Future's management team, under the leadership of chief executive Mark Wood, has been pushing the digital side of the business hard, in the UK in particular, to offset the ongoing decline in print sales and to boost profits. And it has been the digital side of the business that has impressed me most as the company has clearly been commercialising its rapidly growing global online audience of 50m unique users.
Digital growth driving revenues
In fact, Future now has more than 100 digital editions and bespoke apps on all the major tablet platforms and, through content partnerships, it has been entering new markets including a move into English Premier League Football with Football Week. Around 45 per cent of sales on Apple's Newsstand are subscriptions and, of these, an eye-catching 90 per cent are 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 and boosting digital revenue.
The company has revealed that in the three months to the end of December, digital revenues increased 24 per cent year on year to account for 23 per cent of turnover, up from 18 per cent in the first quarter of the prior year. Digital advertising is growing fast, too, and represents 54 per cent of total advertising revenues; that's a full nine percentage points more than a year ago. And, buoyed by the success on Apple's store, Future now has over 40 of its brands on Google Play's new Magazine Shop, which launched in December. This bodes well for digital circulation revenues, which have posted quarterly growth of 16 per cent over the last year on iPads and other tablets. That's just as well given the pressure print revenues remain under, which is why the company's UK total revenues were down 1 per cent in the latest three-month trading period even after factoring in the above bumper growth from digital.
It was a similar story in the US business, which has also seen an acceleration of consumers moving from print to digital: online and tablets now account for almost three-quarters of total advertising revenues, up from 64 per cent a year ago. Although the US operation remains loss-making, first-quarter losses were lower than in the same period of 2011 following disposals and significant cost cutting. Latest guidance from management is for the unit to be profitable on a cash basis in the financial year to the end of September 2013.
Valuation
The US operation will certainly need to return to profitability if Future is to lift underlying pre-tax profits from £4.8m to £6.3m on a modest 1 per cent rise in revenues of £118.6m in the financial year to 30 September 2013, as media analyst Malcolm Morgan at broker Peel Hunt expects. On that basis, adjusted EPS should rise from 1.1p to 1.3p, which means Future's shares, offered at 20.5p in the market, are priced on a forward PE ratio of almost 16.
That rating drops sharply to 11 times earnings estimates assuming Future delivers pre-tax profits of £8.3m and EPS of 1.8p on flat revenues in the 12 months to September 2014. True, if Future manages to hit those numbers, there could be more medium-term upside to come, but having seen the shares rocket 40 per cent in the five months since I advised buying at 13.5p ('A bright future', 8 Oct 2012), I am inclined to bank profits with market makers willing to buy them at 19p and keep them on my watch list for now. As Mr Morgan noted in his morning meeting note: "We do not see anything in today's announcement that will drive the shares forward in the near term." I agree, and it's time to book profits on this trade and take a watching brief for a better entry point to play the turnaround.
■ My 2013 Bargain share portfolio will be published online on my home page at 7am on Friday 8 February. Also, 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.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 21 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
Sanderson (An 'app' online investment, 5 February 2013)
Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)
BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)
Bellway ('Profit from the London property boom', 30 Jan 2013)
Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)
Market timing ('Lessons to learn', 24 Jan 2013)
Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)
Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)
PV Crystalox Solar ('Seeing the light', 21 Jan 2013)
Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)
Eros ('A share firmly in the picture', 15 Jan 2013)
Netcall ('Jumping the gun: take two', 15 Jan 2013)
Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 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 Jan 2013)
Air Partner ('A share ready to take off', 7 Jan 2012)
FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)
