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QUALIPORT
By
Rochester, Kent – The media industry is a prime hunting ground for long-term business "franchises". And there are few better in the sector than Metal Bulletin (LSE: MTLB), a publisher of specialist information relating to metal trading and financial markets. At the right price, this company is a worthy member of anybody's quality portfolio. Capitalised at just £158m, my interest in Metal Bulletin (MB) has been piqued by its significant share price slide of recent weeks. The despondency has left MB's valuation approaching a rating that could be declared "reasonable", a description that has rarely been applied to the company in the past five years. The business MB describes itself as an "owner of valuable intellectual property and the provider of must-have information to niche business marketplaces". Those niche marketplaces are metals, textiles, financial products, energy and shipping. As TMFNigel testifies, the company truly offers "required shelf-filling material for all industry executives". The publications come in a variety of formats (e.g. journals, directories and statistical analyses) and via a variety of media (eg. hard copy, CD-ROM and Internet). The subject matter contained in MB's news publications also includes specialist industry reports and the all-important pricing of various commodities. In effect, MB's titles are the equivalent of the Financial Times to the UK stock market investor. MB's income is generated from reader subscriptions and advertising. Notably, it's one of the few companies that can turn a profit from its fast-growing Internet operation too. Alongside the publishing, MB also generates revenues from organising industry conferences and exhibitions. However, revenues are partly correlated to the overall health of the trading markets it serves. MB has also been affected by the ongoing consolidation in its readership base too. The financials While MB has been a sure and steady performer over the past five years, the above table fails to do justice to the company's record. Sales have compounded at an annual average of 12% since 1990, while earnings, helped by a near-doubling in operating margins, have increased by an average of 16% over the same timeframe. Reassuringly, there wasn't a decline in either sales or profits during the 1990s. Certainly MB's operating margins, now hovering around the 20% mark, underpin the notion of a competitive moat surrounding the company's services. Historic growth has come through a mixture of organic improvements and acquisition. MB regularly states its intention to acquire "high quality businesses that compliment [its] existing portfolio", and while I'm always wary of the dangers that acquisitive companies possess, it goes with the territory when sniffing around the media sector. Return on equity The corporate activity of recent years hasn't gone entirely without problem. MB's 1998 purchase of the Energy Information Centre (EIC) for £8m always looked a bit daunting (EIC only generated profits of £279,000 at the time!). Changes in the UK energy market necessitated a subsequent restructuring of this division and only now is this particular operation showing signs of a return to profit. The EIC purchase, effectively paying £8m for zero profits, has badly damaged the returns generated for shareholders. Nevertheless, even with EIC and a part contribution from another acquisition made last year, MB's return on shareholders' equity is still attractive. Since 1993, shareholders' funds have jumped from £4.7m to £19.0m, goodwill written off has increased from £0.1m to £7.3m, and pre-tax profits have gone from £2.2m to £6.0m. All that equates to incremental return on equity figure of 17.7% (£6.0m - £2.2m / ((£19.0m + £7.3m) - (£4.7m + £0.1m))). Pre-1998 and EIC, MB's incremental returns were at the 30%-plus level. I feel the 17.7% figure is probably the minimum MB shareholders can expect over the long term, acquisition faux pas permitting. Cash, debt and BCA At the end of last year, and unlike most other UK media companies, MB had a healthy net cash balance. However, the £10m cash pile quickly evaporated after the January purchase of BCA Publications, a private Canadian publisher of independent financial marketplace research. The rationale was simple: to harness cross-selling opportunities and create economies of scale with the group's existing North American division. It should be pointed that MB is no stranger to the US. The company has generated 20% of its sales from across the Atlantic for many years. The maximum consideration for BCA, MB's largest ever purchase, is £31m, with the instalments to be spread over the next five years. With MB having paid £13m upfront already, interest payments on the resulting £3m net debt should be well covered at the moment. In terms of the price paid, it doesn't appear MB has been stretched too far. Calculating a rough net present value of MB's future instalments and using BCA's profit from 2000, MB paid around 18 times historic earnings for the Canadian outfit. All in all, considering the price paid, debt requirements and the existing presence in the US, I don't foresee a corporate mishap on the scale of Emap (LSE: EMA) and its purchase of US firm Petersen. Valuation and summary At 292p, MB shares stand on a prospective price to earnings (P/E) ratio of 22, falling to 19 for the year ending December 2002. The dividend yield is presently around 2%. No obvious bargain, although historically, the shares are relatively cheap. Ever since 1996, the shares have traded around the 30 times earnings level. Having tumbled from a 435p peak made in late 2000, the subsequent share sell-off has looked a little unwarranted (although I'm not complaining!). Last month's full-year results from MB stated that the metal markets were "recovering", while "strong" revenues were seen from the financial markets operation. The main fear, I assume, is that BCA will prove to be a dog. Overall though, MB exhibits many characteristics that the Qualiport searches for. A dominant position in its marketplace; MB's publications are essential, repeat purchase products. High margins and a high return on equity underpin the financial merits of the company. A problematic acquisition or a financial market meltdown aside, MB appears to be one growth company that allows conservative investors to sleep easy at night. That said, given the current rating, I'd prefer to let BCA bed in and review MB at the next set of interim results. More: Metal Bulletin discussion board | latest annual results | website(to December 31st) 1996 1997 1998 1999 2000
Turnover (£m) 22.9 24.6 28.3 30.0 36.3
Operating profit* (£m) 4.5 5.2 6.2 6.4 7.7
Earnings per share* (p) 6.9 8.0 8.4 9.2 11.1
Dividend per share (p) 4.0 4.6 5.2 5.5 5.7
(* -- adjusted for goodwill)