Market Musings 22/4/2012
Given events over the past few days it’s no surprise that this blog is once more focused on the TMT sector.
(Disclaimer: I am a shareholder in both Trinity Mirror plc and Independent News & Media plc) On Friday Richard Beddard asked me why I didn’t appear to be particularly concerned about Trinity Mirror’s pension deficit. Regular readers of this blog know that pensions are always a concern for me – I always incorporate the pension deficit or surplus into my valuation models, while as a former shareholder in Uniq (now a part of Greencore) I know all too well what can happen if the pension deficit gets too big. In the case of Trinity Mirror, at the time of writing the company has a market cap of £79m, while it exited 2011 with a pension deficit of £230m and net debt of £200m. So net long-term liabilities of more than 5x its current market cap, which is certainly concerning. This concern is somewhat alleviated by its freehold property assets of £177m, while last year it generated after-tax operating cash flow of £75m. With well-documented cost take-out measures underway and the UK advertising market still tough, I think it’s reasonable to assume that as the cost measures flow through and advertising picks up that Trinity Mirror can hold cash generation reasonably steady for the next 2-3 years. With modest capex requirements for the business and no dividend payout, this should see net debt more or less eliminated by end-2015. While it’s tricky (if not impossible) to predict where the pension deficit will be by then, it only has to improve by £53m (for information, it deteriorated by £70m last year, so moves of this magnitude are not unthinkable) before it’s covered by the property interests. Obviously, a marked deterioration in the UK newspaper sector or adverse market moves that significantly impact the pension deficit pose risks to this thesis, but if I’m right, I should see the value of my TNI shareholding rally strongly from current levels. One thing that TNI observers may wonder about the above analysis is why I’ve left out the current discussions between the publisher and the pensions authorities in the UK about temporarily reducing payments into the scheme – all other things being equal, these cashflows will be used to nuke liabilities (i.e. less money going to fix the pension deficit = more money going to fix the net debt), and given that I treat net debt and pension deficits the same in my investment models it has little impact on my sentiment towards the company.
Speaking of media, I came across an interesting survey of advertising expenditure in Ireland, which is quite timely in light of recent developments in the media sector here. While digital is growing at a rapid rate, it is worth noting that ‘old media’ still accounts for the lion’s share of advertising expenditure. I accept fully that there are clear structural shifts underway in terms of where ad spend is migrating to and from, but I remain confident of my central thesis for both INM and TNI that even though the overall ‘pie’ is shrinking, they have the ability to counter this to at least some degree through market share gains as weaker competitors exit the market. INM, as it likes to remind people at every opportunity (!) “is the only profitable newspaper and media firm in the country“, and many of its titles, at both a national and local level, compete with financially challenged rivals. For Trinity Mirror, the firm’s 130 regional titles and 5 national papers appear to be well placed in terms of right-sizing the cost base (this list suggests that it has been more proactive to date at weeding out underperforming titles than its peers) while the well-documented challenges faced by rivals such as Johnston Press could see an acceleration in rival titles exiting the market in 2012/13.
(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent news that two Norwegian kraftliner mills have gone bust, another of Smurfit’s rivals, French containerboard producer Papeterie du Doubs, has gone into liquidation. All of this is supportive for pricing in an industry long known for its problems with overcapacity.
(Disclaimer: I am a shareholder in Playtech plc) In the betting space, William Hill’s IMS revealed a solid overall performance, led by its online division, where net revenues rose 33% (relative to a 12% increase in group net revenue). This has bullish read-through for the minority shareholder in the William Hill Online joint venture, Playtech, and it was no surprise to see PTEC’s shares gain 7% on Friday to close at 370p. This is just 10p below my breakeven level on a stock that has repeatedly disappointed me, and if I can get out of it at 380p or better it will be an escape of Harry Houdini proportions!
(Disclaimer: I am a shareholder in Ryanair plc) I was interested to read that Flybe has pulled out of Derry Airport in Northern Ireland. This will likely result in (very) modest gains for Ryanair, whose Derry-Liverpool and Derry-Birmingham routes will presumably pick up some traffic from Flybe’s discontinued Derry-Manchester service.
In the construction arena, Irish heating and plumbing supplier Harleston bought Heat Merchants and Tubs & Tiles, which came a little bit out of the blue for me given all the chatter linking Saint-Gobain to these assets. The future of the 11-strong chain of Brooks’ builder provider units remains unclear, so hopefully we’ll get some clarity on that this week.
(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Valuhunter did up (with a little help!) an absolutely fantastic post on Tesco that’s well worth checking out.
Finally, if you ever feel like you’ve made a serious blunder in work, just remember that it could be worse – at least you haven’t accidentally fired every single one of your colleagues.