Profits plunge at Reach

Shares in the UK’s biggest commercial news publisher Reach (RCH) jumped by almost 20 per cent in the wake of its full-year results. Investors were reassured that full-year profits would likely be in line with expectations, and pleased that print circulation revenue had grown. 

There was plenty for shareholders to worry about in the interim figures, however. Digital sales, for instance, fell by 16 per cent year-on-year to £60.8mn. Management blamed this on Facebook’s “de-prioritisation of news content” which led to a significant decline in page views. Meanwhile, although customers are still buying newspapers, print advertising sales tumbled by 18 per cent, meaning total print revenues were down 2.7 per cent. 

It's not all bad news. The group has been on a money saving drive and has shrunk its adjusted operating cost base by 3 per cent, “partly offsetting the impact of lower revenue on operating profit”. Its efforts were helped by a welcome decline in the cost of newsprint, driven by lower energy prices. Nevertheless, adjusted operating profit still fell by 24 per cent year-on-year to £36.1mn. 

Statutory figures paint an even gloomier picture, with operating profit down 68 per cent at £11.1mn. This figure includes the legal costs of the recent phone hacking trial – the outcome of which is due in the autumn – and restructuring charges, which also weighed on the publisher’s operating cash flow. 

Another big challenge for Reach is the phasing out of third-party cookies. This development will make it trickier for companies to track people around the web, thus making it harder for publishers to flog ad space if they lack their own first-party data about readers.

Reach has now registered about 30 per cent of its UK audience, and said this is fuelling “directly sold, higher value advertising”. Around 40 per cent of digital revenue is now “data-driven”, and this number is expected to rise further as advertisers seek alternatives to third-party cookie based targeting. For now, however, this isn’t translating into digital growth and the majority of readers remain unregistered.

From a valuation perspective, Reach is tempting. Shares have fallen by 31 per cent since January, and the group trades on a forward price-to earnings multiple of just 3.1. However, we remain very wary of both the economic backdrop and the internal workings of the company. Sell. 

Last IC View: Sell, 84p, 7 Mar 2023