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QUALIPORT
Finding Value In Media

By Maynard Paton (TMFMayn)
September 13, 2001

Carburton Street, London -- Media companies Johnston Press (LSE: JPR) and Metal Bulletin (LSE: MTLB) published their interim results last month. Both are on the Qualiport's watch list and have suffered notable share price declines of late. Is either share a "buy" at the present time?

Paper profits

Local newspaper publisher Johnston Press was proposed as a Qualiport company in July. Suffice to say, nothing has essentially changed in the newspaper industry since then -- the sector remains as attractive as ever for long-term shareholders. Indeed, the only cloud on the horizon for Johnston shareholders is an economic one. The company recently remarked: "Given... the clear evidence of a slowdown in the economy, we have taken steps to... accommodate any downward pressure on revenues".

The results and highlights from Johnston's latest six-month announcement were:

                           Six months to
                      30/06/01       30/06/00

Turnover (m)          153,935        147,465
Operating Profit (m)   48,276         44,160
Net Interest (m)       (8,067)        (8,994)
Pre-tax profit (m)     40,209         35,166

Earnings per share (p)   14.22          12.18
Dividend per share (p)    1.65           1.50

* Interim turnover edged 3.8% higher, with divisional sales growth ranging from +13% (recruitment) to -5.5% (motor);

* A further improvement in operating margins, to 31.3%, leading to operating profit growth of 9.3%. and;

* Net debt was 253m at the end of June, compared to 275m twelve months earlier.

Local value?

All in all, Johnston remains a sound business. But how attractive is the company's 277p share price? There's a bit of fiddling required to produce a free cash flow calculation, but, on the whole, the shares are very attractive.

In the twelve months ending June 2001, Johnston generated an operating profit of 88.4m. The company's depreciation charge during that period was 11.6m. However, following various upgrades to printing facilities, 20m was spent during calendar year 2000 on fixed tangible assets, while a further 28m and 15m are forecast for 2001 and 2002 respectively.

Furthermore, using the effective rate of interest on Johnston's average level of debt for the year to June 2001 (6.77%), and applying that to Johnston's present level of borrowing (253m), gives a prospective interest bill of 17.1m.

So, assuming zero profit growth in the year ahead, 20m for capital expenditure, and tax at 30%, Johnston's prospective free cash flow comes to 44.0m, or 21.9p per share. I think an entry price of 277p, a valuation that offers a free cash flow yield of 7.9%, is very appealing.

Precious metal

Commodity market commentator Metal Bulletin was proposed as a Qualiport company in April. There have been two significant changes at the company over the past five months. Firstly, the financial performance of the group's largest ever acquisition (BCA Publications) can now be seen within the accounts. Secondly, there's been a significant downturn in profits at the ongoing business.

The results and highlights from Metal Bulletin's latest six-month announcement were:

                           Six months to
                      30/06/01       30/06/00

Turnover (k)           19,815         15,141
Operating Profit (k)    3,332          2,584
Net Interest (k)         (183)           215
Pre-tax profit (k)      3,149          2,799

Earnings per share (p)    4.34           4.01
Dividend per share (p)    1.90           1.75

* While underlying turnover improved by 3% to 15.6m, underlying profits tumbled from 2.8m to 2.1m. Falling metal markets (leading to falling advertising rates), plus various acquisition integration costs, caused the profit decline.

* The purchase of BCA in February, plus assorted titles from Reed International (LSE: REED) in May, contributed 4.2m of sales and 1.2m of operating profit. The acquisitions removed two of Metal Bulletin's major US competitors and reduced the group's overall revenue dependence on the company's somewhat volatile advertising market.

* The corporate expenditure has seen Metal Bulletin move from having net cash of 6.7m in June 2000 to net debt of 12.3m in June 2001.

Metal value?

With Metal Bulletin succumbing to the latest downturn in the commodity markets, the recent acquisitions will, I'm sure, begin to look pricey in the short term. However, the purchases have undoubtedly reinforced the group's already strong position in its niche publishing industry. Long term, Metal Bulletin remains a fundamentally attractive company.

But at 197.5p, how attractive are Metal Bulletin shares?

Excluding the acquisitions, the year to June 2001 saw Metal Bulletin generate operating profits of 7.0m. On an annualised basis, the acquisitions would have produced approximately 2.9m. And with cash of 4.2m and debt of 16.5m at present, a net interest charge of around 1.1m could be on the cards for the forthcoming year.

So, assuming no profit growth in the year ahead, and that the company's depreciation charge remains a proxy for cash capital expenditure, Metal Bulletin's prospective free cash flow comes to 8.8m, or 11.3p per share.

With Metal Bulletin distributing half of its cash flow as a dependable dividend, demanding a 7.5% cash flow yield should give an adequate margin of safety. That gives an entry price of 152p.

However, that's not the end of the valuation story. The vendors of BCA have a claim on shareholders' future cash flows following the company's sale. Anything between 7.5m and 18.6m could be given to BCA's management over the next five years. Assuming the former BCA owners would be happy to accept 10m (or 18p per share) as an alternative today, the entry price is reduced to 134p. So, with the current 197.5p share price, patience is required.

Summary

Both Johnston Press and Metal Bulletin are quality companies suitable for any long-term portfolio. Both have sturdy, dominant franchises in their respective industries.

However, the two media firms are very susceptible to external influences. In Johnston's case, it's the overall UK economy; in Metal Bulletin's case, it's the global metal markets. However, it's futile to predict the short-term direction of either. For ordinary investors, who know that upturns always follow downturns, it's far better to buy in when the outlook is gloomy and use minimal growth projections to help create a suitable margin of safety.

Dealing

As announced on Monday, Tuesday morning saw the Qualiport (notionally) sell 576 PizzaExpress (LSE: PIZ) shares at 865p each. After 15.00 commission, the transaction raised 4,976.40.

And within the next five trading days the Qualiport will buy the following:

* 3,000 of Johnston Press (LSE: JPR) shares
* 1,000 of Emap (LSE: EMA) shares (this article and this post give further valuation details).

More: Johnston Press message board | Metal Bulletin message board