Stock to Watch: Trinity Mirror
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At 50p, well down from over 500p in 2007 and near 200p a year ago, are shares in the holding company for The Daily Mirror, The Sunday Mail in Scotland and various regional newspaper titles shaping up as a contrarian buy? Listed nowadays in the FTSE small cap index, Trinity Mirror (TNI) is capitalised at about £130 million.
Valuation issues are intriguing, with TNI priced possibly on just twice forward earnings. The 2010 results, announced 3 March, showed a 17% rise in operating profit to £123.3 million and management asserted "strong cash generation with net debt falling".
Care is needed interpreting these dynamics, however, as they benefit from the acquisition of GMG Regional Media in March last year, which introduced various titles such as the Manchester Evening News.
TNI's 2010 revenue was highlighted as broadly flat at £762 million, but excluding GMG's contribution, group revenue fell by 7% to £711 million. Most likely, the sense of a fierce media market and weaker advertising has continued to hurt sentiment.
Yet management notes that "we made good progress in rolling out our new operating model, integrating GMG Regional Media and increasing profitability and margin whilst managing extremely volatile revenue trends throughout the year." Moreover, "our planned investment initiatives to grow revenues, coupled with our focused approach to tightly managing the cost base will help support profits this year whilst positioning the group for growth when market conditions improve."
Company REFS shows mixed views among brokers. Panmure Gordon has recently promoted TNI as a 'buy', arguing the shares are being priced for financial distress "which in our view is not the case". The analyst targets £87 million pre-tax profit this year, rising near £91 million next, for earnings per share of 24.6p and 25.7p respectively.
This is marginally ahead of other recent forecasts; for example, on 10 March Altium Securities advised 'sell', projecting profit to trend down from about £82 million to £78 million.
Over the last six months, Altium has progressively downgraded its share price target from 145p, to just 40p last - a curiously timed downgrade given TNI will provide a key trading update at its AGM this Thursday (12 May). You would think the analyst might await clarification; or does he already sense the trend?
Last year's statement gave a full breakdown of divisional performance including advertising, a key aspect to watch. There is possibly some divergence between national and regional titles as advertising shifts online, where national media has better web reach.
Brokers' forecasts omit a dividend for 2011 at least, the last payout being 18.7p a share for 2008, down from 21.9p in prior years. The dividend cut was made with regard to trading conditions although TNI's overall liabilities were likely a factor too.
The stockmarket will probably want to see dividends reintroduced as proof the company has turned a corner, although the shares could still rise usefully meanwhile, if trends improve. Only Panmure Gordon has recently been bold enough to project a dividend for 2012, at 4.0p a share.
Investment in the business platform means 2011 operating costs will increase, making it vital that revenue improves in order to validate the strategy being pursued. A new digital content management system is said to enable readership to grow, for example enabling readers to post comments; improved speed for breaking news; and flexibility to read content on mobile devices. Some of this however may simply reflect catching up with other media.
While The Daily Mirror lacks a competitive online offering in relation, say, to The Daily Mail and the broadsheets, perhaps The Mirror's legacy readership is not so internet-attuned anyway. But the online presence has to evolve for The Mirror to be seen as properly competitive by advertisers, longer-term.
Readership figures for the second half of 2010 indicate an average near three million people compared with 4.7 million for The Mail. That is well up on The Telegraph, for example, at 1.7 million, which has had chronic financial issues. Although Warren Buffett has emphasised how powerful newspaper brands can be, for investors, intense competition in the UK has made it a lot tougher to thrive.
Opinion also likely differs over strengths and weaknesses in TNI's balance sheet. Management emphasises an improving profile: for example net debt, falling by £58 million to £266 million, also the pension deficit by £136 million to £161 million. However, the balance sheet still has over £1 billion liabilities in context of £680 million net assets – which involve £950 million goodwill and intangibles.
In a situation like this you need to pay attention to bank relations, which can get twitchy if the trading environment declines. At least TNI looks sound in this respect, with management citing "no drawings on the group's £178.5 million bank facility which is committed until June 2013... £116 million cash held, together with cash generation this year, should cover the next repayment of loan notes due in October."
Panmure Gordon argues that the sale and leaseback of TNI's freehold assets could help, given they have a balance sheet value of £185 million.
Standard Life () may have contributed to recent weakness in the shares, reducing its stake from over 14% last December below 9% recently. It can be hard to interpret institutions' trading like this: sometimes they astutely cut losses and/or see better use for capital elsewhere, at other times they do sell out at a low.
In conclusion, the nub issue is whether The Mirror and other group titles have traction, together with a new digital effort, to take TNI forward; otherwise the shares remain liable to a discount, the firm seen as declining.
That discount currently looks very steep, so it could be worth paying attention this Thursday.