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Smash Hits For Your Portfolio

By Maynard Paton (TMFMayn)
November 14, 2002

Qualiport member Emap (LSE: EMA) issued a robust set of interim results on Tuesday. The publisher of such magazines as Smash Hits, heat, FHM and Angling Times revealed a number of positives, not least news of steady UK advertising revenues and an 8% dividend increase. The figures also reaffirmed Emap's high margin and asset-light accounts.

(To provide some background to Emap, you may wish to read this review of the business and this assessment of the group's previous results).

Interim numbers

Emap's latest performance is shown below:

Six months to September 30th                2002         2001

Turnover (m)                                477          547
Operating Profit (m)                         95           92
Pre-tax Profit (m)                           86           70

Earnings per share (p)                      24.2         19.2
Dividend per share (p)                       7.0          6.5

(all figures before goodwill and exceptional items)

Highlights from the six-month statement were:

* No more Petersen, no more Digital (hurrah!): The interim results were the first in a long time that had no contribution from Emap's US operation nor any 'exceptional' losses from Internet-related businesses ('Digital').

While shareholders must be pleased Petersen was sold in August 2001 and Digital has (as promised) now broken even, the comparison with the prior half-year is distorted by these events. On a continuing operational basis and excluding Digital, turnover increased 5% to 468m and operating profits improved 8% to 95m.

* UK magazine advertising did well in a difficult market: Publications such as Max Power, Today's Golfer, Closer and New Woman helped Emap's domestic consumer magazines report sales up 6% to 170m. The company said advertising revenue "had been strong across most of the [UK magazine] portfolio". Emap's domestic market share improved slightly to 16.6%. Also worth noting is that steady subscription payments make up about half of all magazine-related revenues.

* B2B fared reasonably well, too: Following "a modest portfolio rationalisation", aggregate turnover at Emap's business-to-business titles (including Construction News and Health Service Journal) and exhibition activities fell 2% to 89m. But underlying revenues improved 3%.

* Music gave a mixed performance: Operating in a "tough radio advertising market", Emap's radio network (including Big City, Kiss and Magic) witnessed a 7% sales decline. However, a good performance from heavy metal favourite Kerrang! and Emap's fledgling television channels helped divisional turnover rise 7% to 74m.

* France kept steady: An acquisition caused revenues of French consumer magazines to increase 7% to 135m. But a weakening economic environment kept the underlying performance flat.

* Fabulous margins: Even with a relatively subdued advertising climate, Emap commendably generated juicy margins from its different media. As the table below shows, group operating margins were 20.3% in the first half:

Six months to September 30th 2002
Media type                             Operating   Operating
                                        Profit      Margin
                                         (m)         (%)

Consumer Magazines (UK)                   32         18.4
Consumer Magazines (France)               24         17.7
Consumer Magazines (International)        (1)        (4.5)
Business-to-Business                      22         26.5
Radio                                     14         31.8
Television                                 4         40.0
Digital                                    0          0.0
Total                                     95         20.3

* Great cash flow: Emap continues to score well on the attractive, difficult-to-replicate, intangible asset front. Is there another FTSE 100 company that spends just 6% of its operating profit on tangible fixed assets? Smoothing out a seasonal bias, the twelve months to September 2002 saw a net inflow of working capital cash, too.


Of course, holding Emap shares doesn't come without risk. The three main dangers are:

* Management: The architect of Emap's success during the 1980s and 1990s, chief executive Robin Miller, is set to retire next year. Tuesday's results provided no news on his replacement. How much talent will the new man have?

* Acquisition spree: As the Petersen debacle showed, media companies are often lured into disastrous corporate purchases. The forthcoming liberalisation of UK media ownership rules will undoubtedly cause a few more. Emap's results confirmed the company had an eye on acquiring further domestic radio assets.

* Dynamic markets: Emap must keep constantly on top of changing fashions, tastes and interests, as approximately 25% of UK consumer magazine newsstand sales come from titles launched in the last five years. Emap says such dynamic markets provide "tremendous opportunities for new product development". Shareholders must realise these markets also provide plenty of scope for innovative rivals leaving Emap in their wake.


In terms of valuation, if it's assumed...

* Annual operating profits are 190m (twice the first-half figure);
* Depreciation reflects ongoing capital expenditure;
* Net interest of 18m is payable on current net debt of 280m;
* Profits are taxed at 30%, and;
* Minority interests claim 6m (in line with fiscal 2002)

... then Emap should be able to generate 49.6p per share of free cash in the current financial year. At the present 758p share price, the shares offer a free cash flow yield of 6.5%. Demanding a free cash flow yield of 7.5% would require a share price of 661p.


In accordance with the Fool's Trading Rules and following our recent review of the company, the Qualiport will sell its entire PizzaExpress (LSE: PIZ) holding within the next five trading days.

More: Why Radio Is Great For Buy And Hold

The author owns shares in PizzaExpress.