What next for Daily Mail and General Trust?
Are newspapers dying? That was a bold rhetorical question for the chairman of Daily Mail and General Trust (LSE: DMGT) to ask in the chairman's review section of the company's last annual report.
Despite the predictable answer that rumours of their death are much exaggerated, posing the question was an expression of just how confident DMGT's management are of having diversified away from dependence on newsprint.
So what does the company do? To emphasise its transformation, it distinguishes its activities between business to consumer and business to business markets.
In the B2C segment is the national newspaper group, Associated Newspapers, the regional newspaper group, Northcliffe, and an Australian radio joint-venture.
National media
Associated Newspapers, which includes the Daily Mail, Mail on Sunday and the free Metro titles, remains the largest contributor. It accounted for 46% of revenues for the half year to 4 April 2010.
Even here, the company has diversified away from newsprint. Online revenues are increasingly important, from recruitment and property sites as well as advertising revenue from its online newspapers.
Local media
Northcliffe, the regional newspaper chain, accounted for 15% of revenues at the half year.
It is the dog business in DMGT's portfolio. Regional newspaper readership is in secular decline, with 60 titles closing in 2009 as advertising revenues plummeted.
Regional newspapers are heavily dependent on classified advertising, but online the marketplace is increasingly segmented by subject matter (jobs, cars, property etc) rather than by location.
Unsurprisingly DMGT has been cutting costs, but it risks a vicious cycle whereby cutting costs reduces editorial quality which in turn reduces circulation.
Trinity Mirror (LSE: TNI) bought Guardian Media Group's regional titles in February at what seems a bargain price, and has already made savings by rationalising back office operations with its own regional titles. The other main regional newspaper group, Johnston Press (LSE: JPR), is committed to the business because that is all it does. My guess is that DMGT would not be sorry to divest its regional titles to one or the other.
Radio
The B2C segment is completed with a joint venture radio network in Australia which contributed 1.6% to revenues.
The B2B segment contains some surprises, if you are not familiar with the company.
Euromoney
DMGT's 67% interest in Euromoney represents 15% of revenues but a larger percentage of profits.
Euromoney publishes high-end financial and business media in print and, of course, increasingly online. It operates in the same space as Informa (LSE: INF) and Reed Elsevier (LSE: REL), which I wrote about in July.
Business information
DMGT owns a range of B2B information providers in the insurance, property, financial, energy and environmental sectors, generating revenues in the US, Australia and the UK. They contributed 17% of revenues at the half year.
Exhibitions
DMGT's exhibitions business is being refocused on the B2B market, and operates industry events globally. It accounted for 6% of revenues, but further growth by acquisition is contemplated.
You can earn but you can't vote
The newspaper industry is renowned for its magnates: think Hearst, Murdoch, Maxwell. DMGT's history is as a family business and the current Viscount Rothermere is chairman. Family trusts control over 92% of the voting stock.
If you buy shares in DMGT, you get the non-voting class. You can share in earnings, but not in control. The company has been able to sustain this odd capital structure by eschewing new capital issues. Instead it funds growth from long-term bond issues and internally generated funds.
With a good track record of dividend growth it seems to be a winning formula. Whether the business model works as well for a global diversified information business as it does for a national newspaper remains to be seen.
Prospects
This is the best company in the newspaper sector, and unsurprisingly trades at a premium. Its forward PE of 10.3 is over double that of Trinity Mirror on 4.6, or Johnston Press on 3.8.
The idiosyncratic capital structure gives the company net debt of £1 billion at the half year, against total equity of £90.5m: an astronomic level of gearing. There is also a hefty pension deficit, so the financial risk is not inconsiderable.
After losses in the year to October 2009, profitability has been restored as advertising and other cyclical revenues start to come back. There is plenty of room for further growth when, for example, the housing market is restored to normality.
That growth should fund the company's continuing transformation, and resumed dividend growth, making it a good long-term investment in my view.
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