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MARKET COMMENT
By
Carburton Street, London -- With a dominant broadcasting position in the country's most lucrative marketplace, there are few inherently more appealing media firms than Capital Radio (LSE: CAP). Not even a disastrous foray into restaurants a few years back could dent the group's core business. And although Capital is presently suffering from declining advertising revenues, today's preliminary results continue to highlight the company's sound long-term attractions. A tough advertising market caused Capital's annual sales to slip 1% to £123m, although the top-line performance was aided by last year's purchase of Century Radio and Beat. On an underlying basis, like-for-like sales growth fell 6%. But with Capital's acquisitions remaining loss-makers, the deterioration in trade was exacerbated further down the profit and loss account. Capital's underlying pre-tax profits plunged 27% to £30.1m. That said, even during the current economic climate, operating margins at Capital's more established stations remain a startling 37%. The purchase of the Century and Beat highlights the problem that has faced all radio investors of late -- the risks of overpayment in the race for industry leadership. For instance, Capital paid a steep £109m for Century and Beat, which at the time generated £10m of sales and no profits. Although Capital's national sales house has notably improved revenues at the two provincial stations, it'll be some time before shareholders see a satisfactory return on this investment. Indeed, the risk of Capital and its rivals overpaying for further acquisitions could increase in the next few years. New broadcasting legislation, expected to become law in late 2003, will relax the current media ownership rules and prompt another round of industry consolidation. Even though Capital remains an enticing business, its valuation is far from attractive. At 795p, Capital shares are valued at 30 times today's adjusted earnings per share figure. With the difficult advertising climate continuing, and plenty of scope for acquisition-led value destruction ahead, prospective Capital investors should tune in later for a better buying opportunity. More: Capital Radio: Time To Tune In? | Capital Radio discussion board