A couple of weeks later I noted a rather interesting stock exchange announcement from Future (FUTR: 13.5p), the company behind those two websites and one that also has around 200 special-interest publications and websites with operations in the UK, US and Australia. In fact, Future exports or syndicates publications to 89 countries, making it the UK's number one exporter and licenser of magazine content with sales running at 2.2m magazines each month. If you have yet to come across the company, perhaps its biggest-selling products may be more familiar: T3, Total Film, Classic Rock, Official Xbox Magazine, gamesradar.com, bikeradar.com and musicradar.com.
What really caught my attention in that pre-close trading statement last month is that Future is bang on course to deliver the strong profit recovery analysts have been predicting. It's easy to see why because Future's management team, under the leadership of chief executive Mark Wood, has been pushing the digital side of the business really hard and, in the UK operations, this has more than offset the ongoing decline in print sales to boost profits.
For instance, following a successful launch on Apple's Newsstand in October 2011, sales of Future's digital editions - the company has more than100 digital editions and bespoke apps on tablet - passed £5m in the 12 months to end September and traffic to its websites has soared more than 50 per cent to over 45m unique site visits every month. Importantly, page view and engagement metrics are increasing at the same rate, which would indicate that the business is succeeding in building a sustainable user base - and one it can commercialise.
The company's financial performance from digital certainly backs this up as iPad owners bought more than 830,000 copies of Future's titles between October and March, generating gross revenue of over £3m, or £500,000 a month. Net of Apple's share of revenues, that works out at around £2m of income. But by the end of the third quarter to end June, total digital edition sales on the iPad and other tablets had rocketed to 1.7m. And these are only early days as the market for tablets, which only went on sale two years ago, is growing rapidly with industry experts expecting 940m of us to have one by 2015. In turn, this is opening up new markets and a new customer base for Future.
For example, around 45 per cent of sales on Apple's Newsstand are subscriptions and, of these, an eye-catching 90 per cent were new customers. It's worth noting that Future may be a UK company, but its market is global: 80 per cent of Apple's Newsstand sales are from customers outside the UK. And by repackaging archived content into new iPad products as well as launching new formats the company is creating additional revenue streams. So, given these dynamics, it would be a smart move for Future to try to exploit a huge overseas market for its digital products. That is precisely what it is doing.
In the US, Future has launched US versions of its two top UK digital platforms: Techradar.com and cycling website BikeRadar. It has proved a great success and Techradar.com is now generating 3.3m monthly unique users in the US - more than treble the level of traffic a year ago - and BikeRadar's online traffic is up around 47 per cent year on year. As a result, Mr Wood believes that the US business will return to profitability on a cash profit basis in the year to end September 2013, which is quite a turnaround as in the six months to 31 March 2012 this operation made a cash loss of £1.4m on revenue of £11.6m. Staff cuts and disposals of US music websites will also help slash losses.
So with digital sales growing rapidly and a turnaround in place for the US business, media analyst Malcolm Morgan at brokerage Peel Hunt expects Future's underlying pre-tax profits to surge from £3.9m to £5.6m on revenues of £121m in the 12 months to end September, to lift adjusted EPS to 1.1p. But it is in the current financial year that the company's valuation falls into real bargain territory. That's because, based on a similar level of revenues, pre-tax profits are expected to rise to £6.8m as US losses fall sharply. On this basis, EPS rises to 1.4p and the forward PE ratio falls to 9 which is an anomalous rating for a company in recovery mode posting double-digit earnings growth. For good measure Future's market value of £43m is a hefty 30 per cent below book value of £60m, although the company is carrying £92m of intangible assets on its balance sheet for those 200 titles. Reassuringly, there are no financial concerns as net debt is £17.1m, so gearing is under 30 per cent and Future is trading well within its credit lines and covenants.
The fundamental case for buying the shares aside, Future's share price has just signalled a buy signal on the charts by generating a breakout when it rose above 13.5p last week, a level that had previously capped every single rally since August last year. I think this breakout is the real deal and well worth buying into ahead of the full-year results on 23 November. I have a three-month price target of 18p and rate Future shares, priced on a spread of 12.5p to 13.5p, a trading buy.
