabilising, central banks like the US Federal Reserve are less inclined to implement additional monetary easing measures.

In our view these are among the key factors that will handicap gold prices, and by extension, KCN’s revenue growth.

Outlook

KCN stuck to its FY13 gold production guidance of between 200,000 and 220,000 ounces. 1H13 production totalled 90,413 ounces, meaning KCN is relying on stronger 2H13 output numbers in order to meet its guidance. Although Chatree’s Plant 2 is now back online, development at Challenger is expected to continue.

Also, the limited availability of stoping areas at Challenger the company highlighted in its 2Q13 production report indicates difficulties accessing the ore body being mined. Therefore we don’t share KCN’s optimism that full year production guidance will be met.

Moreover, the upward trend in its cash costs is coming at a time when gold prices have been retreating. This is creating pressure on cash margins and will ultimately translate into poor earnings in our view.

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Sims Metal Management (SGM) collects, sorts and processes scrap metal materials that are recycled for resale.

The company’s divisions include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of semi-fabricated steel products.

SGM has operations in Australia, New Zealand, the United Kingdom, North America, Asia and Europe and is the world’s largest listed metal recycler with approximately 270 facilities and 6,600 employees globally.

The company is currently in a global search for a new CEO after current CEO Daniel Dienst announced he would retire when his contract concludes on June 30 2013.

1H13 Results

The group’s 1H13 results were disappointing to say the least. Revenue came in at $3.4 billion, a 25% decline on the prior corresponding half, due to a reduction of intake shipments in North America.

SGM reported a 1H13 net loss of $295.5 million, 53.3% better than the prior corresponding period’s $633.2 million loss. The result was attributed to goodwill impairments and inventory writedowns totalling $291.3 million.

On an underlying basis, the group did record a $10 million profit, although the rest was down from $42 million a year earlier. Given the poor result, management decided not to declare a dividend for the first half – the first time the company has not paid an interim dividend since listing.

US and UK Businesses

On 21 January 2013, SGM announced that it will form a special committee to investigate the inventory valuation issues in the company’s UK business.

The result of the committee’s investigation was a $78 million write-down of inventory, of which $16 million was allocated to 1H13 and the remaining balance resulted to a restatement of prior period results.

The write-down represents a massive 29% of the value of inventories in its UK business. That trouble does not stop in the UK.

SGM’s US division, which contributes around 60% f the group’s overall sales, also suffered impairment charges in the first half. The company recorded a goodwill impairment charge of $291 million in the 1H13.

Excluding the write-downs, the US business barely made a profit, reporting an underling EBIT of $2.1 million–a 30% drop from the prior corresponding period.

Looking ahead

The outlook does not look pretty for SGM, at least in the short-term. The $78 million writedown on its UK inventory is extremely alarming because it shows the company’s lack of adequate financial controls in relation to its inventory reporting.

It also brings into question the company’s financial controls in other regions and raises the possibility of further write-downs. Poor management has led to the decision not to distribute a dividend for the first time since it listed, which does not bode well for shareholder confidence.

Moreover, the group downgraded its guidance three times in 2012. Without a significant pickup in US economic activity, we cannot see this year being any different. As such, we feel there is more downside to SGM’s share price in the near-term.

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Sims Metal Management (ASX:SGM) recycles ferrous and nonferrous metals and other materials ranging from other metals to plastics, electronics tyres and refrigerators.

The company has operations in Australia, New Zealand, North America and Europe.

SGM fell heavily over the GFC as commodities crashed, and has since failed to make a significant recovery as the scrap metals market has failed to see a solid price recovery.

A continued deterioration in scrap metal demand bodes poorly for SGM, which has recently reported a string of very disappointing financial results.

Its recent FY11 earnings were fairly robust but SGM’s outlook remains uncertain due to global market volatility.

FY11 results impress

Sims Metal Management had a tough start to FY11 after reporting a 75% on-year plunge in 1Q11 net profit to $8.2 million.

EBIT for the period also slumped 69% to $16.7 million, with SGM attributing the poor result to lower scrap intake, and constrained scrap flows and margins.

Last month, SGM reported a FY11 net profit jump of 52% to $192.1 million, with underlying profit of $182 million topping analyst estimates.

A final dividend of 35 cents was declared. Revenue was up 19% on-year amid stronger scrap shipments and improved pricing.  Intake was higher across all regions, which helped drive profit growth.

An improvement in its US operations was a big contributor to the results. However, no guidance was given due to the global economic uncertainty.

Global pain

Nearly 85% of SGM’s earnings are from North America and Europe. These areas are currently experiencing significant problems with a looming euro debt crisis.

Global difficulties in the form of US political gridlock, that country’s first ever credit downgrade, continued European sovereign debt fears, and Chinese inflationary pressures have prevented SGM from providing guidance.

We have also seen the Aussie dollar rally significantly over the past year, adding to the challenges SGM is already faced with.

A higher Aussie dollar results in SGM reporting lower earnings from its overseas operations.

During the last wave of global uncertainty, SGM went through a string of disappointing financial releases.

Looking ahead

SGM has not provided any specific outlook, due to a lack of clarity regarding future economic conditions that could affect scrap flows.

As such it has been one of the shares to sell in recent months.

With a history of disappointment during tough global periods, we feel SGM is not out of the woods yet.

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Australian Agricultural Co. (ASX:AAC) is the oldest continuously operating company in Australia, supplying domestic and export beef consumers.

AAC is the largest beef cattle company in Australia, and is managed from Brisbane, with regional management located on each station. The business also has one of Australia’s leading composite breeding programs.

AAC has been one of the shares to sell since April, tumbling from a high of $1.70 to current prices around $1.40.

On 25 July, AAC reported a 1H11 net loss of $12.6 million.  This compares to a net loss of $12.2 million a year earlier.

However, revenue jumped 53% on-year to $58.2 million, driven by an increase in cattle sales and favourable seasonal conditions.

AAC reaffirmed FY11 EBITDA guidance of $50 – $60 million, taking into account the Meteor Downs station sale, favourable market conditions and the government’s repeal of the live cattle ban.

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CSR Limited (ASX:CSR) is a leading building products company with operations throughout Australia and New Zealand.

CSR’s stock dropped dramatically over 2008 into 2009 as the company suffered from two angles: a poor sugar industry and a dire building sector.  It was previously considered among the market’s blue chip stocks.

Investors were unsure of the combined effect of its exposure to two completely different industries.

On the one hand was a subdued housing market whilst on the other was a less cyclical, fairly defensive sugar industry.

Due to problems with the two businesses, CSR went through a demerger. CSR established a sugar and renewable energy company – Sucrogen. This was later sold to Wilmar International for $1.75 billion.

This left CSR as a traditional manufacturing group, supplying building products in Australia and New Zealand. The group also has an interest in aluminium smelting and property.

The business is currently facing some challenges, particularly a challenging building and housing sector.

Divesting assets

Over the past two years, CSR has been actively divesting some of its assets.

In a bid to stage a recovery, CSR made the decision to demerge its business into two new separately listed companies: one for sugar and renewable energy, and another for its building products, property and aluminium businesses.

Last year, CSR agreed to sell its insulation panels and trading businesses in the Asian region to Rockwool group for $128 million.

CSR stated that the sale will allow it to better focus on the Australia/New Zealand building products market.

The decision followed on from the sale of CSR’s Sucrogen division to Wilmar International.

At the time, CSR said it would consider a range of capital management initiatives to utilise these funds efficiently, which the market took as implying it may consider an acquisition.

A sweet result

In May, CSR reported a 13% on-year increase in FY11 underlying profit to $90.2 million.

Including the one-off gains related to its sale of Sucrogen and its Asian insulation business, CSR’s net profit totalled $503.4 million (compared to a $111.7 million loss in FY10).

CSR saw earnings growth across all of its businesses (ex-insulation), despite the impact of wet weather in eastern Australia.

A final dividend of 5.3 cents was declared. Adding this to a special dividend and a capital return from the Sucrogen proceeds takes the total amount distributed to shareholders for the year to $1.72 a share.

The company returned $800 million to shareholders from sales of Sucrogen and Asian Insulation businesses.

Gloomy outlook

The demerger and divestment helped CSR’s shares to hold up for a while but a bloomy outlook for the sector has since hurt CSR.

The building sector faces tight credit conditions and the prospects of higher interest rates.

CSR feels leading indicators such as finance and housing approvals point to a moderation in housing activity over the coming year.

We feel CSR has a lack of catalysts at the moment to drive value. The outlook across its businesses is dismal and its share price weakness reflects that.

Parts of its business are also being negatively affected by a strong Aussie dollar.

With plenty of macroeconomic issues surrounding CSR and its peers, we feel CSR is likely to be one of the shares to sell in the near term.

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Elders (ELD) is one of Australia’s most historic companies, having been an advisor, supplier and agent for Australian primary producers for 170 years.

ELD incorporates the Elders rural services and financial services businesses and the forestry and automotive operations acquired and developed by Futuris Corporation.

The group was one of the shares to sell following the GFC, plummeted from a high near $30 to current levels around 50 cents.

On 23 May, ELD reported a 1H11 net loss of $14.6 million.  This compares to a $165.9 million loss a year earlier.

The result was affected mostly by debt restructuring costs, with the group actually reporting an underlying profit of $1 million.

Underlying EBIT rose 94% on-year, with the Rural Services division contributing most to the result due to an improvement in network performance.

However, Elders downgraded its full year profit forecast to $7.5 million – $24.5 million amid uncertainty about the outlook for its Automotive and Forestry divisions.

ELD tumbled over 9% on the day, making it one of the worst performers in the Australian share market.

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OneSteel (OST) is an Australia manufacturer of steel and finished steel products and is also a leading metal distributor.

OST, which was spun out of BHP in October 2000, markets products used in the construction, manufacturing, housing, mining and agricultural industries.

On 10 May, OST downgraded its full year guidance due to the strong Aussie dollar.

OST said that the dollar’s strength had hurt its steel margins and iron ore revenue.  Indeed, OST has been one of the shares to sell over the past year due to the soaring dollar.

Furthermore, its iron ore operations have been impacted by adverse weather in the second half.

As a result, OST now expects full year earnings to be around $270 million, down from its previous forecast of $232 million.

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Fairfax (FXJ) is a leading Australian media company with a range of prominent newspapers such as The Sydney Morning Herald, The Age, and The Australian Financial Review.

On 3 May, FXJ warned that full year operating earnings are expected to be 6.1% lower than the prior year.

FXJ anticipates FY11 EBITDA to be $600 million, down from FY10’s $639.1 million.

The group said second half revenue was down 4.5% so far amid lower advertising levels, whilst operational costs were tracking higher due to the development of new iPad applications.

A stronger Australian dollar was also weighing on earnings, in addition to the poor cyclical trading conditions.

Fairfax was one of the market’s shares to sell on the day of the update, sinking 8%.

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