610p - Media - It's been a rough few weeks for newspaper publishers - rough enough for us to turn bearish about shares in Daily Mail & General Trust. First, regional newspaper publisher Johnston Press reported a sharp fall in advertising, and said that there were no signs of improvement. Then, the Daily Mirror's publisher, Trinity Mirror, said that the outlook was weak. And even though the Daily Mail group, whose titles include London's Evening Standard as well as the Daily Mail, was reasonably upbeat in late May - seeing a modest improvement in the display advertising market for its national newspapers, despite steep falls in overall advertisement sales - it reported no discernable improvement in the UK advertising market in June, with the football World Cup failing to produce a bounce.
It seems that while some of this downturn is cyclical, there are also structural issues at play. In particular, the growth of the internet is stealing advertisers and readers. Edward Hill-Wood, an analyst at investment bank Morgan Stanley, worries that the "migration of print advertising to the internet is still in its infancy, and is only marginally responsible for the current downturn".
Even the group's flagship newspaper, the Daily Mail, has not been immune to the long-term decline in newspaper readership. Management has offset the impact of the fall by raising the Daily Mail's cover price by 5p - the first increase in nearly five years. But, ultimately, a policy of increasing prices to offset falling circulation is unsustainable as it alienates readers. With broadsheets such as The Times and The Independent moving to tabloid size, the Daily Mail has lost product differentiation, too. Now, competition is set to increase for the Evening Standard. London Underground's operator, Transport for London, has started a tender process for a free afternoon/evening paper to be distributed at its stations. Marketing spend on the Evening Standard may have to be raised to compete with the new title.
The picture at the group's regional newspapers is also bleak. Advertising sales in the UK were down 7.5 per cent in the first half, with recruitment and motor advertising both slumping 14 per cent. Morgan Stanley expects regional advertising sales to fall 5 per cent for the full year and, like their national counterparts, regional newspapers are losing advertising to the internet. The regional division's limitations were highlighted when management recently tried to sell it, but failed to attract a high enough bid. Management now says that it can extract value from the regional newspapers itself, and has launched a restructuring and cost-cutting programme. Still, the aborted sale of the regional business hints at strategic drift.
More encouraging are the group's business-to-business (B2B) and exhibitions operations, which produce 40 per cent of profits. In the first half of 2005-06, DMG Information and Euromoney both produced good increases in underlying operating profit. This presence in B2B media may suggest its shares deserve a premium rating. However, the B2B cycle has been on the up for some years, and will turn down at some point.
So, while reported profits this year will be massively boosted by the sale of the Aberdeen Journal (see table), the advertising recession will hurt, and Morgan Stanley forecasts a fall in underlying earnings from 43.4p to 38.1p. That means the non-voting shares trade on 16 times underlying earnings, against 11 times for Trinity Mirror and 12 times for Johnston Press. But the Daily Mail group is clearly grappling with a long-term decline in circulation, falling advertising revenue and growing competition. Adding that all up, the shares do not deserve this hefty premium to other newspaper publishers. Sell.
| 'A' Ord price: 610p | Market value: £2.47bn |
|---|---|
| Touch: 610-611p | 12-month High: 805p Low: 588p |
| Dividend yield: 2.1% | PE ratio: 14 |
| Net asset value: 121p | Net debt: 174% |
| Year to | Turnover | Pre-tax | Earnings per | Dividend per |
|---|---|---|---|---|
| 30 Sep | (£bn) | profit (£m) | share (p) | share (p) |
| 2002 | 1.94 | 107 | 20.8 | 9 |
| 2003 | 1.93 | 108 | 15.2 | 10 |
| 2004 | 2.11 | 125 | 15.5 | 11 |
| 2005 | 2.14 | 198 | 35.9 | 12 |
| 2006* | 2.18 | 266 | 44.6 | 13 |
| % change | +2 | +35 | +24 | +8 |
*Seymour Pierce estimates
Beta: 0.87
Matched bargain trading
Normal market size: 50,000
Last IC view: Fairly priced, 636p, 2 Jun 2006
BULL POINTS
- B2B assets are doing well
- Implementing cost-cutting
BEAR POINTS
- No sign of advertising recovery
- Daily Mail circulation softening
- Failed to sell regional newspapers
- Underlying earnings set to fall
