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Publishers torn by print-digital divide

Publishing companies have tried to address the rise of digital media in different ways, with mixed results
April 25, 2014

The relentless rise of digital publishing, advertising and consumption is widely seen as the greatest threat to traditional print publishers in the industry's long history. Sales of newspapers and magazines have plunged as audiences go online for their news and entertainment, largely for free. The Internet has broken down barriers to competition, too, reducing the costs of publishing and distribution to essentially nil. That has meant casualties, but the outlook is not as grim as you might think.

Clearly, publishers must evolve or die. In this digital age, they can distribute content worldwide to readers at home, at work or on the road. They can also leverage audio, video and interactive media to package information and tell stories in innovative ways. Investing in new technology and either hiring or retraining staff is expensive, but publishers have little choice if they're to remain competitive.

 

The venerable Johnston Press (JPR) has been among the hardest hit. Almost 250 years old, it made an operating loss of £246m last year as print advertising sales fell 13 per cent. It was also forced to slash the carrying value of its titles by £202m and that of its print presses and properties by over £68m, and spend £33m on restructuring. But, crucially, Johnston has also been willing to embrace modernity. Its digital investments and new websites grew online ad sales by 19 per cent, and substantial cuts have been made to its staff, operating costs and debt pile.

Dutch information giant Reed Elsevier (REL), which garnered half its revenues from print products in 2005, has made even greater strides. Over 80 per cent of its revenues were generated by electronic and face-to-face operations last year, largely through 20 acquisitions and many disposals. And its efforts seem to have paid off so far, with adjusted pre-tax profit up 7 per cent in 2013 to almost £1.6bn.

There are, however, no guarantees in this business. Shares in Future (FUTR), an international media group and 'leading digital publisher', have more than halved in the past year, a decline accelerated after a profits warning in March which cost chief executive and former ITN boss Mark Wood his job.

And, while digital expansion is now commonplace, the likes of Daily Mirror publisher Trinity Mirror (TNI) and Daily Mail & General Trust (DMGT) are only tentatively winding down their print operations. They see it as a core and profitable part of their business that generates the cash needed for digital investments. But that may not please investors when the growth is clearly online. Circulation revenue at DMGT, for instance, slipped 4 per cent last year and print advertising sales fell by £2m to £84m. Online ad sales, meanwhile, jumped by more than half to £23m, and 11.3m people visited its MailOnline website in February, a 47 per cent year-on-year rise.

Hedging bets elsewhere has proved sensible, too. Rather than rely on typical newspaper content, companies like DMGT are selling more business-to-business (B2B) publications, organising events and even developing software, all of which carry higher margins. And it's paying off - sales at DMGT's B2B segment grew 10 per cent on an underlying basis last year. America's New York Times has taken a different tack, releasing a slimmed-down subscription for mobile users, as well as a premium subscription, in a bid to broaden its readership.

Publishers have also tried to escape print declines by expanding into new geographies. Education specialist Pearson (PSON), which owns both the Financial Times and Investors Chronicle, is expanding its education business into faster-growing markets such as Brazil and China in tandem with its digital transformation. It's still unclear whether that approach will work - Pearson has downgraded guidance three times since the beginning of last year - but education remains a lucrative industry for many publishers.

Indeed, corporate information, events and publishing group Informa (INF) saw profits from its academic publishing business rise 4 per cent last year. But gains there were offset by profits falling at its business intelligence unit for a second consecutive year, by almost a tenth. There's clearly no surefire way to make money in publishing and information.

It seems that media conglomerates, especially in the US, have accepted that and have been cordoning off challenged print titles from the rest of their business. Last year, media mogul Rupert Murdoch separated News Corp's print operations - which include The Wall Street Journal and The Times - from its Fox film-and-TV division, while Time Warner recently spun off Time Inc, which owns Time, People and other big titles.

But as some have exited the business - including Newsweek, which published its last print issue at the end of 2012 - others have entered. Jeff Bezos, founder and chief of online retailer Amazon (US: AMZN), bought the Washington Post for $250m (£149m) last year, ending over 80 years of family ownership. His experience and substantial resources could prove invaluable at the storied newspaper as it shifts towards digital and mobile offerings. The deal might even leave UK publishers a little jealous.

Other external factors have played a role in publishers' recent performances. Euromoney Institutional Investor (ERM), for instance, grew underlying pre-tax profit by 6 per cent to nearly £117m last year, yet continues to suffer from thriftiness among financial institutions on their advertising budgets - increased regulatory pressure, more stringent capital ratios and ongoing litigation have limited their spending. Expect underlying sales growth of a modest 2 per cent for the six months to 31 March. Moreover, the strong pound continues to depress dollar profits. Euromoney claims a 1¢ rise in the average US dollar rate cuts operating profit by about £0.6m.

CompanyPrice (p)Market Cap (£m)Share price change one year (%)Forward P/E ratio (consensus)
Bloomsbury Publishing (BMY)1671234812
Centaur Media731045612
Daily Mail & General Trust8322,8702015
Euromoney Institutional Investor1,1921,5102716
Future828-57-
Informa4972,990312
Johnston Press261816611
Pearson1,0618,700-516
Reed Elsevier (REL)88919,2601716
Trinity Mirror (TNI)174443906

IC VIEW:

As a publisher ourselves, it should be no surprise that we're optimistic about the sector, including prospects for newspapers and magazines. It has, however, become imperative that publishers grow their digital audience to replace declining print readerships. Offering platforms and apps tailored for smartphones and tablets, which provide 'value added' storytelling that utilises devices' visual and audio capabilities, will be key to attracting new readers.

We know it's agonising for publishers to do away with much-loved titles, an act of filicide often perceived as betrayal to loyal readerships - remember, Informa recently took shipping industry bible Lloyds List digital-only after 279 years in print. It's likely to be a drawn-out process and delicate balancing act, too, as doing away with print publications outright can leave companies with little of substance to offer. But the long-term health of publishing businesses rests on their owners making those difficult decisions.

Centaur Media (CAU), which owns titles such as 'Marketing Week' and 'The Engineer', DMGT and several of their rivals are achieving rapid growth in online views and digital ad sales, which should make up for ongoing print declines. We expect publishers which provide differentiated and quality content, such as business-to-business or specialist information, to outperform generalists.

FAVOURITE:

Although shares in Centaur Media have already climbed 56 per cent in the past year, we see further substantial upside. Print revenue fell 5 per cent in the last six months of 2013, but group sales and adjusted cash profit rose 8 per cent and 7 per cent, respectively. Moreover, its digital and events division accounted for nearly three-quarters of revenue, making it well placed to thrive online. Centaur's new boss has also made good progress, consolidating the business into two divisions and accelerating its digital shift. We rate the shares a speculative buy.

OUTSIDER:

Recent downgrades at Future, which publishes T3 and Total Film magazines and owns techradar.com, have sent its shares plunging this year. In light of weak advertising revenues in the past few months, it expects full-year cash profits to be below last year's adjusted figure and miss market forecasts. True, Future's digital and non-print revenues climbed 9 per cent in the last three months of 2013, but its problems may not be over - it recently slashed its US headcount by a third as it shifted responsibility for its US print operations to the UK. Hold.

THE BROKER'S VIEW:

Content key to digital success

After a strong showing last year, media stocks have underperformed the market in the past three months. Trading at fairly full valuations, any problems or downgrades have been quickly reflected in share prices - delays to the launch of DMGT's new risk management product, RMS (one), did not go down well.

The greatest challenge for publishers is successfully shifting from print to digital publication. It's hard to see a real role for print going forward, as more and more people consume content on PCs and mobile devices. But it's also difficult to walk away from print entirely. When do you pull the plug?

All publishers have been affected by the trend, and companies such as Centaur Media and Pearson are in the midst of digital transformation. Leading the pack is DMGT, which has created an incredible international presence with MailOnline. We expect that will become very profitable over time, and believe the company's shares have significant upside after their recent fall. Catering to mobile, a huge and fast-growing element of digital media, is also key. Companies that have been targeting it with designated platforms have seen the benefits coming through. And there are very decent prospects among companies that have a focus on business-to-business and other must-have proprietary information.

More broadly, the challenge for publishers such as Trinity Mirror is to prove they have content that people will pay for in a digital environment. Since the early days of the internet, consumers have been generally promiscuous and reluctant to pay for anything. If a publisher's content isn't strong or different enough, it's hard to see why people will pay to consume it. That can make it a struggle to compensate for lost print revenues.

We have recently upgraded both Centaur Media and DMGT from 'hold' to 'add', with price targets of 77p and 960p, respectively.

Roddy Davidson is a media analyst at Westhouse Securities