Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Daily Mail and General Trust (DMGT.L) – Making The Right Choices

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At DMGT’s investor day last April, the group’s finance director, Stephen Daintith, outlined the investment case for the group. He said that it offered investors:

 

  • [An] opportunity to invest in a global portfolio of diversified market-leading media assets
  • Good organic growth opportunities – strong B2B pipeline, fast emerging consumer digital businesses and resilient national newspapers
  • [A group that is] highly cash generative
  • [A track record of] investment of strong cash flow and active portfolio management to drive sustainable earnings growth
  • [An] impressive track record of real dividend growth

 

(Disclaimer: I am a shareholder in Trinity Mirror plc and Independent News & Media plc)  In this piece I will examine all of these stated claims in turn, and also make a few observations comparing DMGT to its principal quoted peers in the UK and Ireland (which I have previously profiled e.g. Independent News & Media, Trinity Mirror and Johnston Press).

 

To start with, DMGT is correct to say that it offers “a global portfolio of diversified market-leading media assets”. While most people will be familiar with its national Daily Mail newspaper title, far fewer people will know that national media operations account for only 43% of group revenues. Indeed, DMGT’s combined national and local media units contributed only 55% of group revenues in FY11, down from 65% in FY06. The diminished importance of its core media base is further highlighted when underlying profits are examined, contributing just 29% of the group total in 2011, from 60% five years earlier.  Outside of national and local media assets, the group’s other businesses are: (i) RMS, or Risk Management Solutions, which provides “products, services and expertise for the quantification and management of catastrophe risk”. In 2011 this contributed 8% of revenues and generated margins of 29.9%; (ii) Business Information, which provides B2B “information to the property, financial, energy, and educational recruitment markets”. In 2011 this contributed 12% of revenues and generated margins of 19.7%; (iii) Events, which organises exhibitions and conferences, and which contributed 7% of revenues and enjoyed margins of 29.4% in 2011; and (iv) Euromoney, described as “a leading international business-to-business media group focused primarily on the international finance, metals and commodities sectors”, which contributed 18% of group revenues and achieved margins of 25.6% in 2011. These high-margin businesses stand out in contrast to the traditional base, namely the national media (margins of 8.8% in 2011) and local media (margins of 7.2% in 2011). It should be noted that these units do not solely comprise print assets, as they are also home to a number of digital business, including the wildly successful (and profitable) Mail Online.

 

In terms of growth opportunities, DMGT has excelled throughout the downturn. While the headline figures are distorted by the impact of the portfolio management measures discussed below, overall margins in the newer business areas have trended higher during the recession, while the topline performance has also been very resilient. In the case of the legacy businesses, these have experienced pressures similar to the rest of the sector. The national media operation has seen reported revenues and operating profits fall by 10% and 24% respectively between 2006 and 2011, while for local media the decline has been 48% and 81% respectively over the same period. The latter has been the subject of speculation in recent times about a possible disposal, with acquirers ranging from private equity to Trinity Mirror reportedly in the frame. I will discuss the merits of such a deal towards the end of this piece.

 

Switching to DMGT’s cash generation, this is a key bull point around the stock. Over the past 6 years the group has generated over £1.6bn in cumulative free cash flow, or circa 90% of its current market capitalisation. This has funded considerable investment in growing the business, with £908m of this cash used on acquisitions, £362m on gross capex and a further £63m invested in associates and JVs.  DMGT also paid out £332m in dividends over that period.

 

This brings us on to the next point, about portfolio management. As noted above, the group has been an active acquirer of assets, but it is not shy to divest non-core businesses. It recently concluded the sale of its Australian radio business, but this has only been one of a number of disposals in recent years (see slide 16). It is clear that DMGT is focused on increasing its exposure to high-margin, high-growth business sectors, and given the high margins and resilient sales in the ‘newer’ business areas noted above, who could blame it?

 

Lastly, DMGT distinguishes itself from the other listed UK and Irish companies who derive the majority of their revenues from media assets in that it is the only one that pays a dividend. Investors have seen dividends per share grow 25% between 2006 and 2011 – with no break in the payouts over that period – which is a remarkable achievement considering the economic backdrop. Dividend cover is very healthy, approaching 3x in 2011.

 

So, Mr. Daintith is clearly on the money with what he says. The questions that remain for me are: (i) What is DMGT to do next? and (ii) Is DMGT worth investing in?

 

To tackle them in order, one would be forgiven for thinking that ‘keep going’ would be reasonable advice for Rothermere et al. The company has clearly made the right choices in terms of diversification, investing in highly profitable and growing segments. The balance sheet is in a strong condition, with reported net debt falling from £1.05bn in FY09 to £720m by the end of last year (2x EBITDA). In the absence of any large acquisitions DMGT could very easily be debt free within 3 years. So, it has the luxury of not being compelled to do anything. However, given the portfolio management steps noted above, I imagine that sitting still is not something the management team is keen on. Further investments in growing the high-margin segments are surely to be expected, while for the legacy businesses we are unlikely to see much by way of acquisition activity given both the concentrated media ownership at a national level (and lack of obvious sellers) and the muted organic growth outlook for local papers. The group also has a number of joint ventures and associates that it may be tempted to fully buy-out / spin-off over time.

 

While DMGT is by no means under any pressure to do so, I suspect that we are likely to see the group divest the local media business, Northcliffe Media, over the medium term. It is an increasingly peripheral asset, accounting for only 5% of group underlying profits last year. Management are over a third of the way through a three-year restructuring plan for the division, and it will be interesting to see if it is still under DMGT ownership by the scheduled conclusion date of it. Whatever about its performance relative to the rest of the DMGT family, it is underperforming its listed peers, with operating margins of 7.2% in FY11 comparing unfavourably to Trinity Mirror’s 13.8% and Johnston Press’ 17.3%. I wonder (emphasis) if developments such as a recent advertising partnership indicate that DMGT would be open to resuming its previous reported talks with Trinity Mirror about a merger of their local newspaper titles (DMGT’s assets are profiled here, while TNI’s are profiled here). This could open up possibilities for cost take-outs in areas such as procurement, distribution, content syndication and editorial. Given both firms’ balance sheets, an all-share deal could be the best scenario for both as it would allow Trinity Mirror to continue its deleveraging drive while DMGT, which has no pressing need for extra funds, could share in the theoretical upside once the cost synergies noted above are implemented. Of course, this is clearly ‘fantasy M&A’, but it would offer an elegant solution for both companies. In terms of other speculated ‘interested bidders’, I would be surprised if private equity was seriously interested in DMGT’s local newspaper titles given their muted growth outlook, unless other large groups became available that would permit the achievement of serious synergies such as those mentioned above.

 

In terms of my investment conclusion on DMGT, I note that analyst opinion on the stock is divided. Of the 15 analysts who follow the stock 5 rate it a ‘buy’, 5 are neutral and 5 recommend that it be sold. This may be because the stock is not exactly cheap, trading on around 10x prospective earnings based on where the ‘A’ shares closed at this evening (488.5p). Recent updates from the company have been solid, with the Q3 IMS reiterating full-year guidance. For me, I view the DMGT story as one of a group that: (i) is on a solid financial footing + (ii) is mainly exposed to high-growth, high-margin business areas + (iii) has an enviable track record – on this note, I was impressed to see that it has not made a capital call on its shareholders since 1933 + (iv) has plenty of strategic options be they acquisition/investment/alliance/divestment to enhance shareholder value. Were the shares more cheaply rated, I would be tempted by it. However, for now I think I’ll hold back and wait for a more attractive entry level.

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Written by Philip O'Sullivan

September 17, 2012 at 7:08 pm

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