Fool's Eye View

[ November 9, 2000 ]

Capital Performance

By Christopher Spink (TMFEagle)

Great Titchfield Street, London -- Advertising spending on the radio is growing at a higher rate than any other traditional medium, such as newspapers pages or television breaks. Strong full year results from Capital Radio (LSE: CAP) this morning confirm this trend. In the year to the end of September underlying pre-tax profit rose 9.5% to £41.3m on radio revenue up 17.8% to £123.9m.

Capital is the country's largest quoted commercial radio operator. As well as its immensely successful London station, the company holds a whole raft of other regional licences. Most cover major metropolitan areas, such as Manchester, Glasgow, Cardiff and Birmingham. The group is also expanding its digital interests, acquiring many local multiplexes.

These licences really do give such stations complete monopolies over the ears of users in these regions. Local businesses flock to advertise, having no other alternative if they want to grab the attention of young listeners in their area. Capital has expanded its reach significantly over the past year, acquiring Border TV's Scottish radio licences over the summer. Radio revenue improved 13.9% on a like-for-like basis.

The group has finally extracted itself from its ill-advised move into "Radio Cafés". These restaurants have now been closed, incurring an exceptional write-off of £5m.

Local or national?

Turning to the core business, this is incredibly dependent on advertising revenue. Whilst radio advertising spending increased 15.5% last year, much of this growth has come from national advertising campaigns rather than locally based ones. National advertising spending has risen 27% whereas local ad spend has dropped 6.5%.

Capital, which owns a collection of local radio licences, counters this trend by claiming that it can run national advertising campaigns since its stations now reach potentially 58% of adults in the UK. Its broadcasts account for 24% of adult listening hours.

Capital looks well placed then against the owners of the three national commercial radio stations: Virgin 1215, run by SMG (LSE: SMG); Classic FM, owned by GWR (LSE: GWG); and TalkSport, operated by the Wireless Group (LSE: TWG). In the digital realm Capital wants to pursue the same policy of acquiring national coverage by buying up extensive local licences.

The group made underlying earnings per share of 39.3p in the year to the end of September. This puts Capital on a price earnings ratio of 35. Given the potential growth of national radio advertising, that is not too expensive a price to pay.

Where Next?

• Maynard Paton (TMFMayn) looks at Capital's interim results
• Rob Davies (TMFEssex) puts his Thumbs up for Digital Radio
• Capital Radio discussion board