Market Musings 22/3/2012
We’ve had quite a bit of news in the past few days, mainly from the people who report the news! Let’s catch up on what’s been happening.
(Disclaimer: I am a shareholder in Independent News & Media plc) To start with the media sector, we had FY2011 results from Independent News & Media this morning. Going into them I had forecast revenues, EBIT and net debt of €588m, €77.2m and €432.7m respectively. In the event, they came in at €558m, €75.5m and €426.8m, so more or less in-line. Overall, my sense is that I think the group has done as well as could reasonably be expected. As slide 18 of the results presentation reveals, the group has delivered on almost all of its stated objectives, with the only disappointments being related to areas where it cannot exert any direct control. In terms of my investment view, while updating my model this morning I noticed that the value of its stake in Australasian media group APN News & Media has increased sharply in recent weeks. Based on the exchange rate at the time of writing INM’s shareholding in APN is valued at €142m, which compares to INM’s market capitalisation of €132m (bear in mind INM exited 2011 with net debt of €427m and a pension deficit of €147m). Overall, my valuation model, which as before places a EV/Sales multiple of 1.0x on the core operations and values APN at its current market level, now produces a valuation of 33.9c/share, some 18% above my previous valuation (mainly due to APN) and 41% above where the shares were trading at the time of writing. Given the decent operating performance, strong cash flows and potential for the unlocking of shareholder value through further cost cutting / asset disposals, I must admit that I’m tempted to add to my position.
In other media sector news, UTV reported 2011 revenues and profits that came in marginally ahead of expectations, coupled with further progress on reducing its debt pile. In a sign of the times, it wrote down the value of its Irish radio assets by £45m (-37.5%). UTV has been a great performer in recent times despite challenging conditions, but I can’t justify including it in my portfolio given that I already have a number of ‘old media’ plays (i.e. Trinity Mirror and Independent News & Media) in it.
Speaking of old and new media, here are some stark data points:
- Total US newspaper ad spend in 2000: $49bn. Total US newspaper ad spend in 2011: $21bn (Source: Financial Times).
- Total UK mobile ad spend in 2008: £25.5m. Total UK mobile ad spend in 2011: £203m.
In the energy space, I was pleased to see more large cap interest in small cap stocks, with Total taking a serious look at Wessex. This is a theme I’ve been banging the drum about for some time. In terms of other M&A news in the sector, I was interested to see more acquisition activity in the North Sea. Elsewhere, Credit Suisse initiated on Dragon with a bullish note. As regular readers of this blog know, a fund I’m an investor in recently sold out of Dragon, but for those of you with a longer-term investment horizon I think it’s an excellent stock to look at given its low-risk model and strong balance sheet.
Speaking of oil stocks, yesterday’s UK budget gave a number of tax breaks to the sector, which should spur further exploration and development activity. This is bullish for oil services stocks, such as Lamprell, Hunting, John Wood and my old friends Kentz.
In the construction sector, structural steel firm (and hence leading indicator for the construction industry) Severfield-Rowen, a stock I’ve traded in the past, said the UK remains “extremely challenging“. I keep a close eye on that stock as I think it provides some good read-through for a raft of other construction names with significant exposure to the new build space. Its comments don’t exactly inspire confidence!
Turning to the retail sector, Game Group’s shares have been suspended, with management saying the equity is likely to be worthless. I mentioned the stock back in January, and I’m pleased to have reached the conclusion I did then! Another good conclusion on it comes from Mark Carter, who hits the nail on the head with: “I always said that a major chain relying on second-hand sales was a stupid idea anyway“.