Bloomsbury’s tales to make for a profitable read

For starters, Bloomsbury’s 2020 digital strategy, a key driver of growth, is bang on track to deliver £5m of operating profit and £15m of revenues by the 2021-22 financial year. The initiative aims to accelerate growth of digital revenues and reposition the business from primarily being a consumer publisher to a digital B2B publisher in the academic and professional information market. Around 80 per cent of the 60,000 books that Bloomsbury has in print are in the academic, professional and special interest category.

Interestingly, earlier this month, analyst Malcolm Morgan of brokerage Peel Hunt told the firm’s clients “that the company may be poised to enter into an upgrade cycle based on the commercial performance of the digital resources augmented by an increased emphasis on cash-funded acquisitions.” He has a point as underlying digital revenues surged by 42 per cent in the 2018/19 financial year, and academic and professional segments delivered over 20 per cent of the group’s pre-tax profit, a performance that was driven by double-digit top-line growth. There is a clear pathway to higher profit generation in the coming years.

A clear roadmap to higher profitability

This explains why Mr Morgan is pencilling in near 10 per cent growth in this year’s pre-tax profits to £15.7m on revenues up in low-single digits to £169m to produce an earnings per share (EPS) of 16p, highlighting the operating margin expansion from the digital strategy. Moreover, analysts’ assumptions that Bloomsbury could be making a near 10 per cent operating profit margin on revenue of £172m in the 2020/21 financial year are now looking on the conservative side.

It’s worth flagging up the company’s solid cash flow generation, too. A current year forecast free cash flow yield of 7 per cent equates to 16p a share and supports expectations of a 5 per cent hike in the annual payout to 8.44p a share. Also, Bloomsbury had net funds of £27.6m (36.5p) at the last financial year-end (February 2019), so even after paying out dividends, the cash pile is set to swell to £33.5m (44.5p a share) by February 2020, rising to £39.4m (52p a share) by February 2021, thus providing further surplus capital to deploy on earnings accretive acquisitions.

On this basis, Bloomsbury’s shares are being valued on a forward cash-adjusted earnings multiple of 12 times for the 2019/20 financial year, falling to 10.6 in the 2020/21 financial year. The shares are valued on a modest 1.3 times book value, too, and offer an attractive prospective dividend yield of 3.5 per cent. That’s hardly an expensive rating for a business that continues to make wizard profits from the Harry Potter series – J.K. Rowling’s books were amongst Bloomsbury’s top selling consumer titles in the first quarter of the current financial year – and has a strong slate of new titles for release.

For instance, Tom Kerridge's new book, Lose Weight and Get Fit, is slated for release in December 2019 and will be accompanied by a six-part primetime BBC Two television series of the same name. Mr Kerridge's previous two books, Fresh Start and Lose Weight for Good, were released in December 2017 and 2018, respectively, and were also accompanied by TV series. They have been significant money spinners for Bloomsbury. Worth noting, too, is that Bloomsbury title, Three Women, by Lisa Taddeo was ranked Number 1 in the Sunday Times Non-Fiction bestseller last week, further highlighting the publisher’s knack of backing the right authors.

Target price

I suggested buying Bloomsbury’s shares, at 218p, in my 2019 Bargain Shares Portfolio, albeit the share price was marked up to 229p on the offer price when The London Stock Exchange opened on Friday, 1 February 2019, so I have used the higher price as the entry price as is the case with all 10 constituents. Even so, my portfolio has still produced a total return of 28.1 per cent in the first six months since inception, handsomely outperforming the 11.4 per cent total return on the FTSE All-Share index, and a miniscule 2.9 per cent total return on the FTSE Aim All-Share index (prices correct at 9.20am on Monday, 29 July 2019).

It goes without saying that I feel that there should be significantly more upside to come from Bloomsbury’s shares as the potential for the company to deliver near 10 per cent pre-tax growth both this year and next is simply not being priced in, nor is the possibility that the board will use some of its bumper cash pile to make potentially earnings enhancing acquisitions. That’s worth considering given that Bloomsbury’s management team have a good long-term track record, having invested £90m in 22 bolt-on acquisitions since 2000.

The bottom line is that Peel Hunt’s target price of 300p values Bloomsbury’s equity at £226m and seems on the money to me. That’s because even if that price level is achieved then the shares will still only be rated on a cash-adjusted forward price/earnings (PE) ratio of 13.3 for the 2020/21 financial year based on the company delivering EPS of 18.6p and having a closing cash pile worth 52p a share in February 2021. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.