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