QUALIPORT
Thumbs Up For Emap

By Maynard Paton (TMFMayn)
May 31, 2001

Carburton Street, London -- Qualiport member Emap (LSE: EMA) published its full year results on Tuesday. The departure of company Chief Executive Kevin Hand and a £545m charge against the Emap USA operation made the headlines. However, the boardroom politics and a disappointing stateside performance didn't totally overshadow decent divisional results from the UK and France. With the prospect of the troublesome US operation being sold in the near future, plus the company continuing to possess enticing business and financial characteristics, the Qualiport remains an Emap fan.

(For those not too familiar with Emap, you may wish to read this review of the business and this assessment of the group's previous interim results).

The financials

Alongside the US write-off, Emap's latest results were also clouded by the company's ongoing digital media expenditure. Stripping out such items, here are the "normalised" results as presented by Emap. 

                      Year to         Year to
                      31/03/01        31/03/00      Change
                        (£m)            (£m)         (%) 

Turnover                1,133           1,089        4.0 
Operating Profit          234             227        3.1 
Net interest payable      (37)            (40)       
Pre-tax profit            197             187        5.3 
Earnings per share       56.8p           54.7p       3.8 
Dividend per share       19.5p           18.3p       6.6 

Here's how the group performed at the divisional level: 

                   Year to    Year to 
Revenue            31/03/01   31/03/00   Change
                     (£m)      (£m)        (%)
 
Emap UK              619        585        5.8 
Emap France          239        244       (2.0) 
Emap USA             254        243        4.5 
Emap International    21         17       23.5 
Emap Digital          20         14       42.9

                    Year to    Year to 
Operating          31/03/01   31/03/00   Change 
profit               (£m)       (£m)       (%)
 



Emap UK              166        155        7.1 
Emap France           40         37        8.1 
Emap USA              28         35      (20.0) 
Emap International     0         (1)       n/a 
Emap Digital         (50)        (3)       n/a 

Emap UK

At the November interim stage, Emap had admitted that parts of its UK magazine business had been "underperforming during a reasonably buoyant [advertising] market". The cause of the deterioration was blamed on a restructure from a product-based to market-based sales operation. Thankfully, the problems now seem to be over, after Emap highlighted the "improved effectiveness of the new sales operation". In fact, advertising revenues improved by 7% during the first three months of 2001, when the UK market as a whole was flat. Not only was there an improvement in advertising, but Emap's UK magazines also benefited from "extremely healthy" circulation revenues.

There was also a decent contribution from UK Radio. An "exceptional growth" performance of 19% was recorded, and while first quarter radio revenues are currently down on last year, Emap is still outperforming a "fragile" radio industry.

Emap France

With a flat advertising market and no improvement in circulation numbers, French profit growth came through margin improvements. Improved distribution terms and editorial efficiency now give operating margins of 16.7% in France, up from the 15.2% seen last year.

Emap USA

To recap, Emap bought Petersen (now renamed Emap USA) for £950m in early 1999. Ever since then, various troubles have hindered the subsidiary, not least caused by a substantial advertising exposure to the weakening US motor industry.

Alongside a deteriorating advertising market, pressure from US retailers also hampered Emap USA. Underlying divisional revenues were down 7% during the year. Underlying profits tumbled 25%. The US business remains up for sale and "all options remain under review".

Emap Digital

Disappointingly, there was no further reduction in new media expenditure. Emap had previously trimmed the total "digital" investment forecast from £250m to £120m at the November half-year stage. Start-up costs associated with various B2B websites led to an operating digital loss of £50m during the year (£30m in the second half), accompanied by a £10m exceptional digital restructure charge. Emap still reiterated its commitment to a break-even digital performance in two years' time.

Summary and Valuation

Reading the latest results, I'm reminded of Emap's great financial traits, namely:

* High operating margins. Group operating margins (excluding digital) are at the 20% level. UK margins come in at the 27% mark;

* Low fixed asset expenditure. Capital expenditure during fiscal 2001 was just £19m, compared to operating profits of £234m, and;

* Low working capital requirements. Emap typically has a negative working capital balance. The company holds little in the way of stock and takes advantage of upfront magazine subscriptions.

All that, combined with a boatload of market-leading publications, makes Emap still an attractive Qualiport company.

On top of that, there's welcome news from the boardroom. With Kevin Hand taking the rap for the US debacle, Chairman Robin Miller now steps into the Chief Executive role. This is unquestionably reassuring for shareholders. Miller is a proven management act, having been Emap Chief Executive between 1985 and 1998.

On the downside, Emap has still to dispose of its US operation. While there are reportedly many interested parties, undoubtedly now is not the best time to be selling a US media business. Miller is quoted as saying Emap will keep the US operation if it does not receive a satisfactory price. With operating profits of £28m, a price tag of £300m ought to be a minimum ballpark figure.

In terms of valuation, I've changed my line of thinking from that expressed in October. But prospective Emap investors still have to take into account the large sums being invested in digital activities.

Assumptions

Let's make some assumptions:

* "Normalised" (i.e. excluding Emap Digital) earnings per share (EPS) of 56.8p are a proxy for free cash. Emap's depreciation charge typically equals its capital expenditure;

* Over the next two years, digital expenditure will amount to £105m. While £90m is forecast, it's prudent to build in some contingency given the "exceptional" digital costs (which are "exceptional" in themselves!) and write-offs in the latest numbers;

* In line with company expectations, digital activities will breakeven from 1st April 2003, and;

* Any sale of Emap USA will be done for at least £300m, with the proceeds reducing Emap's £655m debt pile. The disappearance of £28m worth of US profits would then be largely counterbalanced by a reduction in interest payments.

At 831p, Emap's shares currently offer a free cash flow yield of 6.8% (56.8p/831p). However, no digital expenditure is taken into account with this figure. So, if we were to pay for the digital expense up front, we'd have to fork out an extra £105m, or 41.5p per share. Therefore, the current free cash flow yield falls to 6.5%. (56.8p/((831p+41.5p)).

What would represent a very attractive entry price for Emap? Well, an 8% free cash flow yield, less the upfront digital expenditure, equates to 668.5p. All things remaining equal, the Qualiport is a buyer of Emap shares at around that level.

More Emap discussion board | Emap's November interim results