In the financial year ending 28 February 2012, digital book sales soared from £2.2m to £5.7m, including £3.5m in the final six months. In the first half of the current year to end August 2012 they rocketed a further 89 per cent to £4.5m to account for 10 per cent of the company's revenues and there is little sign that the momentum is slowing. In a trading statement this week, the book publisher revealed that ebook sales ramped up a further 58 per cent year on year in the last four months of 2012.
Bloomsbury's exposure to this fast-growing segment is clearly positive as, for the first time ever last year ebook sales in the US exceeded hardback sales and the rate of sales growth in ebooks for young adults and children exceeded that of adults.
But the rapidly increasing popularity of ebooks does have an impact on the timing of the company's revenues since these sales generally peak in January and February following the sale of ereader devices at Christmas. Moreover, academic sales, another major revenue stream for the publisher, peak at the beginning of the academic year, in September and October. Since these two revenue streams now account for a higher proportion of total turnover, the proportion of the company's profits accruing in the second half of the financial year increases. This not only skews the results, but also means that the risk to earnings is greater, too, which creates uncertainty.
To some degree this is what we witnessed in this week's trading statement when Bloomsbury's chief executive, Nigel Newton, noted that: "We will only begin to have visibility of post-Christmas returns and the important post-Christmas ebook sales over the next six weeks…the results for our 2012-13 financial year will be dependent on these and the completion of several contracts under negotiation.” Uncontracted and budgeted rights sales of £2.7m have yet to be signed and there is a risk that these could fall into the following financial year if they are not completed by the 28 February year-end. Clearly, these two factors add risks to broker estimates, which is perhaps why investors have not reacted more positively to the trading update.
Strong pipeline
Still, there is plenty to be positive about and it is worth pointing out that Bloomsbury has been active in acquiring further rights and will be publishing two major potential bestsellers this year: And the Mountains Echoed by Khaled Hosseini and Elizabeth Gilbert's novel The Signature Of All Things. Mr Hosseini's bestselling books The Kite Runner and A Thousand Splendid Suns have been huge hits for Bloomsbury in the past. Also, six of the company's top 10 bestsellers in the UK in the period before Christmas were cookery books and, to build on this, the company is publishing Paul Hollywood's Bread, which will be accompanied by a BBC TV series in March 2013.
Bloomsbury is also the new publisher of the TV MasterChef series, which is produced in over 36 countries worldwide and broadcast in over 200 territories around the world. The multi-year partnership with Shine 360° will see MasterChef branded titles published across multiple markets and territories from autumn 2013 onwards.
Cash-rich balance sheet
The company has also been using its healthy cash pile sensibly to make some smart acquisitions, including New York-based Fairchild Books, a publisher of textbooks and educational resources for students of fashion, retailing and interior design, for $6.1m (£3.8m). Also, the £1.7m bolt-on acquisition of AVA boosts Bloomsbury's market share in applied visual arts, where it is the world's leading publisher, and provides significant opportunities for new digital initiatives. Expect more deals, too, as Bloomsbury retained £7.7m of net cash on its balance sheet, worth 10p a share, at the end of December.
How Simon Thompson's 2012 Bargain Shares Portfolio has performed
| Company | TIDM | Offer price, 10 February | Bid price, 17 January | Dividends paid (p) | Total return (%) |
|---|---|---|---|---|---|
| Telford Homes (see note 5) | TEF | 91.7 | 201 | 3.5 | 123.0% |
| MJ Gleeson | GLE | 110 | 183 | 0 | 66.4% |
| Molins (see note 2) | MLIN | 107 | 153 | 5.25 | 47.9% |
| Stanley Gibbons (see note 1) | SGI | 178 | 243 | 6.25 | 40.0% |
| Indigovision (see note 3) | IND | 325 | 333 | 80 | 27.1% |
| Trading Emissions (see note 8) | TRE | 25.25 | 24.5 | 6 | 20.8% |
| Bloomsbury Publishing (see note 6) | BMY | 115 | 122 | 5.25 | 10.7% |
| Mallett | MAE | 73 | 66 | 0 | -9.6% |
| Rugby Estates (see note 4) | RES | 433 | 330 | 0 | -9.6% |
| Eurovestech (see note 7) | EVT | 9.3 | 6.75 | 1.32 | -13.2% |
| FTSE All-Share | 3044 | 3211 | 5.5% | ||
| FTSE Small-cap index | 3051 | 3574 | 17.1% | ||
| FTSE Aim index | 794 | 736 | -7.3% | ||
| Notes | |||||
1. Stanley Gibbons paid a dividend of 3.5p a share on 21 May and 2.75p on 1 October 2. Molins paid a dividend of 2.75p a share on 11 May and 2.5p on 11 October 3. Indigovision paid a dividend of 5p a share on 19 April and 75p a share on 30 November 4. Rugby Estates purchase price adjusted for 7:3 share consolidation and capital return of 250p a share (through B and C shares) in June 2012 5. Telford Homes paid a dividend of 1.5p a share on 20 July and 2p a share on 11 January 2013 (ex-dividend: 12 December). 6. Bloomsbury paid a dividend of 4.31p a share on 25 September and 0.94p a share on 30 November 7. Eurovestech paid an E share dividend of 1.32p a share on 21 September. Shares delisted from Aim on 24 September and trading is now on the Matched London Facility. 8. Trading Emissions pays a dividend of 6p a share on 11 February 2013 (ex-div: 16 January 2013). | |||||
Low rating
Following the trading update, analyst Malcolm Morgan at broker Peel Hunt maintained his full-year pre-tax profit estimate of £11.7m, giving adjusted EPS of 12p and a dividend of 5.5p, for the 12 months to end February 2012. He also held his forecasts for the following year at pre-tax profits of £12.2m, EPS of 12.7p and a dividend of 5.7p. On this basis, the shares, at 122p, trade on a very modest 10 times earnings and offer a yield of 4.5 per cent. Net of cash, that earnings multiple drops even further to nine times prospective earnings. The shares are also priced a hefty 20 per cent below the company's August 2012 net asset value of 150p a share.
So, although we will have to wait for a further update on post-Christmas returns and ebook sales, it is a fair guess that Bloomsbury could be in for some decent digital sales given the bumper number of Kindles and e-readers sold in the final quarter of last year. I am also less concerned about the £2.7m of uncontracted rights sales at this stage because, even if these are delayed into the next financial year, it's not as though they have been lost.
On a risk:reward basis I believe that the risk to Bloomsbury shares is to the upside at this level and, having first recommended buying the shares at 115p in February last year - and having received dividends of 5.25p a share since then - I continue to rate them a decent medium-term value buy.
■ Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.
My next online column will appear at 12pm on Monday 21 January 2012 and will be available on my homepage.
MORE FROM SIMON THOMPSON ONLINE ...
In the past few weeks I have written a number of online exclusive articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 (Stockpicking Marvels, 16 January 2013)
Eros (A share firmly in the picture, 15 January 2013)
Netcall (Jumping the gun: take two, 15 January 2013)
Moss Bros, Communisis (Jumping the gun, 14 January 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures (Small cap wonders, 11 January 2013)
IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)
S&P 500 portfolio of dog shares (Dog shares barking back, 8 January 2013)
Air Partner (A share ready to take off, 7 January 2012)
FTSE 100 traded options strategy (Highly profitable options, 3 January 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments (Rampant bargain shares, 31 December 2012)
