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Trinity Mirror a deep value play

The Daily Mirror publisher is making encouraging progress and its shares could kick off their disaster-ready rating
April 21, 2016

Shares in Trinity Mirror (TNI) are priced for disaster at just three times forward earnings. However, while print titles are under pressure and a £305m pension deficit blights the balance sheet, we think the market is not giving enough credit to the benefit from digital growth, cost savings and acquisitions. There is also the incentive of a forecast yield of over 4 per cent for the brave.

IC TIP: Buy at 122p
Tip style
Value
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Robust digital growth
  • Shares on 'deep value' rating
  • Prospective yield of over 4 per cent
  • Cost savings and acquisitions
Bear points
  • Declining top line
  • Pension deficit

Digital investments are paying off handsomely for the Daily Mirror publisher. Exclude its acquisition of regional publisher Local World in November and average monthly users of its websites increased by more than a third to 98m in 2015, driving underlying digital publishing revenues up 22 per cent. Management also generated £20m in savings by cutting costs, consolidating operations and boosting efficiency, and is targeting a further £15m in 2016. For instance, it replaced six smaller titles with the Manchester Weekly News, relaunched titles such as the Liverpool Echo with a greater focus on city activities and sport rather than crime, closed titles and print plants, and scrapped an unprofitable newsprint supply deal for The Independent and i newspapers. Combined with lower newsprint prices and volumes, that meant underlying operating costs fell 9 per cent. The upshot was a 4 per cent rise in adjusted operating profits to £110m, despite an 8 per cent fall in underlying revenue.

Further gains are likely to come from Trinity Mirror's £183m acquisition of the remaining four-fifths of Local World, which publishes regional titles, including the Bristol Post and Essex Chronicle. Regional newspapers' loyal readership and localised content mean they aren't as easily substituted as the national titles. Moreover, Local World's websites attracted 23m unique monthly users in 2015, driving digital sales up more than a fifth to account for about 14 per cent of turnover. The deal means Trinity Mirror now boasts 13 of the top 20 regional paid dailies by circulation in England and Wales and a monthly digital audience of 120m. Integration of the business should also result in an estimated £12m in gross annual cost savings.

In a show of confidence, Trinity Mirror recently launched New Day, the first new national newspaper in three decades. The title has the potential to expand the group's pool of advertisers and management expects it to break even in 2016. Even if it proves a dud, losses from a quick closure would be expected to come in at under £10m.

The group's impressive progress has prompted Numis analysts to raise their forecasts twice in the past five months. They expect operating profits to rise 24 per cent in 2016, then retreat 4 per cent to £130m in 2017. But the mixed growth outlook is more than factored in by the shares which, priced at a measly three times forecast earnings for 2016, suggest the market is readying itself for disaster.

While we're more optimistic, the deep value rating is not without some justification. A key concern for investors is falling print circulation and advertising sales, which meant underlying print publishing sales fell by a tenth in 2015. Together with weaker printing revenues, that meant Trinity Mirror's underlying turnover fell 8 per cent in 2015 and 9 per cent in the first two months of 2016. Another worry is pending legal claims of phone hacking, but management made another £29m of provisions last year on top of the £12m set aside in 2014. And, while the gaping pension deficit is a major issue, cash generation has recently been reassuring and Numis expects net debt of £93m at the end of 2015 to more than halve to about £41m by the end of 2017.

TRINITY MIRROR
ORD PRICE:122pMARKET VALUE:£346m
TOUCH:121-122p12-MONTHHIGH:190pLOW: 117p
FORWARD DIVIDEND YIELD:4.7%FORWARD PE RATIO:3
NET ASSET VALUE:*NET DEBT:£92.9m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201366410132.0nil
201463610232.83.00
201559310432.85.15
2016**73113036.75.41
2017**69412635.55.68
% change-5-3-3+5

Normal market size: 2,000

Matched bargain trading

Beta: 0.27

*Negative shareholders equity

**Numis forecasts, adjusted PTP and EPS figures