Stockwatch: Turnaround! Turnaround! Read all about it

Do you remember all the fuss over corporate pension deficits? Trinity Mirror was one example of pension liabilities allegedly overcoming the value of underlying operations; why two years ago its FTSE SmallCap shares had fallen as low as 25p. Similarly BT Group in the FTSE 100 (UKX) was said to have a £40 billion pension millstone around its neck which would dog its shares. Yet both have re-rated supremely, Trinity Mirror's chart showing progress up to 234p by last spring (now 182p), and BT more than doubled to 418p over a similar period.

The warnings underestimated strengths of cash flow to cope, which have also enabled Trinity Mirror to reduce debt and finance an investment programme in digital output. Dividend payments from 2015 are indicated. With a financial turnaround being established, it is an interesting time to watch whether a new strategy of "One Trinity Mirror" - combining national and regional media titles - can pay off. If so, then the risk/reward profile favours longer-term upside.

Mind that attention on Trinity Mirror's pension issues may have lapsed as a result of an audacious deal struck in February 2012 to suspend £70 million of pension fund contributions in order to help pay off US creditors. The indication was that only £10 million a year would be transferred into the fund before reverting to normal annual payments of £33 million from 2015 - still a significant "tax" on profits and possibly why the consensus 2015 forecast (see table) is slightly down on 2014 despite a turnaround evolving. It's not easy to reconcile this with historic accounts though: the P&L has typically shown a pension finance charge of £11-13 million while notes to the 2013 accounts cite the pension deficit reducing by £45.5 million to £252.2 million as a result of asset prices rising.

Cash flow strength

I recall a Citigroup "sell" note targeting 35p a share (against a spring 2012 share price around 50p) because the pension deficit was larger than Trinity Mirror's market capitalisation (then about £130 million). Cash flow strength has disproved such analysis, but similarly as the market over-stressed the pension risk two years ago it now seems gone from consideration.

Group financial reporting is also at odds with the March 2012 deal: 2013 pension payments turned out to be "£19 million against £9 million guidance". I make these points because it's a complex area where varying payments may continue to affect earnings.

Phone hacking scandal

Another and higher profile risk has been potential charges from the phone hacking scandal, similarly used by some analysts to assert "sell". But the financial downside has turned out relatively small.

Amid continued investment in digital capability, the key factor is whether the current chief executive's "One Trinity Mirror" strategy will work. Simon Fox took office in September 2012; a surprise choice given his stewardship of HMV coincided with poor performance and administration by January 2013. He had no media experience, either.

Roy Greenslade, a previous Mirror editor now professor of journalism at City University, made a biting verdict of the strategy in a June 2013 Evening Standard column: "This is a breathtaking move, which can be read either as a brilliantly counter-intuitive business response by a chief executive unhindered by a newspaper track record, or as a naive act that betrays his grievous inexperience in publishing." Mind that Greenslade's columns have strongly criticised Fox's action to merge regional and national divisions, but as a turnaround took shape he rather retracted to say last March: "Simon Fox has much to celebrate about his two-pronged strategy - prudent cost-saving while investing in digital innovation."

This was in response to 2013 prelims that showed a 2.6% rise in pre-tax profit to £101.3 million with strong cash flows reducing net debt by £45.8 million to £97 million despite investment spend. Admittedly, revenue slipped 6% to £663.8 million but commentators and the market have been overly pessimistic about Trinity Mirror's ability to re-invent itself amid the steady decline in print publishing, and robust cash flows assisting this. The group also has "protecting and revitalising our core brands in print" as a key plank of strategy.

Going digital

The Daily Mirror has been criticised for going digital relatively late, where The Daily Mail for example has established a strong lead. Yet the 28 July interims cited average monthly unique users across Trinity Mirror group up 91% to 61.3 million and average monthly page views up 132% (likewise year on year) to 440.2 million across the publishing operations, with digital revenue up nearly 50%. Such dynamics are small in context - digital representing just 6.8% of total interim revenue - yet various other factors will combine, going forward. Structural cost savings of at least £10 million are expected for 2014 despite increasing investment in digital and after absorbing a 10% hike in newsprint prices.

Progress is such that, even against future pension liabilities, the board has indicated in its latest results it expects to pay a final 2014 dividend of 3p a share, in June 2015, and pay annual dividends of about 5p from 2015 - i.e. a prospective yield of about 2.75% at the current share price. A price/earnings of five to six times remains fundamentally modest despite re-rating from a multiple of just one, two years ago when observers reckoned Trinity Mirror had no real media future and was weighed down by pension liabilities and debt. While the table shows negative net tangible assets of 43.2p a share, latest balance sheet net assets of £602.3 million involve £670 million intangibles and £12 million goodwill - such are "people business", media valuations. This compares with a current market cap of £470 million.

Simon Fox has had time to settle in and, to be fair, progress has been a lot better than experts predicted a year or two ago. This is an indicator to follow more seriously, as a well-executed turnaround can see five-year rewards for shareholders. The Daily Mirror is not written off, it is rising in digital status and the group has plenty more media assets to enhance. Admittedly, the shares are a speculative play, but Trinity Mirror should overall continue to rise if the turnaround progresses.

For more information see trinitymirror.com.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.