Misery for Daily Mail

The UK's economy remains stubbornly in recession, even if the worst of the drop in output is now over. This will spell more bad news for Daily Mail and General Trust (DMGT), best known as the publisher of the voice of middle Britain, the Daily Mail. In the past three months, DMGT's share price has soared on the hopes of a recovery, in the process significantly outperforming the FTSE 100 index. Its shares have risen 55 per cent, compared to just 15 per cent from the Foostsie over that period.

Yet the momentum may well have got ahead of itself, because continuing recession will put further pressure on the group's advertising revenue. The group derives 42 per cent of its revenue from its Associated Newspapers arm, which publishes the Metro freesheets as well as the Daily Mail. And this subsidiary gets at least 40 per cent of its revenue from advertising. Meanwhile, the group's regional newspaper business, Northcliffe Media - which represents 15 per cent of DMGT's turnover - gets 67 per cent of its revenue from advertising.

Over the first 11 months of its year to the end of September, Associated Newspapers suffered a 16 per cent fall in advertising income on the previous year, and advertising revenues from Northcliffe Media were 31 per cent lower. In addition, DMGT's bosses warned in September that "trading remains volatile from week to week"; as a result, future revenues are uncertain.

True, a report from the Institute of Practitioners in Advertising has revealed that cuts in marketing spending have slowed, with year-on-year spending falling 28 per cent in the third quarter compared with a 38 per cent drop in the previous quarter. But advertising volumes have nevertheless fallen for eight consecutive quarters, and media agency Carat does not see a full recovery in the UK advertising market until 2011.

Smaller marketing budgets have also accelerated the shift of advertising online, where the success of campaigns is easily measurable, and for DMGT this has been the only area of growth in advertising.

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However, with online advertising rates still considerably below print rates, online revenues have not been able to offset the decline in print revenues. Associated Newspapers grew digital its advertising revenues by 25 per cent in the half year, but they account for just 1 per cent of the division's income.

Further, news is still free online and - thanks largely to the BBC's subsidy from the taxpayer - is proving especially difficult to turn online traffic into a commercial product. Combined with falling circulations, this raises questions about the long-term viability of newspapers. "Fast-forward 10 years and there may not even be a space for DMGT," says Adrian Kearsey, media analyst at stockbroker Evolution.

Added to those concerns, DMGT has a sizeable debt pile - £1.2bn, up 20 per cent in the first half of the year partly due to sterling's weakness. The ratio of debt to cash profits was 3.7 times in the first half of 2008-09, which is uncomfortably close to the ceiling - four times - that DMGT's bankers will allow. So management wants to cut the debt. The worry is that doing so could mean a cut in the dividend, too. Meanwhile, management is hacking away at costs and aims to deliver savings of £150m at a one-off cost of £100m to be charged in the year just ended.

The closure of the London Lite afternoon freesheet, which analysts estimate may have been losing £10m a year, would also help. This seems most likely now that London's Evening Standard - in which DMGT holds a residual 25 per cent stake - is circulated free.