The first point I would make is that it makes commercial sense for UTV to offload the Irish television business which shows ITV programming as owner of the Channel 3 franchise in Northland Ireland, and includes the recently launched UTV Ireland, a dedicated television channel for the Republic of Ireland. As the company's chairman Richard Huntingford rightly points out there has been an "increasing level of consolidation in the global television sector in the past few years, creating media companies that span content, broadcast and platform ownership." In fact, all bar three of the original 15 regional broadcasters are now under ITV's ownership.
So having successfully extended the reach of its television business with the launch of UTV Ireland in January this year, this looks an opportune time to maximise shareholder value through its television interests becoming part of ITV's global broadcast and content business. This is especially the case once you factor in the further hefty capital investment required to bring UTV Ireland to profitability. Indeed, in the first half of this year UTV Television reported losses before tax and finance costs of £3.9m on revenues of £58.3m, reflecting an operating loss of £7.5m from UTV Ireland. In 2013, prior to the launch of UTV Ireland, UTV Television posted an operating profit of £9.7m, and last year pre-tax profit fell to £5.5m on revenues of £116m, so the start-up losses are clearly proving a drain on the company.
However, I believe that having launched the channel, and incurred the start-up losses, the business is now at a point where it is commercially worth more to ITV than it is to UTV's shareholders. A sale price of £100m on a cash-free-debt-free basis seems a good deal to me.
Sum-of-the-parts valuation
Moreover, as part of the sale agreement, the UTV pension scheme will remain with UTV Television so shareholders will no longer have to shoulder a pension deficit which stood at £3.2m at the end of June (IAS19 accounting standards) and three times higher than that based on the scheme's actuarial update. The sale, subject to shareholder approval at a general meeting, is expected to complete early in 2016. In effect, ITV is paying 11 times operating profit for UTV Television once you add back losses for UTV Ireland.
I fully expect UTV Media's shareholders to vote through the deal too. The carrot being that the board intend to return a chunk of the cash proceeds from the sale to them. In fact, after paying off net debt of £46.5m, net proceeds from the disposal after accounting for transaction costs and expenses will be around £98m to leave UTV Media with net cash of £51.5m. In addition, the company sold off one of its 13 local radio station earlier this month, Juice FM in Liverpool, for cash of £10m. That was a fair price as Juice FM reported profit before tax of £408,000 on revenues of £2.2m in 2014 and had gross assets of £603,000. It also represented a modest part of UTV Media's radio division which reported operating profit of £16.7m in 2014 and had gross assets of £125m.
This means that with UTV Media's shares priced at 184.5p, up from 173p prior to last week's announcement, the company has a market capitalisation of £177m and an enterprise value of £116m after adjusting for pro-forma net cash of £61m post the disposal of UTV Television early next year. The question is whether this represents a fair valuation for UTV Media's remaining businesses? To answer that it's worth considering the make-up of the business in its' slim down form, and likely prospects for the year ahead.
The future is radio for UTV
In the UK, UTV's radio assets consist of talkSPORT and 12 local radio stations, most of which are based in the north west of England. The company's national radio station, talkSPORT, is part of a consortium with Arqiva and Bauer Media, which won the licence to operate the second national DAB radio multiplex in March this year.
As part of the new services, talkSPORT will be launching four new national radio stations, talkRADIO, talkSPORT 2, talkBUSINESS, and, under a 12-year licence agreement between Virgin Group and UTV, Virgin Radio. The launch of these new digital stations will be a strategic priority for the company. UTV will invest in the region of £4m in 2016, including capital expenditure of £1m, and a further £1m in 2017, after which the new stations are expected to move into significant profit.
Another priority for UTV Media will be the development of talkSPORT International. This radio channel provides football commentary in six languages in 52 territories around the world and will seek to monetise its Premier League worldwide audio rights by expanding its geographic footprint, broadening its broadcaster base and creating attractive packages for sponsors and advertisers. It makes sense to do so as talkSPORT has proved very popular, so much so that it has outperformed the UK market in terms of revenue growth since it was acquired by UTV in June 2005.
The station currently has three million weekly listeners, having grown its UK audience by more than half in the past decade. These listeners are mostly male and demographically attractive to advertisers. So maintaining talkSPORT's strong audience performance will be a key objective, as well as leveraging the strength of the talkSPORT brand overseas.
In terms of its contribution, talkSPORT accounted for half of the UK radio operation's revenues of £57m in 2014, albeit the 22 per cent revenue growth posted by the station was boosted by the FIFA World Cup last year. That proved a stiff headwind in the first half of 2015 when talkSPORT's revenues declined by 15 per cent. Still that was a credible performance in a post World Cup year, and in the context of flat national advertising market too. And having reduced costs by £2.1m this mitigated the impact on profits.
As a result the UK radio division reported combined operating profit of £5.6m on revenue of £26.2m in the first half of 2015 and a repeat performance in the second half of this year would suggest it's capable of turning in profits of £11m in a non-football tournament year. As the tough World Cup comparators fall away, talkSPORT has reported good growth in both August and September. Looking ahead to 2016, it's worth flagging up that the UEFA Euro 2016 football tournament will be held in France from 10 June to 10 July 2016. When the tournament was last held three years ago in Poland and Ukraine, talkSPORT's revenues surged by 16 per cent in the first half of 2012 and its contribution over the course of that year rose by a quarter. That's good news for next year's prospects in my view.
Irish radio business
In Ireland, UTV is the largest local radio operator with seven stations broadcasting from Belfast, Dublin, Cork, Limerick and Drogheda and a national advertising sales house based in Dublin. The radio stations have strong positions in the key urban areas in which they operate and UTV's strong audience delivery mitigated the worst effects of the deep advertising recession which Ireland has experienced over the past few years.
Macro economic conditions are now improving although the Irish radio advertising market was still down by 4 per cent in the first half of this year. This resulted in the division's operating profits falling by £400,000 to £2.1m on a decline in revenues from £10.9m to £9.5m, albeit the strength of sterling against the euro accounted for part of the shortfall. That said, UTV Radio Ireland is well positioned to take advantage of the ongoing economic recovery which should ultimately lead to commensurate growth in the Irish advertising sector.
So assuming both the Irish and UK radio businesses can at least maintain their first half profit performance, then UTV's radio operations look capable of generating annual operating profit of £15.4m before central costs estimated at £2.8m. In other words, these assets are in effect being valued on just over nine times operating profit in a year when Irish revenues have been subdued and talkSPORT doesn't have the benefit of a major FIFA or UEFA football championship. That doesn't seem a steep valuation to me.
New capital structure and target price
It's also worth noting that UTV Media will be paying off all its borrowings post the sale of UTV Television and entering into new bank facilities and aims to cap the net debt to cash profit multiple at two times. So after factoring in the annual depreciation charge this would imply a borrowing facility of no more than £27m to £28m. That's prudent.
What this also means is that the company could easily pay out a third of its market capitalisation, a sum of around £60m, as a capital return to shareholders and still have ample funds available to finance the investment in the DAB multiplex, and the £10m retention payment which will be placed in a retention account for seven years to cover warranty and tax indemnity claims on the sale of UTV Television. Full details of the proposed capital return will be included in the sale circular which has yet to be released.
The bottom line is that I feel that a much fairer value for UTV Media's equity is 215p a share, implying a pro-forma enterprise value of £142m, or the equivalent of 11 times this year's likely operating profit from its radio activities. Offering 16 per cent share price upside to my three-month target price of 215p, a timeframe to cover the completion of the sale and cash return, I rate UTV Media's shares a trading buy on a bid-offer spread of 184p to 184.5p.
Please note that I have also written another article today on Aim-traded mobile software provider Globo ('Globo bombshells', 26 October 2015)
MORE FROM SIMON THOMPSON...
I have published articles on the following 51 companies in the past five weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ MS International: Buy at 180p, initital target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)
■ Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 October 2015)
■ UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 October 2015)
■ Globo: shares suspended at 28p ('Globo bombshells', 26 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
