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QUALIPORT
Time To Turn To Tiddlers?

By Maynard Paton (TMFMayn)
November 29, 2001

Carburton Street, London -- Two tiddlers on the Qualiport's watch list -- Ulster Television (LSE: UTV) and Latchways (LSE: LTC) -- recently issued interim results. Are either worth investing in at their current valuations?

Ulster Television

Ulster Television published its six-month story on September 17th.

                           Six months to       Six months to
                            30 June 2001        30 June 2000

Turnover (k)                 20,853              20,443
Operating Profit* (k)         6,898               6,872 
Exceptionals (k)                  0              13,378  
Pre-tax Profit* (k)           6,997              20,524

Earnings per share* (p)          9.3                 9.2
Dividend per share (p)           3.8                 3.6

(*adjusted for goodwill)

The salient points concerning Ulster and its recent results are:

* Valued at 153m, Ulster operates the ITV television franchise for Northern Ireland. The company has held the license since 1959 and the current broadcasting contract runs to 2008. ITV attracts nearly three times as many viewers as Channel 4, its nearest commercial rival. And with a 41% share of peak-time viewing during 2000, against an ITV average of 37%, Ulster is the one of strongest ITV franchises.

* A change in management during 1999 heralded Ulster's expansion into non-television operations. The company purchased Northern Ireland's largest Internet Service Provider for 4.4m in March 2000. Ulster also bought 60% of Cork's leading radio broadcaster, with the balance to be purchased in the near future, for a total consideration of 25m earlier this year.

* Ulster's dominant market position generates attractive financials. Although 2000 encompassed a somewhat buoyant advertising market, operating margins last year were 32.8%, while the company's return on average equity was a staggering 47%. 

* Ulster isn't immune to the current advertising slump. Television revenue during the first half of 2001 fell 5% to 18.8m, with television-based operating profits declining 6% to 6.7m. Only the maiden contribution from the group's radio operation helped to keep interim operating profits steady at 6.9m.

Valuation

While yesterday's comments from ITV counterpart Granada (LSE: GAA) suggested no near-term improvement for ITV, Ulster remains an attractive business for long-term investors. It's a simple and visible company, with a dominant presence in its sector. The only worry with Ulster is the sudden hunger for acquisitions coinciding with the boardroom changes. While acquisitions are all part and parcel of the media industry, the jury remains out on how Ulster's new management will fair.

In terms of valuation, if we...

* Annualise the half-year television operating profit of 6.7m, and then reduce the total figure by 5% to cater for any further advertising downturn;

* Assume Ulster's radio operation generates a full-year operating profit of 2m (the division generated 0.5m between April and June this year);

* Assume annual capital expenditure comes to 1.89m, 1.3 times the company's yearly depreciation charge of 1.45m;

* Assume Ulster's annual interest bill comes to around 0.9m (the interim balance sheet contained 10m of cash and 17m of debt), and;

* Assume tax is charged at 30%;

... then Ulster's prospective free cash flow comes to 17.5p per share. At the present market price of 291p per share, that represents a free cash flow yield of 6.1%. An entry price of 235p (seen just three weeks ago!), which would offer a free cash flow yield of 7.5%, would tempt the Qualiport.

Latchways

Latchways published its six-month story on November 12th.

                           Six months to       Six months to
                           30 Sept 2001        30 Sept 2000

Turnover (k)                  3,252               3,771
Operating Profit* (k)           403               1,147 
Exceptionals (k)                  0                   0 
Pre-tax Profit* (k)             364               1,115

Earnings per share* (p)          2.3                 7.1
Dividend per share (p)           3.0                 3.0

(*adjusted for goodwill)

The salient points concerning Latchways and its recent results are:

* Valued at 31m, Latchways is a leader in the design of safety equipment for people working at height. While details on this niche industry are thin on the ground, the UK sector is pretty much the province of Latchways and the privately owned Capital Safety. Growth is driven primarily by health and safety legislation.

* Latchways' business is gradually shifting towards larger volume customers, which will make future profitability somewhat volatile. Increasing attention is being given to telecom and electricity companies for the installation of safety equipment on their masts and towers.

* Small, third party companies have traditionally installed Latchways' equipment. However, dealings with large blue-chip businesses have necessitated a one-stop-shop installation process. Thus Latchways has recently bought HCL Group, its largest installer, for around 2m.

* A general slowdown in US revenues, the downturn in the telecom industry, combined with the foot and mouth outbreak preventing any access to electricity pylons, dented Latchways' latest half-year sales. Increased infrastructure costs also helped pre-tax profits to plunge from 1.1m to 0.4m.

* Latchways has traditionally produced attractive financials. In the year ending March 2001, operating margins of 31.8% were reported. During the same period, the company generated a return on average equity of 43%.

Valuation

While the business of safety equipment may not be the most visible for ordinary investors, the company's historical financial performance is clearly attractive.

In the latest results, Latchways' management commented that it would be "premature" to expect the interim shortfall to be made up in the second half. However, through the purchase of HCL, there does appear to be large, incremental revenues on the horizon. That said, the acquisition takes Latchways into new (and perhaps unfamiliar) operational areas, and may upset the company's other installers. But by acquiring HCL for a price to earnings ratio of about 10, the worries are somewhat offset.

In terms of valuation, I'm going to ignore the recent half-year profit downturn. Instead, with the potential of larger contracts on the way, I'm simply going to assume Latchways can regain its performance for the twelve months ending March 2001 over the next year or two.

Thus, with operating profits of 2.99m; depreciation of 0.34m; estimated maintenance capital expenditure of 0.45m; net interest of 0.08m, and; a 30.7% tax rate; Latchways' free cash flow for 2001 came to 17.9p per share. So, at the current price of 290p, the shares presently offer a free cash flow yield of 6.2%. Should the share fall below 240p, to offer a free cash flow yield of 7.5%, the Qualiport would be tempted.

More: Eyeing Up ITV | Falling For Latchways | Ulster Television discussion board | Latchways discussion board

The author owns shares in Latchways