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Don’t dismiss upside at DMGT

There is value in being one of the nation’s favourite publishers
April 8, 2021
  • Potential recovery in the ad market and a smarter, slimmer strategy 
  • DMGT is still vulnerable to cyclical movements in the economy
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Emerging recovery in advertising market 
  • Strong and fast-growing digital products
  • Slimming down with better focus
  • Cash boost through stake in Cazoo
Bear points
  • Print products still account for most of the revenues in the media business
  • Reliance on ads makes it vulnerable to health of economy 
  • Relatively weak margins compared with digital peers 

Newspapers are risky businesses. Building up a loyal readership is no mean feat while navigating the turbulent world of advertising often spells trouble for companies that are poorly managed. That explains why much of the press is racing towards digital-first, subscription models.

But that does not explain why the aristocratic Rothermere family, who own Daily Mail and General Trust (DMGT), has stuck in the newspaper business for so long. It does not explain the company’s share price performance over the past year, either. The group, which owns the Daily Mail and Mail Online on top of a number of other UK papers, has managed to add more than a third to its market value since April 2020, despite the damage that the pandemic has inflicted elsewhere in the industry.

The reason is that over the past century or so the Rothermere clan has built a different type of beast – one that we think could thrive in the long run, although potential investors will still need a healthy risk appetite if they want to tuck into the stock today.

 

A long history 

The company was first created to manage the family’s newspaper assets in 1922, after two Harmsworth brothers founded and launched the Daily Mail at the turn of the 19th century. But the group has branched out of its core paper since listing on the London Stock Exchange in the 1930s, investing in various edtech (education technology), events and property businesses. 

But its consumer media division – which also presides over the Metro newspaper and online-only The ‘i’ – still makes up half of the group’s adjusted revenue. There is much noise about the risky nature of the business of news – but combined, the Mail, Metro and ‘i’ brands reach almost 60 per cent of adults in the UK each month, giving the group a direct line to so-called 'middle England'. 

The company’s second-largest contributor is its insurance risk business, which accounts for 21 per cent of total adjusted revenue in 2020. That was followed by property information at 15 per cent, then by edtech and its events business, both at 7 per cent. These are lumped together as the ‘B2B’ part of DMGT – and all except one (no prize for guessing events was the laggard) performed relatively well over the past year despite the pandemic. But the company last month announced that it was offloading its edtech business Hobsons for $410m. 

 

A slump in events activity meant that overall B2B revenues still fell 7 per cent on an underlying basis to £606m in 2020, exacerbated by relatively weak performance in the UK property information business – although that was mostly offset by stronger results in the US.  

 

The print problem

Despite the fact that the MailOnline product was able to post 3 per cent underlying growth in 2020, that was overshadowed by a 30 per cent drop in print ad revenues, on top of a 7 per cent decrease in circulation revenue. 

Most of the consumer media revenue is derived from print, which makes it easy to dismiss DMGT as a publishing business headed towards legacy status. In fact, management seems obstinately committed to the continued existence of print products, despite the market-wide structural decline, acquiring three new printing plants last October. 

But investors would be minded not to underestimate DMGT’s digital presence. MailOnline’s total average daily global unique browsers grew by almost two-fifths to a whopping 17.3m last year. That is excluding the brand’s presence on social media platforms: on Facebook (US:FB), the Daily Mail has more than 20m followers.  

This rapidly growing online reader base should help the consumer media business transition to a digital-first strategy. 2021 could be the opportune moment to commit to the switch, as early signs of a recovery in advertising sales emerge. The Advertising Association and marketing agency Warc anticipates 15.2 per cent growth in the ad market in 2021 in the UK, driven by online activity, with national newsbrand ad spend set to increase by 13.8 per cent.

Those figures bode well for this year. But it also should serve as a reminder that, like many media businesses, DMGT’s exposure to the advertising market means that its fortunes often move in lockstep with the health of the wider economy. 

 

Changing dynamics in the world of online media could help dampen that cyclicality, though. A growing list of international publishers are reaching commercial agreements with the likes of Facebook and Google parent Alphabet (US:GOOGL), after the Australian government passed a law earlier this year that compels tech titans to pay for news content that is displayed on their platforms. News Corp (US:NWSA), which owns the Daily Mail’s closest competitor in the UK, The Sun, has bagged contracts with both Google and Facebook. While no such legislation has been introduced on our own shores, the global rebalancing of the relationship between tech and traditional media could work in DMGT’s favour, given its huge online presence.  

 

A slow and dramatic transformation 

DMGT has been slimming down its portfolio for a while. Prior to offloading the edtech business a few months ago, it ditched its energy information business, Genscape, in November 2019, as well as the On-geo and BuildFax property information businesses earlier that year. It also cut its ties with Euromoney (ERM) in 2019, relinquishing its 49 per cent stake and returning around £896m to shareholders in the process. 

The group looks like it is developing a smarter focus on its core media business – helped by the acquisition of the New Scientist for £70m earlier this year; the title makes around three-quarters of its revenue from subscriptions and has a compelling online product, too. 

DMGT’s hand in various businesses is also paying off through its approximate 20 per cent stake in Cazoo, the online car retailer which is headed towards listing on the New York Stock Exchange via a special purpose acquisition company (or ‘Spac’). The listing has a pro-forma equity value of around $8.1bn. If all goes to plan, DMGT expects that on closing it could receive as much as $1.35bn in cash proceeds. That should give it plenty of resource to plough into the digital transformation of its media business, which should eventually feed into higher margins. Its current gross margin sits at around 28 per cent. Compare that with the more digitally-agile New York Times (US:NYT), which boasts a gross margin of 51 per cent.  

 

A cash injection of this size could also help cushion DMGT's pension scheme. The group's retirement benefit deficit stood at a relatively modest £13.5m in 2020, but has around £3bn of liabilities

 

A risky buy

In 2013 Viscount Rothermere bought 100 per cent of the voting shares in DMGT, and its dual shareholding structure means that it is not counted as part of the FTSE 100. This also means that the fortunes of the company are, a century after its formation, still decided by the same family. This might put some investors off – but there is some evidence that family-owned businesses outperform in the long run. 

Either way, DMGT is at a critical turning point. A more streamlined portfolio looks appealing, and if it can pull off the modernisation of its media interests, it should be able to unlock the value of its huge and loyal readership. This will be neither quick nor easy, but the upside is significant. The shares are not cheap relative to earnings, with a forward price/earnings multiple of 27 – but we think that the value of DMGT’s stake in Cazoo, a tighter focus on consumer media and changing power dynamics in online content make for good odds. 

 

Daily Mail & General Trust Class A (DMGT)  
ORD PRICE:908pMARKET VALUE:£1.9bn  
TOUCH:907-909p12-MONTH HIGH:997pLOW:601p
FORWARD DIVIDEND YIELD:2.8%FORWARD PE RATIO:27  
NET ASSET VALUE:506p*NET CASH:£198m  
Year to 30 SepTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p) 
20181.4318241.923.3 
20191.4111438.623.9 
20201.216026.124.1 
2021**1.135524.324.7 
2022**1.167633.225.3 
 +3+38+37+2 
Beta:0.7    
*Includes intangible assets of £350m, or 155p a share
**Berenberg forecasts, adjusted PTP and EPS figures