Qualiport

[ November 13, 2000 ]

Emap Eases Internet Expense

By Maynard Paton (TMFMayn)

Carburton Street, London -- Emap (LSE: EMA) delivered its results for the six months ending 30 September 2000 this morning. In short, a welcome reduction in the planned expenditure for the company's online activities, combined with respectable growth in UK and French markets, continue to underpin the Qualiport's investment in the publishing company.

(Before we get started with the interim details, for those not too familiar with Emap, you may wish to read this review of the business and this assessment of the group's latest annual results).

Here are the financial details from today's interim results, all adjusted for goodwill. Note that the first table below includes Emap's revenues and expenses associated with its fledgling Internet ventures, figures that the company excludes when calculating its own "normalised" profits.

And as forewarned by the Qualiport a few weeks ago, it's this digital investment that is holding back Emap's current short-term profitability. However, excluding digital investments and exceptional items, pre-tax profits would have remained level at £92m.

                                         Six months to 
                                   30/09/00        30/09/99
                                     (£m)            (£m)

Turnover                              567             549
Operating Profit                       94             109
Exceptional profit                     (1)             59
Net interest payable                  (23)            (21)
Pre-tax profit                         70             147

Pre-exceptional Earnings per share   18.7p           25.5p
Dividend per share                    6.5p            6.1p

Here's how the group has performed at the divisional level, too.

                      Six months to 
Revenue            30/09/00   30/09/99   Change
source               (£m)      (£m)        (%)


Emap UK              302       286         5.6
Emap France          119       119         0.0
Emap USA             127       130        (2.3)
Emap International    10         8        25.0
Emap Digital           9         6        50.0
Total                567       549         3.3

                      Six months to 
Operating          30/09/00   30/09/99   Change
profit               (£m)      (£m)        (%)

Emap UK               74        71         4.2
Emap France           23        19        21.1
Emap USA              17        22       (22.7)
Emap International    (1)       (1)        0.0
Emap Digital         (20)       (3)     (566.7)
Other                  1         1         0.0
Total                 94       109       (13.8)

Emap UK

Overall, Emap's UK operation contributed a solid performance, with "underlying" UK sales increasing by 9%. However, the accomplishments at the UK division were hindered by a recent reorganisation. At the prior full-year results stage, Emap restructured its UK businesses into market-based (e.g. music and automotive), rather than product-based (e.g. magazines and radio) subdivisions. Part of that restructure involved the creation of Emap Advertising, an internal sales house that would service key advertising clients across the group's full range of consumer media.

However, today's results revealed that the "disruption created by the formation of Emap Advertising... resulted in consumer magazine advertising underperforming in a reasonably buoyant market". This, it has to be said, is disappointing, especially given the upbeat comments made at the annual results in May.

Six months ago, Emap commented: "There are already early signs that this new media flexible approach to our markets is creating opportunities to grow new revenue streams... Emap Advertising has delivered over £2 million of new revenue from cross-media deals that would not have been possible to put together under the old structure".

The impact of the "changed sales arrangements" relating to Emap Advertising mostly affected the group's mainstream UK "lifestyle" magazine operation ("Emap Elan"). Advertising revenues here plunged 8%, although Emap described the sub-division as remaining "extremely healthy" and referred shareholders to a 9% increase in lifestyle circulation numbers.

Emap's "Automotive and Active" range of publications also suffered six-month revenue deteriorations, albeit caused by trading conditions rather than the recent restructure. "A reduction in the number of motorbikes being sold, increased competition in the performance tuning market... and weakness across gardening, photography and equine sectors" caused this sub-division's advertising revenues to decline 2% during a "difficult" first half.

The star of the UK was undoubtedly Emap's music sub-division. Underlying revenues and operating profits rose by 25% and 55% respectively, underpinned by magazine circulation revenue rising 24% and increased market share of radio advertising. Indeed, according to Emap, the group's Kiss 100 station now has more 15-24 year old listeners than Capital Radio (LSE: CAP). Plenty of spin-off opportunities, such as Kiss TV, branded nightclub events, CDs and the like, all lay the foundations for future growth within the "Emap Performance" sub-division.

And the fourth part of Emap UK, the business communications operation, reported an "excellent" first half. Advertising within Emap's range of trade magazines was up 10% in the period, leading to underlying revenues increasing by 8% and operating profits surging 19%.

Emap Abroad

Emap France produced an "excellent" set of interim results. Underlying French turnover rose just 1% although significant improvements in operating efficiency improved operating profits by 15%. French margins are set to improve further in the second half, with the full benefit of an improved and more competitive distribution agreement still to filter through into the accounts. In fact, operating profits at Emap France still have plenty of headroom, with margins currently running at 19% compared to the UK's 24%. French advertising is said to remain "strong" while circulation numbers continue to be "stable".

But the Peterson business of the US continues to disappoint, with underlying sales falling 6% and operating profits declining 8%. The introduction of discounted long-term magazine subscriptions, plus a "significant investment" to launch the US version of FHM, did most of the financial damage. And although Emap USA sees "the early signs of a recovery", circulation numbers still remain "volatile".

Digital

In this Qualiport feature, concerning the sudden fallout amongst dot-com startups and its effect on the newspaper industry, I wrote:

"As investors become far more selective with their online venture funding, the present situation looks to be good news for the "traditional" media company. In short, the existing sector players will have fewer competitors, and will perhaps require less money, to establish a sizeable Internet presence."

This leads us to the real news of today's Emap results. After announcing in March that £200-250m would be expensed on Internet-related ventures over the next three years, Emap has today revised its spending plan. Following a "thorough market analysis", Emap is now to concentrate on 8 key online operations with total digital expenditure not expected to exceed £120m.

And although details of the actual ventures themselves are a little thin on the ground, very importantly, Emap has set clear investment targets for the significant digital investment. A break-even performance is anticipated in three years' time, while a 35% return on investment and £100m of annual revenues are both targeted for 2005.

Summary

There are two points to make. Firstly, both the two major areas of decline -- UK lifestyle magazines and Emap USA -- appear to be largely of the company's own making. The problems created by the UK restructure are being addressed and the resulting Emap Advertising concept is said to remain "robust". Meanwhile, actions to introduce a more stable subscriber base have hit short-term profitability in the US.

Both of these events are eminently solvable and look as if they are abnormal. Overall, apart from certain areas in the US operation that had previously struggled anyway, there seems to be no area within Emap that is suffering any notable decline due to the competition.

The other point to make is the revelation concerning the severe reduction of Internet investment. This is good very news for Emap, because it infers that:

• building a sizeable online presence now requires a lot less money than it did in March 2000, or;
• the online threat to consumer magazines has substantially receded.

Either way, I'm increasingly of the opinion that tomorrow's winners of the new electronic media appear will ultimately be the current winners of today's "traditional" media.

In terms of valuation, the fact that Emap hasn't changed this year's digital expenditure plan of £50m leaves my earlier stab at a "top-up" level intact. Or in other words, "Emap shares would look 'great value' some way below the 800p level".

All in all, with the possibility for further margin improvement, the potential of the digital ventures and the prospects for group's various divisions being described today as "strong", "positive" or "improving", Emap continues to remain a core holding for the Qualiport. Especially when the Internet appears to be far less of a threat than it once was.

Where Next?

Read previous Qualiport reviews of Emap:

• Emap's Digital Dilemma
• Conclusions from Emap's 2000 full-year results