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Don’t Reach for this value trap

With the print media industry in decline, it’s only a matter of time before a British newspaper goes out of business, and we think Reach’s publications look at risk
July 19, 2018

It has been three decades since a national British newspaper last went out of business – a statistic publishers use to give shareholders reassurance. We're not sure it should. According to data gathered by media regulator Ofcom, the proportion of adults who obtain their news from printed papers fell to 29 per cent, from 40 per cent during the three years to 2016 and is likely to have fallen even further when Ofcom release 2018 figures. This is reflected in a decade of declining sales per share (see graph) for Reach (RCH), which owns the Mirror, Express and Star newspapers as well as a plethora of local titles.

IC TIP: Sell at 72p
Tip style
Sell
Risk rating
Medium
Timescale
Long Term
Bull points

Long-term revenue decline
Disappointing online performance
Massive pension deficit
May struggle to make acquisition savings

Bear points

Better operating margin
Potential dividend support

Reach was the name adopted by Trinity Mirror in June following its purchase of newspaper assets from Northern and Shell, including the Express and Star titles. It was a controversial deal – the Daily Express is right wing and anti-EU while the Daily Mirror is pro-Labour. While past deals have been used to cut costs, the fact both papers will need to retain editorial independence may make staff savings trickier.

Cost-cutting is an essential part of the strategy for the group, which operates with the millstone of a £378m pension deficit and associated annual contributions of £44m for the next decade. In the 2017 financial year the group made savings of £20m (£5m ahead of the initial target set for the year), which lifted the adjusted operating margin by 0.7 percentage points to 20 per cent. Yet adjusted operating profits still fell 9 per cent to £125m as revenue continued its seemingly perpetual decline. Broker Numis forecasts a like-for-like revenue decline of 7 per cent in the 2019 financial year as the pressures of online advertising and falling demand for print publishing plague the numbers.

In 2017, Facebook and Google commanded a quarter of the total global advertising spend, according to Statista, and that figure is climbing. News outlets are attempting to allay the problems by launching online sites, but it is harder to make money from digital content. Last year Reach didn't even manage to get halfway towards its target of 15 per cent like-for-like growth in publishing digital revenues. Meanwhile, digital sales still only account for 15 per cent of publishing revenues.

For shareholders, it a concern is that the Northern and Shell titles won’t be able to immediately boost EPS (especially given £59m of contingent liabilities attached to the deal). While Numis has upgraded revenue guidance, because Reach had to raise money via a 77.4p equity placing to fund the acquisition, reported earnings per share is not expected to rise in the 2018 financial year.

REACH (RCH)    
ORD PRICE:72pMARKET VALUE:£215m
TOUCH:72-73p12-MONTH HIGH:107p65p
FORWARD DIVIDEND YIELD:8.9%FORWARD PE RATIO:2
NET ASSET VALUE:*NET DEBT:£9m 
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201559310432.85.15
201671313338.15.45
201762312336.15.80
2018**72113436.76.09
2019**70815542.16.39
% change-2+16+15+5
Normal market size:5,000   
Beta:0.57   
*Negative shareholder equity, including £901m of intangible assets
**Broker Numis forecasts