Qualiport

Who are they, and what do they do?

As we enter the finishing straight in our search for a quality media company to join the Quality portfolio, today we are giving EMAP the once over. For those who missed our first ever Friday report last week, click here to look at Capital Radio's credentials. Reuters is the other media company still in contention from the 121 companies in the sector. Easter is fast approaching, and we want to make the final decision before then. Stay tuned, Fools.

The Company

Listed on the London Stock Exchange in 1947, the former East Midlands Allied Press is now an international media business comprising 5 divisions, 50 companies and over 470 products. Back over 50 years ago, it had an issued share capital of £290,000. Today, it is capitalised at over £2.2 billion and is in the top 120 companies in the country by that measure. Growth rates in recent years have been well above average, and continued outperformance could see them elevated to the elite FTSE 100 index in the near future. The company has a year end date of 31st March.

The Business

As stated above, EMAP splits itself into 5 related but distinct business divisions: Consumer Magazines UK, Consumer Magazines France, Business Communications, Radio and the newly created but so far tiny "New Technology, New Territory."

In the last full financial year, EMAP successfully disposed of the last of its regional newspaper businesses, as it decided to concentrate on products with strong brands, dominant market positions and high cashflows. Out went the whole of the remaining newspaper and newspaper printing division to Johnson Press for a consideration of £213m, which gave rise to an exceptional gain of £113m. In came rock cable TV station The Box and various small magazine titles. The new financial year has seen the disposal and acquisition program accelerate even further.

Consumer Magazines UK

The flagship magazine title of the entire company is FHM, the award winning men's magazine with the saucy front cover that's not on the top shelf of your newsagent. It now sells over 600,000 copies per issue, making it the largest monthly circulation magazine in the country, amazingly. Other high circulation titles include Q and Empire (music, entertainment), Golf World, Practical Photography, Mother & Baby, Garden Answers, Angling Times (first launched by EMAP back in 1953), Smash Hits and Big (teenage), Max Power and Car (motoring and motorcycling), Elle and New Women (women's glossies), Yours and Slimming (women's interests), and More and Bliss (young women).

This division earns its revenue from both advertising and cover price sales, roughly in the proportion of 40% and 60% respectively. Strong pure magazine sales allow the company to raise cover prices by above the rate of inflation. The other advantage of having leading titles is that the company is not as dependent on advertising income as their major source of revenue. In times of recession (remember them?), consumer advertising is usually one of the first areas of expenditure to be hit. Sure, discretionary spending on things like glossy magazines falls too, but not to the same extent. In this scenario, market leading titles have a big advantage as consumers cut back. You can work it out -- instead of buying 2 magazines, you now buy one. Which one will it be? Your favourite, which for many people is the market leader.

In the 6 months to 30th September 1997, turnover for this division made up 38% of the company's sales and provided 44% of operating profits. Operating margins stand at 20.1%, up from 17.2% in the comparable prior year period, and up from 19.1% in the year ended 31st March 1997.

Consumer Magazines France

France now plays a significant part in EMAP's overall operations, so much so that for the year ended March 1997 it was their biggest division by turnover. Consumer Magazines UK has now overtaken it again, but obviously the French connection is a very important part of EMAP's overall strategy. One in two French adults read an EMAP magazine. For those who have browsed the news stands in Paris, some of the following titles may be familiar: Modes & Travaux (women's), Tele Star, Tele Poche (TV weeklies) and Bientot Maman (Mother-To-Be).

The strength of sterling, and continued depressed business confidence, has made France an awkward territory for EMAP. The strategy is to grow in this region by further new launches and selective acquisitions. Margin improvement through the cutting of costs at acquired titles has provided the French division with its recent growth in profits and margins. Going forward, top line growth (sales) will be needed to fuel future profit expansion.

In the 6 months to 30th September 1997, turnover for this division made up 30% of the company's sales and provided 26% of operating profits. Operating margins stand at 15.2%, up from 10.4% in the comparable prior year period, and up from 13.2% in the year ended 31st March 1997.

Business Communications

The next biggest division is a bit of a mixed bag, but it essentially targets businesses as it main customer rather than the individual. Having said that, there are exceptions, such as publications like Information Week, Network Week and Internet. The latter two are the leading publications in a still rapidly growing market. In the future this division will focus on electronic publishing, presumably meaning the Internet and email delivery of its products.

Also nestled into this division is EMAP's exhibitions company, called Trade Promotion Services. Events such as the 40° fashion trade show held at progressively bigger venues, culminating in the third anniversary show being staged at London's Earls Court, are organised within this arm of the business. Other events included the International Autumn Fair and the International Garden and Leisure Exhibition (GLEE).

The Business Communications division is in the midst of change. Last year, 14 business magazines were sold to Quantum Publishing as EMAP decided to concentrate on higher and longer term growth industries. Amongst the titles to go were British Baker and UK Press Gazette. In come the medical titles of Macmillan, amongst them Nursing Times. Health is a business that EMAP expects to show significant growth given the rise of health issues as the population ages. They obviously don't think the same about the bakers of the country -- perhaps they feel the new style supermarket bakers aren't too disposed to reading all about their profession.

In the 6 months to 30th September 1997, turnover for this division made up 23% of the company's sales and provided 17% of operating profits. Operating margins stand at 12.7%, up from 12.1% in the comparable prior year period, but down from 16.0% in the year ended 31st March 1997.

Radio

At last, we have something in which to compare EMAP to Capital Radio. Before you start twirling your radio dial trying to find EMAP FM, I'll give you a tip. It don't exist. Most Londoners will recognise Kiss 100 FM, as well as Melody 105.4 FM, very recently acquired from Hanson for £25m. Around the country, readers may know of the Magic brand in Yorkshire with its distinctive advertising campaign. Those people who've already got the 1997 annual report should tun to page 7 for a very funny look at one of their advertising posters, featuring the zaniest looking cat in the world! Other radio stations include Key 103 and Piccadilly Radio 1152 in Manchester, Metro FM in Newcastle, and City FM and Magic 1548 in Liverpool.

The Magic brand is an attempt by the company to move away from the "Gold" banner which principally is seen as catering to an older audience. Advertisers are very set in their ways, and it is often difficult and expensive for them to target the same brand at different aged audiences. After much market research, EMAP decided to go with the Magic formula, which is aimed at the 35 - 45 age bracket.

EMAP is starting to dabble in radio programming and has already produced the networked Saturday afternoon football programme "Who Ate All The Pies," which has been quite a hit with advertisers. Whether it expects to participate in the digital radio revolution remains to be seen. The Radio Authority is currently inviting applications for the first and only national commercial radio multiplex. Yesterday Ginger Media Group (read: Chris Evans) announced that it has teamed up with GWR to form a bid under the Digital One name.

In the 6 months to 30th September 1997, turnover for this division made up 9% of the company's sales and provided 17% of operating profits. Operating margins stand at 32.1%, up from 31.2% in the comparable prior year period, and up from 31.3% in the year ended 31st March 1997. In comparison, the operating margin for Capital's radio interests is 36%, down from 37%. The profitability of the two companies seems to be converging, and it will be interesting to keep an eye on this trend. Capital has the distinct advantage of having the brand leader, while EMAP has the potential to eat into that market share, especially in the highly competitive London region.

New Technology, New Territory

Under this auspicious banner comes music cable TV station The Box and new websites launched on the Internet. At least 50 people are working on Internet related activities that either compliment existing products and services, or are revenue raisers in their own right. One activity I've personally seen them getting involved in is as an Internet advertising agency.

EMAP is keen to start branded TV programmes as a way of leveraging brands and copyright into other forms of media. FHM already has a very popular website (I wonder why?), and EMAP is eager to make a cable TV television programme using that strong brand name. Under current ITC rules, masthead programming (turning magazine titles into TV) is limited to cable television. The exception is the BBC, with shows such as Top Gear, where (much to the chagrin of others) they are allowed to use a public service television programme effectively to promote their commercial magazine.

This division is also seeing the first real expansion out of the UK and France. Two small Australian companies were purchased in August, and in the last week EMAP announced a joint venture in Singapore and Malaysia. The company hopes that this joint venture will further establish EMAP's presence in Asia (FHM and Car are already published there) and it is in line with their emphasis on developing new markets.

The turnover from this division so far is inconsequential, and it is loss making. It obviously plays a big part in EMAP's future, and significant investment is planned.

Next

Now we know a lot more about EMAP's existing business and their expansion plans. As we have analysed each of their business sectors, we have looked at their profitability principally through their operating margins. The good news so far is that margins have almost universally been on the increase. But that's only part of the story.

On Friday, we shall give their financials a more thorough look. Media companies are different beasts from your common manufacturing business. They traditionally have few fixed assets and a high proportion of intangible assets, an item we shall be seeing in balance sheets a lot more in the future due to a change in an accounting ruling.

Till Friday, keep Fooling. And don't forget to check out the Rentokil numbers -- they're on a roll. All comments, as usual to the Message Boards.

Bruce Jackson (TMFGoogly)

Qualiport Numbers

This Week's Numbers          Week Ending 25/03/98

          Change     Bid
          pence       £

RTO        0.17      3.50


Rec'd        #     Stock      Buy      Now  % Change  £ Change

19/12/97   1565  Rentokil     2.55     3.50   37.3%      0.95
19/12/97   1565  Rentokil  4040.63  5477.50   35.6%   1436.87


                    Week          Year          History

Qualiport           5.1%         32.6%            35.6%
FTSE 100            1.1%         16.2%            18.9%
FTSE All Share      1.3%         16.0%            18.4%