Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Trinity Mirror (TNI.L) – Read all about it

with 44 comments

I’ve been planning to do more detailed analyses on each of the holdings in my portfolio for some time, partly because it’s a useful exercise to see if the reasons why I’ve bought the stock are still valid, and partly because it forces me to update my models and think about whether or not there are other ways of analysing the company. To kick things off, I’ve picked (for no particular reason), Trinity Mirror plc.

 

Regular readers of this blog will know that I’m bullish on the stock. At first glance this stance appears inconsistent with my bearish tack on traditional media in general, which is on an irreversible structural decline course. Reflecting on my own media consumption, I cannot recall the last time I listened to the radio. I have gone days – possibly weeks – without having turned on the television at home. In fact, if I exclude the two legs of the Republic of Ireland – Estonia play-off for Euro 2012 I cannot actually remember what the last thing I saw on TV was. However, as I sit typing here my iPod is playing in the background and I’m periodically scanning through the latest updates on Twitter and Facebook. When it comes to printed content, the only publications I actually buy are the Financial Times and Business & Finance magazine (which kindly publishes my columns each month!). For all other news needs, these are met by free websites. And talking to friends and family, I know that my media consumption patterns are by no means unusual.

 

So, given this bearish tack towards the sector, why on earth have I bought this stock?

 

For starters, at a current share price of 47.5p, Trinity Mirror’s valuation appears extremely attractive:

 

  • Consensus PE for FY12: 2.0x (median estimate for PE is 24.3p)
  • Consensus EV/EBITDA for FY12: 2.3x
  • Consensus FY12 EV (Including Pension Deficit) / EBITDA: 2.9x
  • Price/Book: 0.2x
  • Value of Freehold Property / Share: 72.0p (52% above the current share price)

 

Secondly, commentary from the company has been getting increasingly positive:

 

  • IMS 12/5/11: “The trading environment remains challenging due to the fragile economic environment and the adverse effect of public sector spending cuts and tax increases”. Trinity Mirror hikes cost savings target from £10m to £15m.
  • H1 results 12/8/11: “While the economic environment remains difficult we have undertaken a series of actions to limit the impact on operating profit”. Trinity Mirror hikes cost savings target again, this time to £25m.
  • IMS 10/11/11: “Whilst we expect the trading environment to remain difficult, the Board anticipates that the benefit of management initiatives will continue to help offset the effects of the challenging environment. The Board expects increased circulation volumes and revenues of our Sunday titles will help deliver performance marginally ahead of the top end of the current range of market expectations in 2011“.

 

Thirdly, concerns around its balance sheet appear overdone:

 

  • One push-back I’ve received about Trinity Mirror before is its balance sheet. However, the company has made tremendous progress in improving this in recent years.
  • At the end of FY09 net debt stood at £299.8m while the pension deficit (after deferred tax) was £213.6m. Helped by cash generation and changes to scheme benefits, this improved to £237.3m and £117.5m at the end of FY10. On my projections, I see net debt improving further to £195.8m at end-FY11, which may be a little optimistic given that net debt at the end of H1 stood at £239.7m. My optimism stems from the group having paid £33m in pension contributions into the scheme in the first half of the year, equivalent to the total for all of the previous year, so I am assuming that this will not be repeated in H2, paving the way for significant debt paydown between now and year-end. Either way, the company’s current guidance is that “debt is expected to fall“.
  • Even if you conservatively assume that net debt stays at the H1 level, this puts net debt/prospective EBITDA on an undemanding 1.9x.

 

Fourthly, Trinity Mirror is generating serious cashflow

 

  • Trinity Mirror generated operating cashflow of £110.1m in FY10. This is equivalent to 90% of its current market cap. In my model, I see the company generating operating cashflow of £98.5m this year, £84.8m next year and £71.3m the following year. These forecasts are grounded on an assumption of ongoing revenue and margin compression, with no recovery for the UK newspaper sector. This may prove overly bearish given that many of TNI’s financially weaker competitors are likely to go to the wall (not to mention that the company has a lot of self-help levers on the cost side), meaning that even as the newspaper industry ‘pie’ shrinks, TNI may be able to offset this through winning extra share.
  • In terms of net cashflows, I see TNI generating a total of £120m between this year and the following two years (i.e. more or less the same as the company’s current value). This opens the door for significant share price appreciation as the equity component of Trinity Mirror’s enterprise value increases as the company deleverages.

 

Fifthly, Trinity Mirror has serious asset backing

 

  • Taking a very bearish scenario, what happens if TNI generates £120m in cashflow between now and January 2013? On my numbers, the company’s net debt will stand at £113m by then. Holding the pension deficit steady at £117.5m, this leaves it with liabilities of £230m (the company’s current liabilities are relatively modest, and in any case dwarfed by the company’s current assets, so I’ll leave them out of this back-of-the-envelope calculation!). Against that you have freehold property valued at £182.1m and a raft of local and national newspaper titles. While it’s anyone’s guess what newspaper assets will be worth come January 2013, I’m willing to bet that Trinity Mirror’s portfolio of media assets will be worth more than the sum of the current market cap (£121m) and the gap between its property assets and long-term liabilities (£48m) by then, not least given that these assets on my bearish assumptions will still be generating net cash flow of >£30m/year by then, and, of course, the reality that this is an industry that has traditionally attracted acquirers whose motives for owning newspaper assets have little to do with profits.
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Written by Philip O'Sullivan

November 29, 2011 at 7:49 pm

Posted in Sector Focus

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44 Responses

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  1. I had a long answer but I accidentally deleted it so i’ll keep it brief. My suspicision is that investors are nervous about potential liability around phone hacking. Piers Morgan is going to appear before Leveson and quite a few people (previous employees/private investigators) have stated it was widespread at the Mirror. What is more, the possible liability from this could be anything which is obv devastating for share prices (although perhaps less for actual business value i.e BP). However, this is just suspicion and even despite the declining industry story, TNI looks cheap.

    Calum

    November 29, 2011 at 9:31 pm

  2. Hiya Calum. While obviously there is a risk of a skeleton (or several) in the closet being found, I do take comfort from reports such as this one: http://blogs.news.sky.com/kleinman/Post:647bc46f-8db3-4758-be4d-dd58bc6ea98a

    That said, the NOTW’s demise serves as a warning about the potential downside if Leveson uncovers something unpleasant!

    Philip O'Sullivan

    November 29, 2011 at 9:47 pm

  3. Hi Philip. Well thought out and clearly argued. TBH I had not realised how lowly rated the stock was. There is significant distress.

    I consume much of my media online for free but still purchase a few titles, mostly related to cycling or finance.

    This is a company that at the present valuation, with your simulation could well be worth more dead than alive.

    In general I dislike investing in automobiles, airlines and newspapers. The long term history of these industries is worse than appalling.

    The collateral damage from the Levenson inquiry could (and should) be serious. If a line can be drawn under that, then the company should consider a break up.

    From a technical viewpoint there would appear to be a stabilisation/support at 40p.

    It is fascinating in that it is a leveraged company in a dying industry that generates a crazy amount of cash. Worth watching.

    John McElligott

    November 29, 2011 at 11:19 pm

    • In an ideal world a break-up should be on the cards, but there is a paucity of buyers of non-national media assets out there, and giving up the likes of the Daily Mirror would only turn TNI into another Johnston Press. However, having covered UTV in my analyst days, I do see scope for TNI to find itself the proud owner of a rising number of “local monopolies” in the newspaper sector as regional peers go to the wall in much the same way that UTV has the staying power to be the “last man standing” in a lot of its regional markets. This would give it power to nudge up advertising revenues and – at more of a stretch – circulation revenues, and the operating leverage from this would be pretty material. However, in my assumptions I’ve cautiously forecast that none of this will happen, so there is scope for upgrades to what I’ve estimated.

      I’d love to get a chart showing the number of regional newspaper titles in the UK over the past, say, 10 years, to illlustrate how the above could play out. Although, maybe that would disguise some of the effect given how many titles have moved from daily to weekly publications (such as the ones announced last week by TNI: http://www.trinitymirror.com/2011/11/liverpool-daily-post-to-switch-to-weekly.html).

      A similar analogy for TNI is Paddy Power – it has kept its Irish shops open and gained share in a shrinking sector while many competitors e.g. Celtic and William Hill have exited the market. Although that’s where the analogy ends!

      Philip O'Sullivan

      November 30, 2011 at 9:02 am

  4. Hi Philip looking at the HY results I think current liabilities dwarf assets (you have it the other way around).

    Overall, my impression is there are so many moving factors it’s daunting even to consider whether the market has overreacted to the challenges TNI faces. However you have done so, which makes you much braver than I!

    http://beddard.net

    November 30, 2011 at 12:45 pm

    • Hi Richard – I dis-aggregated the majority (£200m/£345m at the half-year stage) of current liabilities i.e. the borrowings maturing in less than 1 year from the rest of the current liabilities and put them into net debt instead which I think is more appropriate. Some £145m of the £200m of short-term maturity borrowings was repaid in full on October 24 (http://www.trinitymirror.com/pdf/2011IMSNovFinal.pdf) and I assume the rest has also been / is about to be repaid (the recent IMS highlighted that even after the chunky debt paydown noted above the group’s banking facilities had substantial – £165m – headroom remaining).

      Over the coming years I see significant paydown of liabilities across the board, hence, barring any hiccups current assets will be a multiple of current liabilities going forward – possibly as soon as the FY results stage, depending of course on the timing of debt refinancing.

      Philip O'Sullivan

      November 30, 2011 at 2:09 pm

      • Thanks for the explanation. I’ll certainly pay more attention to TNI as the future unfolds.

        Richard Beddard

        December 1, 2011 at 10:03 am

  5. One thing to start with, and perhaps you can help my clairfy this in my mind. I may be well off the mark; it would hardly be the first time!

    The first thing I do with TNI is strip off the intangibles off the balance sheet. If I recall correctly, they are simply generated by doing a DCF on the company’s papers, which strikes me as a rather strange way to generate ‘assets’. By accepting these as assets and then considering the company’s future earnings, are you not double counting? I would either strip out all of the intangibles and do my own DCF, or simply accept the company’s version of events. I’d prefer to just take them off the balance sheet and use my own forecasts for analysis. I may well be misunderstanding the point of this, but accounting in this way looks to me just like an innovative way of not being in negative equity. Barratt or Howden, for instance, don’t do a discounted cash flow analysis of each of their sites/depots and put that in their financial statements!

    That confusion aside, I’m actually slightly warming to TNI. I think it’s very touch and go, but maybe the balance of risks is being overstated. From a first principles perspective, I think a) the market overstates the pace of decline in declining industries and b) the market tends to be overly pessimistic in recessions. This is a key reason I bought Communisis (used to be heavily involved in mass mailing). The phone hacking thing is a bit of a black cloud, though, as it does strike me that if it hit TNI it would probably destroy the business?

    Not sure. More research needed on my part, really, but aside from the rather annoying phone hacking thing I can certainly see how the balance of risks is attractive at this price. Upside could be huge if it comes off, and I do wonder if it’s as unlikely as the market is pricing it to be. More accurately, if cash flows from newspapers will decline as fast as the market is anticipating.

    Some rough thoughts from someone rather uneducated on the sector!

    Lewis Robinson

    November 30, 2011 at 5:32 pm

    • Hi Lewis! We’re actually looking at this the same way – in my fifth point I compare TNI’s tangible assets against its long-term liabilities and then argue that the difference between them + its market cap is less than what investors should be willing to pay for the intangibles (the mastheads) given their cash generating qualities.

      Philip O'Sullivan

      November 30, 2011 at 11:32 pm

  6. Hi Philip. I don’t like to invest in declining companies, although on a per share basis TNI seems to just about tread water over the years. Not sure the future will be so kind. Anyway, at current levels I think the valuation will be dividend reinstatement driven. If they can return the dividend to anything like it was before, or even just say 5p, then the share are likely to follow suit and head upward to provide a reasonable yield.

    As for the impending death by debt, I don’t really have an opinion. From a quick look it doesn’t look like they’re about to implode, but our fellow investees here seem more worried. Who knows? I think there’s probably massive upside potential in the medium term before it all goes downhill in the longer term.

    Funny you should mention UTV Media as I’m just about to buy them. I’d be interested to know what YOU think about them!

    • Hey John. As it’s the wrong side of 11.30pm just a quick response – hopefully I’ll have time to do a longer one tomorrow (with 6 hours of lectures, alas, this may prove overly ambitious!)

      UTV is not a million miles away from TNI in that most of its assets are in industries that are in structural decline (radio and TV). Against that it does have a relatively attractive portfolio, with its Irish radio assets positioned in all the key urban areas, which makes it more appealing to advertisers, while in the UK its clusters of local radio stations has facilitated cost take-out through syndicated content, co-location and so on. Talksport also has been a great asset for them over the years, while the ITV franchise for Northern Ireland (available in practice throughout the Island of Ireland) has a proven record of outperforming ITV and STV.

      They went through some tough times when the credit crisis hit, but management have negotiated its way through that skillfully, having fixed the balance sheet. In recent times they have been focusing on debt paydown and current trends in advertising aren’t too bad (see previous blogs by me on UTV here to track how this has evolved throughout 2011: https://pdosullivan.wordpress.com/tag/utv-media/)

      While UTV’s low PE rating and high dividend yield look attractive, what turned me off UTV and towards TNI is the fact that TNI trades on close to 1/3rd of the multiple UTV is on, and in essence they have the same investment proposition – relatively attractive assets in industries that are decaying.

      Philip O'Sullivan

      November 30, 2011 at 11:40 pm

      • UTV keeps popping up on my screens but I’ve yet to take a close look. What about the digital assets? This is not something Philip mentioned in his TNI write up either. Are they significant for either company?

        Richard Beddard

        December 1, 2011 at 10:05 am

  7. Hey Richard

    Digital is by far the smallest unit within UTV, contributing £1.9m in operating profits (7% of the group total) in 2010. It comprises an internet service provider and web development and hosting company, so I don’t see a lot of scope for this to grow to any great extent without significant investment (which presumably is not on the cards as the company is in deleveraging mode)

    In the case of TNI, digital contributes 1.1% of nationals revenue and 9.8% of regional revenue. Most of this is, I assume, classifieds revenue (I covered Independent News & Media as an analyst as well, they generated most of their digital revenue from property rentals, recruitment and car sales). While there seems to be a big shift from print to digital in areas such as the ones I mention here, the risk is that too much of a reliance on digital will significantly eat into group revenue – hard to monetise digital – the UK’s most visited news website, the Daily Mail, generates less than £20m/revenues a year (http://www.pressgazette.co.uk/story.asp?storycode=48318), for example.

    Philip O'Sullivan

    December 1, 2011 at 11:43 am

    • Thanks, I see your point now about TNI trading on a third the multiple of UTV. For some reason I think TV and radio will co-exist with the Internet for long time while newspapers face extinction but the problem in the UK at least for commercial free-to-air stations is the competition from the BBC and Sky is so strong. In a shrinking market, perhaps they will meet our (broadcast) needs.

      Richard Beddard

      December 1, 2011 at 12:14 pm

      • Great points Richard – I’ve lost so many channels on my TV package since the start of the downturn due to their closure, with most of these “replaced” with 1 hour delayed feeds of channels I already had. Traditional media is shrinking – the only question is the pace at which it happens.

        Philip O'Sullivan

        December 1, 2011 at 12:27 pm

      • Well, its a worry. That the more ‘resilient’ looking media companies aren’t actually more resilient so much as ‘next in line’. We saw it in retail with music shops, then with video games shops and book shops. Rather comically you find companies moving down the line as animals might run away from a fire. HMV moved more strongly into games, now hardware (but there is not even salvation there it seems). It’s making me sceptical about publishers like Bloomsbury, which I’d love to invest in, and maybe broadcasters like UTV.

        Richard Beddard

        December 2, 2011 at 7:45 am

  8. Hey Richard – I 100% agree that it’s a worry, hence my repeated use of the term “structural decline”! However, the lesson from the NOTW’s closure (http://www.kantarmediauk.com/news–resources/press-releases/mail-on-sunday-and-sunday-mirror-make-significant-readership-gains-in-aftermath-of-notw-closure.aspx) is that a substantial proportion of readers from closed titles will switch to a rival publication, and this should mean that even as the pie shrinks TNI (and, indeed, the likes of UTV) will be able to boost market share to offset this pressure, at least in the short-to-medium term. Just by way of illustration, if there are 2 newspapers (or 2 radio stations) serving a medium sized town and 1 shuts, the other one will be able to charge premium pricing for local advertising at no extra cost – the operating leverage effects from this will be decent enough, at least in the short-to-medium term.

    Whenever I can find the time I’ll do some work to illustrate this effect – RAJAR figures are probably a good start for the radio market, which will have obvious read-through for UTV Media.

    As an aside, to illustrate the disruptive influence of new media, did you know that Google generates more advertising revenue from the UK than the entire UK commercial radio sector? (Source: https://pdosullivan.wordpress.com/2011/03/22/irish-media-sector-printing-money/)

    Philip O'Sullivan

    December 2, 2011 at 9:37 am

    • Hi Philip. I appreciate there ought to be a kind of last man standing effect but I keep looking at retail where I thought that might be the case with HMV as Woolworths, Zavvi etc. closed down. There are other factors at play with retail of course – the hidden liabilities most of them have with operating leases – which really worries me as I just don’t think you can assume they’ll be able to offload them when everybody’s looking for someone to occupy their unprofitable retail space. Also the non-digital competition from Amazon and Supermarkets. So perhaps its the wrong comparison to make.

      Richard Beddard

      December 2, 2011 at 10:01 am

      • For sure, that’s the bear argument for traditional media. However, there is evidence of a high degree of substitution effects for newspapers and radio stations as peers exit the market, which makes me more comfortable that this scenario will play out at least initially (hence why I keep stressing “short-to-medium term”). The operating leverage effects this causes should not be underestimated as advertising rates harden. But I would agree that in the long-term this will be offset by growing substitution to other forms of media as opposed to within the specific radio and newspaper segments.

        The “known unknown” is of course the speed at which this will happen.

        Philip O'Sullivan

        December 2, 2011 at 10:33 am

      • I can see how they’re might be profit in it, so thanks for making me think about a situation which I would otherwise have ignored. Knowingly jumping into the bottomless abyss because you’re confident of catching a temporary updraught is an alien way of thinking even for me (somewhat unjustifiably I think, I’m gaining a bit of a reputation as a cigar butt investor) and for a lot of investors, which of course, is what gives you the opportunity. This is a genuine cigar butt, and you’re lining yourself up for that last puff. It’s fascinating.

        Richard Beddard

        December 2, 2011 at 10:57 am

  9. 🙂

    Worth bearing in mind though that so long as they generate enough cash to nuke the liabilities between now and the end of print media, which I believe they will, you’ll still be left with a property portfolio worth circa 50% more than the current share price. That’s the crucial difference between it and, for example, a retailer that has only leased its stores.

    Philip O'Sullivan

    December 2, 2011 at 11:00 am

    • That’s your bear case in a nutshell. But you must think it will do better than that as you could just buy shares in a listed property developer and get its land at a 50% discount now without having to go through the agony of seeing if you are right.

      Richard Beddard

      December 2, 2011 at 11:07 am

      • For sure. But if that’s the bear case, think what the bull case could look like!

        Philip O'Sullivan

        December 2, 2011 at 11:09 am

  10. […] the other end of the spectrum, Philip O'Sullivan posted on Trinity Mirror, a stock which I seem to recall he has owned for some time now. I actually found myself quite […]

  11. Thanks Philip and Richard for running through some of the thoughts on TNI and UTV. I haven’t really looked at TNI but I guess that on the face of it they’re kind of the same. Structural decline and the investment case is based on a short to medium term recovery, especially if they can get the dividend back towards ‘normal’ levels.

    I’d agree with Philip and say that the UTV decline is slower and in my case I’m investing for up to 5 years and I don’t think TV and radio are going anywhere in that time frame, nor decline significantly enough such that the share price won’t recover. In relation to TNI I guess it’s the old risk/reward trade off in that TNI looks to be higher risk but is trading that much lower.

  12. I think it’s me who should be saying “Thanks” to everyone who commented on this post – I really value the feedback – it’s good to be tested by folk with such a deep understanding of markets and investments. Part of the reason why I started this blog was my dismay at the poor level of debate (and, often, blatant ramping) on most investment message boards. What this discussion highlights is that the blogosphere is the right place to be! Over the Christmas holidays I hope to put up a few more case studies about my holdings, and I would be delighted if you’d give me similar feedback to the above on them.

    Philip O'Sullivan

    December 3, 2011 at 7:11 pm

  13. […] (This is the second installment in my series of case studies on the shares that make up my portfolio. For the last piece, on Trinity Mirror, click here) […]

  14. […] series of case studies on the shares that make up my portfolio. To see the other two articles, on Trinity Mirror and Datong, click on the company […]

  15. […] case studies on the shares that make up my portfolio. To see the other three articles, on Datalex, Trinity Mirror and Datong, click on the company […]

  16. […] make up my portfolio. To see the other four articles, on Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  17. […] my portfolio. To see the other five articles, on Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  18. […] To see the other six articles, on Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names. To download a summary of how my valuations stack up […]

  19. […] other seven articles, on Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names. To download a summary of how my valuations stack up […]

  20. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  21. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  22. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  23. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  24. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  25. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  26. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company […]

  27. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names. I remain an investor in all of the above stocks, save for […]

  28. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names. I remain an investor in all of the above stocks, save for […]

  29. […] News & Media, Total Produce, Abbey, Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names. I remain an investor in all of the above stocks, save for […]

  30. […] peers in the UK and Ireland (which I have previously profiled e.g. Independent News & Media, Trinity Mirror and Johnston […]


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