Trinity Mirror (TNI)

 

Stockwatch: Is near-8% yield a big risk or opportunity?

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Stockwatch: Is near-8% yield a big risk or opportunity?

Is this £209 million small cap media group at a genuine turning point? Most charts show Trinity Mirror (TNI) in a volatile downtrend from 234p in 2014 to a recent 66p low, but long-term followers know it has been volatile since a 20p range in 2010.

This partly reflects contradictions of strong cash flow enabling high dividends and buybacks, albeit a mature business seemingly stuck in revenue decline as new media proliferates. The Mirror also tends to be seen as having older loyal readers - dying out - with those young and left-inclined politically, on social media.

Hardly surprising, therefore, the group's turnaround strategy has involved cost-cutting and forging digital platforms; though, according to a latest trading update, total revenues continue down, by a consistent 9% during 2017.

Fearing a slow death, at about 76p the stock is priced on a forward price/earnings (PE) multiple of 2.2, yielding nearly 8% covered nearly six times by earnings forecasts.

And it explains a current radical move: the £127 million acquisition of Northern & Shell, a holding company for the Express and Star newspapers and various celebrity magazine titles such as OK! Management is raising the risk/reward profile, hence Trinity Mirror shares will re-rate more vigorously if it works, or stay pressured.

Can "media scavenging" prove long-term value accretive?

The 9 February announcement wasn'"new news"; talks with Northern - the holding company for proprietor Richard Desmond - were announced on 10 January 2017 and affirmed last September as involving all its publishing assets than just a minority stake.

Trinity's chief executive describes this as "a really exciting moment...iconic titles...a growing digital presence, stable revenue and an excellent fit with Trinity Mirror." Consideration is split across £47.7 million cash initially, £59 million over 2020 to 2023, with the balance of £20 million via new Trinity Mirror ordinary shares.

The deal is said to be "materially earnings enhancing" in the first year of ownership, with "more robust revenue" due to less reliance on print advertising; and £20 million annualised cost synergies (staff cuts etc) generating "strong cash flows...financial flexibility for investment, support for pension liabilities and potential return of capital to shareholders."

All this sounds most interesting financially, although it does beg the questions editorially about how political opposites of The Mirror and Express will work together post-redundancies. A 27 February circular will apparently reveal more detail than figures later in the 9 February RNS: Northern's 11.8% revenue decline in 2015 and 12.0% in 2016 "reflecting both cover price discounting and a fall in print advertising revenue".

Circulation revenue then increased in 2017 as discounts reversed and digital revenue rose strongly (mind, likely from a low base). Northern's 2017 adjusted EBITDA is estimated at £34 million, and, if this can be substantiated beyond window-dressing for a sale, then, with an additional £20 million cost savings from a merger, there is reason to pay more attention to Trinity Mirror.

What isn't yet disclosed, but anyone can view online via the Companies House free website, is Northern's 2016 operating loss on continuing operations of £17 million after a £10 million loss in 2015. Quite likely Richmond Desmond had had enough and was willing to sell for £127 million, a 65% discount to net assets of £360 million, even after a deducting a £64 million pension liability.

In fairness to Trinity, it achieved £15 million synergies from its acquisition of Local World newspapers in November 2015, significantly de-leveraging within two years. On a financial basis, Northern is a logical next-step acquisition.

Trinity Mirror - financial summary           Consensus estimates
year to 31 Dec/1 Jan 2012 2013 2014 2015 2017 2018 2019
          to 1 Jan    
Turnover (£ million) 706 664 636 593 713    
IFRS3 pre-tax profit (£m) 9.7 -161 81.6 67.2 76.5    
Normalised pre-tax profit (£m) 75.6 75 81.3 92.2 127 118 119
Operating margin (%) 13.5 11.3 12.3 14.9 18.3    
IFRS3 earnings/share (p) 6.7 -39 27.4 29.6 24.8    
Normalised earnings/share (p) 23.6 42.5 27.3 39.2 42.9 34.1 35.0
Earnings/share growth (%) -11.2 80.3 -35.8 19.6 9.4 -20.5 2.7
Price/earnings multiple (x)         1.8 2.2 2.2
Annual average historic P/E (x)     4.3 6.0 2.3 2.0  
Cash flow/share (p) 33.9 27.4 34.3 26.7 26.5    
Capex/share (p) 2.2 3.0 2.5 1.4 -2.3    
Dividends per share (p)     3.0 5.2 5.8 5.7 6.0
Yield (%)         6.9 7.5 7.8
Covered by earnings (x)       6.3 8.1 6.0 5.8
Net tangible assets per share (p) -106 -43.2 -33.4 -77.9 -115    
               
Source: Company REFS              

Is Simon Fox really up to the job as chief executive?

I recall being horrified when Simon Fox was initially appointed in 2012. No prior media experience and coming from embattled retailer HMV, it was a potential disaster for shareholders. He has a persistent critic in Roy Greenslade, media commentator for The Guardian who is professor of journalism at City University - he lambasted Fox in a column 18 months ago for wasting millions on a failed new daily paper launch, and axing journalists' pay while earning £2.35 million a year.

"He lacks a strategy to do anything more than wield an axe...the group's website, despite various revamps, is hopelessly inadequate because the company has failed to invest enough." Greenslade has yet to fire a shot on the terms of the Northern deal, but wrote in September 2017: "It may prolong Trinity Mirror's life, but its future is uncertain...a shotgun marriage by commercial necessity...there is no reason to think that new ownership will arrest the circulation falls..."

His gripe is on principle: media assets need owners who make editorial content their top priority. The late Peter Preston similarly opined: "There needs to be a spark of creativity...a sense that journalism counts for something...think lifeboats tossed in tumultuous seas, two random ageing souls hugging each other for temporary safety. Think this deal, only as good as next year's bottom line."

Certainly, be aware of editorial veterans' views; but it's a Guardian one. Rupert Murdoch practised a ruthless financial approach, with an interest in editorial, but is not among their heroes. They are right to point out a risk, however, Trinity Mirror can appear dependent on acquisitions to drive financial progress; although on the stock's current rating that may be (more than) fully priced in.

Scope to upgrade medium-term forecasts

Care is needed interpreting the 9 February update, lest it prove a snapshot. The stock is up, helped by a "marginally ahead of consensus" narrative versus said forecasts: adjusted operating profit of £121 million and earnings per share of 34.6p (although the table shows 34.1p).

Within a 9% publishing revenue decline for 2017, print is down 11% - somewhat offset by digital's 7% growth, which doubled from 6% in H1 to 12% in Q4. Also, within the totals, publishing's slippage has eased from 10% in H1 to 8% in H2, although it's still a way off arresting decline.

Otherwise, strong cash generation has reduced net debt to £10 million, and asset returns plus other factors have helped the pension deficit down 19% to £378 million. A total dividend of 5.8p per share is proposed, slightly over 5.7p published consensus, for a 7.6% historic yield with the share price currently 76p.

From a financial perspective it's possible to regard such a dividend as underpinning medium-term risk, with earnings cover over five times and set to rise given the proposed acquisition is said earnings-enhancing. It will be interesting to see what forecasts evolve, maybe with Numis/Peel Hunt given conservative guidance as company brokers, so Trinity can continue to beat it.

A financial critique would be Trinity as a classic "cigar butt" i.e. plain cheap albeit no real long-term future, which explains why management is scouring for more of them to prop the show up. If the music stops then what's the asset position to fall back on? At 2 July 2017, the balance sheet showed goodwill/intangibles over 1.4 times net assets, hence the table showing persistent negative net tangible assets.

I can warm to Trinity's "scavenging", having seen smaller oil E&P companies become mid-size over years, picking off cash generative assets divested by majors, like in the "declining" North Sea, although sweating physical assets could be said another game from creating media content.

Stock to Watch: Trinity Mirror

So, the stance on the stock currently boils down to your risk appetite: a speculative buy stance can be justified; the situation feeling quite like my drawing attention in May 2011 at 50p, on grounds strong cash generation would overcome fears of financial distress.

Enough traders may follow the upgrades/yield story than worry about sniping from The Guardian. Speculative buy.

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