Irish media sector – printing money?
(Disclaimer: I am a shareholder in Independent News & Media plc)
Today was a big day for Ireland’s media players, with both Independent News & Media and UTV Media releasing their results for 2010. Both companies have had a similar profile in recent times. They have both had to manage the challenge of declining advertising revenues while at the same time the credit crunch forced them to take decisive action to strengthen their balance sheets. I think it’s fair to say that both of them have made real progress on both fronts.
Taking the balance sheets first, UTV Media has cut its net debt from £107.6m at end-2008 to £71.5m today. That represents a multiple of less than 3x the group’s EBITDA, which is more than manageable. Moreover, with the group generating £25m of operating cashflow in 2010, the group should be able to make a material dent in net debt this year. Consensus before this morning’s results was for net debt to decline to just under £60m by the end of 2011, a target which I suspect is very achievable.
Independent News & Media for many years consolidated 100% of APN, its minority-owned Australian associate onto its balance sheet, which in the past significantly inflated its reported net debt levels. I prefer to – and indeed investors should – focus on its underlying (i.e. recourse) net debt. On this, INM cut its underlying net debt by €100.2m to €473.6 in 2010. While this is a positive development, I note that the reduction was primarily due to the €74m INM got for selling its shares in India’s Jagran Prakashan Limited and also the €28.3m it received from a share placing last November. I think the market will be looking for comfort that INM can pay down debt through internal cashflow generation in 2011. In fairness to INM, it has taken tough action on costs throughout the downturn, with this continuing into this year, with management closing underperforming titles such as the Sunday Tribune and the Daily Star’s Sunday edition. INM’s end-2010 net debt figure represents a multiple of just over 4x underlying EBITDA (from 5.3x in 2009). However, as slide 5 of this presentation reveals, the group has significant operating leverage, with the 3.3% underlying revenue growth in 2010 translating into 13.9% operating profit growth. When INM’s revenues really start to recover, this should have a material impact on its net debt / EBITDA ratio.
In terms of the advertising markets, it is no surprise to see that most of the ones that INM and UTV operate in saw a decline in 2010. UTV say that while the UK local radio market was flat in 2010, total Irish radio advertising was down by at least 10%. Given the steep rise in the number of radio licences given out in Ireland in the past number of years I would have concerns about the financial viability of several local stations here. While the UK radio market performance was resilient, my view is that the industry is “ex-growth”. The growth of new media has intensified the competition for advertising revenue, and I am struck by the fact that Google makes more money from UK advertising sales than the entire UK commercial radio industry. UTV’s television revenue did well on the back of the World Cup, but the extra costs associated with that event in particular meant that profits in that division were flat. On the outlook, UTV says it’s too early to predict the FY out-turn, but it is encouraged by the 2% rise in revenues in the first four months of 2011.
On newspapers, INM saw underlying group advertising revenues fall 6.9% in constant FX terms in 2010. Underlying circulation revenues on the same basis fell 2%. INM says that 2011 has started in a similar fashion, with advertising and circulation revenues -7% and -1% on the same measure in the year to date. Advertising revenues on the Island of Ireland dropped by 12.5% last year. On the outlook, INM says “we are not expecting any material advertising uplift in 2011”, but adds that it expects “a further improvement in operating profit” in 2011 mainly on the back of good work on costs.
Overall, I would view both sets of results as solid, but not spectacular. In terms of what the brokers are saying, Davy says that it is leaving its INM forecasts largely unchanged, while for UTV it says it will review its estimates later today (although I note that the analyst says the group’s ytd performance is in line with his own estimates). Goodbody analyst Gavin Kelleher has quite a detailed piece on UTV in which he says he will be upgrading his estimates for the group by 10%+, but I note that Goodbody was somewhat behind consensus (15.8p adjusted EPS forecast for 2011 vs. Bloomberg consensus of 17.9p) going into these results. Kelleher makes a good point on UTV’s dividend. The company doubled its full year dividend by 100% to 4.0p, which puts it on a yield of 3.1% based on last night’s closing price. NCB is cautious on Irish advertising trends for INM but says that it feels a reduction in the net debt could be a catalyst for a re-rating. Bloxhams has a narrative on the INM results which may be of interest to people looking for a quick snapshot.