Qualiport

[ June 2, 2000 ]

Conclusions from Emap 2000

By Maynard Paton (TMFMayn)

Rochester, Kent --On Wednesday, I started to delve into the 2000 annual results from Emap (LSE: EMA). So, without any further ado, I'll continue from where I left off...

Potential

As can be expected, efforts are being made at Emap to generate organic sales growth. It's a three-pronged attack. Firstly, the group has restructured its UK and French advertising operations and moved away from having separate divisions revolving around a particular medium. Instead, Emap has introduced divisions concentrating on particular industry markets. Thus, advertisers approaching the company will have a focused "one stop shop" for their needs, allowing Emap greater flexibility to generate additional cross media deals that, as the company admits, were "not possible under the old structure".

Although the restructure is still in its infancy, £2m of extra revenues have already been created through the new approach in the first couple of months. Although the £2m figure is a mere pinprick compared to Emap's £1.1b of total sales, it must be remembered that only an extra £11m would equate to a 1% jump in group turnover. And when organic sales growth is running at 1% or 2% anyway, the new advertising restructure could certainly have a significant organic sales impact in the not too distant future.

Secondly, there is the exciting prospect of Emap's "lad mag" FHM becoming the company's first truly international brand. Having launched editions in France, South Africa, the US, Romania, and the Philippines, the group plans further launches in Germany, Brazil and Taiwan. Although financial details are thin on the ground at present, there's obvious scope for FHM to join the elite handful of very valuable global magazine "franchises".

But of course it's the emergence of new media that is where the real organic sales potential lies. The next three years will see Emap invest between £200m and £250m in developing and acquiring various digital businesses. Numerous Internet initiatives were launched during the past year at Emap, largely through exploiting the company's well-known specialist trade magazines to establish web portals and e-commerce operations. Emap describe the digital potential as a "substantial opportunity for asset value creation" that can "create extensive new revenue streams".

There is plenty of rapid revenue potential from Emap's online ventures, especially on the "business-to-business" side. The hyper-growth is shown in the full-year figures. Sales at the "Emap Digital" division rose 91% to £13.4m in the year ended March 2000. But, like most online activities, the division is a loss-maker at present. Still, as noted earlier with the cross media reorganisation, it certainly won't be too long before this embryonic operation starts to positively impact overall organic revenue growth.

Prospects and Valuation

The immediate outlook at Emap appears solid. The group declares that underlying revenues in the UK and France will continue to improve (ie revenues to probably grow by 1% again) and that both businesses are "capable" of another year of double-digit profit growth (ie there's more scope for cost-cutting). Assuming no great shakes from the US and that the online ventures remain profitless, and bearing in mind that the UK and French operations contribute the bulk of the profits anyway, another 10% earnings jump in the current year is not an unrealistic forecast.

With full-year earnings per share (EPS) reported at 53.7p, and the shares currently standing at around 1185p today, the current price-to-earnings ratio (P/E) of 22 is no bargain. If my assumed 10% earnings growth comes through, then the prospective P/E falls to 20. Fair value perhaps, but again, not a screaming undervaluation.

Coincidentally, today's share price was roughly the price paid by the Qualiport two years ago for its initial stake in Emap. Bruce ominously stated at the time that Emap were "not cheap". However, a far more timely purchase of the media company was made late last year. Purely comparing the then earnings yield (the reciprocal of the P/E) of Emap to the risk-free return from government gilts, Emap was a bargain. At around 800p in October, the Emap earnings yield of 6.5% exceeded the risk-free rate of around 6%. So which would you prefer, Emap's initial 6.5% yield, which could be expected to expand at 10% per annum, or the static, but guaranteed, 6% return?

Using this same principle, if I divide the current 53.7p earnings per share by the risk-free rate of return, (still about 6%), I get 895p (or 53.7p / 0.06). Certainly, I wouldn't consider any purchase of Emap above this 895p level. Ideally, I'd want the shares to fall well below that mark for any prospective top-up.

Summary

To me, Emap is a core holding within the Qualiport. The group has a long and great track record, and with minimal reinvestment requirements, is a supreme cash generator. In terms of the "20% margins by 2000" target, it appears my earlier apprehension was unfounded. Although Emap will eventually reach an optimum margin figure, confident management remarks about further profit double-digit profit growth gives the impression that the 20% level was a cautious goal.

Looking to the future, gut-feel tells me that the investment towards digital and online ventures will now become the driver of future growth rather than any further Peterson-type acquisitions. Assuming the reduction of company debt continues at the same level as it did this year, rough calculations suggest that there's going to be little room for significant acquisitions and additional interest payments alongside the stated level of online investment.

Further margin improvements, the potential of digital ventures and the management's ability to consistently earn a superior return on equity should deliver double-digit earnings growth and keep the cash rolling in for a few years yet. Certainly an attractive company to own, but I'm not really tempted to consider Emap for a further top up unless they become ridiculously undervalued. There is the fact that Emap is already the Qualiport's largest holding. But of more significance, I still feel there could be more attractive opportunities elsewhere in terms of the investment value and business mix. Nevertheless, the Qualiport remain happy holders of Emap.

Over to you

Now, over to you. The Qualiport discussion board has been extremely quiet over the last few days. Both Bruce and myself are keen to hear your feedback.

So, what did you think of this feature and the previous commentary on the recent Emap results? Rather than sitting on our hands, should we be ordering another Emap top-up again? Or instead consider selling? Are we right to be concerned with the tiny sales growth, when double-digit profit growth can still be achieved? Indeed, do you agree with paulfowler that if you could hold just one stock, it would be Emap?

Please let us know your thoughts over on the Qualiport discussion board.

Related Links

• The Emap business
• The Emap financials
• The Emap valuation
• Emap annual results 1998
• Emap interim results 1998
• Emap annual results 1999
• Emap interim results 1999
• Emap annual results 2000 preview
• Emap annual results 2000
• Emap discussion board