QUALIPORT
Newspapers Provide Media Safe Haven

By Maynard Paton (TMFMayn)
October 4, 2001

Carburton Street, London -- Regional newspapers appear to be providing a safe haven for media investors at the moment. While fears of recession are causing national and international advertising budgets to be cut, and numerous profit warnings to be issued, local advertising is holding up well. It's all good news for Qualiport member Johnston Press (LSE: JPR).

Johnston and two industry rivals have recently issued relatively comforting updates. Johnston provided this outlook statement within its interim results, published in late August:

"Despite the current mood of economic uncertainty, which makes it difficult to comment on longer term prospects, present indications suggest that further progress should be made in the second half, resulting in 2001 being another satisfactory year."

Meanwhile, this is what Daily Mail & General Trust (LSE: DMGT) had to say on September 25th about trading at its local newspaper operation.

"Regional newspaper advertising revenues have remained stable. For the six months to September 2001, a year on year total increase of 3.5% is estimated, with recruitment revenues up 13% but motors down 4%."

"Other parts of the Group, notably our regional newspapers, have seen no immediate impact on their revenues [since September 11], but it is of course too soon and too uncertain to ascertain whether any longer term effects will be felt."

And September 27th saw Scottish Radio Holdings (LSE: SRH) make the following comments about their local newspaper interests:

"Total Score Press revenues excluding the effect of those companies acquired last year or sold this year, are expected to have increased by 2% over last year. Advertising revenue is in line with last year and circulation revenues for the year to 30 September are expected to show an increase of 7%. "

"The group's long-term strategy of continuing to focus a large part of its sales energies on local markets has stood it in good stead at a time when there has been a general advertising downturn in national revenues."

Growth

Of course, we're not talking mega-growth here. Around 3% revenue growth is all newspaper barons can expect this year. And in the current climate, that's not a bad performance.

However, the relative stability of local newspapers is the trade-off for faster, but more volatile, growth elsewhere. For instance, radio advertising had been growing at near double-digit rates over the past few years. But recent statements from Capital Radio (LSE: CAP) and GWR (LSE: GWG) have highlighted 8%-plus declines in ongoing revenues.

But it's worth repeating (yet again!) that most media companies have lost none of their "franchise" attributes following the advertising slowdown. Indeed, the near monopoly status of certain Johnston papers was recently highlighted by the Department of Trade and Industry.

After Johnston proposed to buy eight East Midland newspaper titles from Trinity Mirror (LSE: TNI) in July, the DTI subsequently stepped in and referred the purchase to the Competition Commission. The DTI commented:

"This transfer would give rise to a potentially significant increase in the concentration of ownership of local newspapers. For example - in Northamptonshire the transfer would give Johnston Press a 96% share of the local newspaper market."

Trinity Mirror

With Johnston attempting to purchase those papers from Trinity Mirror, it's worth briefly commenting upon the Qualiport's rival, not least because it's the only other pure newspaper publisher listed on the stock exchange.

Trinity owns the Mirror tabloid, numerous regional newspapers, a variety of Scottish national titles and a few speciality papers such as the Racing Post. On the surface, the company has the fundamental attractions of most media companies -- established, popular publications with restricted competition.

However, I have significant reservations over Trinity's management. These stem from two counts of somewhat expensive corporate activity.

* Grandiose Internet plans: During March 2000, Trinity announced a £150m "investment" plan concerning various online ventures. Over £42m was spent in 2000. While expenditure has since been curtailed a little, there's no sign of any imminent return on the continuing digital ventures.

(On the other hand, Johnston lost just £1m through its Internet operation in 2000, but expects it to break even later this year.)

Of course, Trinity's ambitious e-plans were similar in scale (and end result!) to those of Emap (LSE: EMA). But at least the directors responsible for Emap's venture are no longer in the boardroom.

* The purchase of Southnews: Paying £286m for Southnews in September 2000, thereby valuing the target at a price to earnings (P/E) ratio of 26, always looked an expensive and hurried move.

To put the pricing into context, Johnston and Trinity stand on P/Es of around 10 at the moment. What's more, six months before the Southnews purchase, Trinity received £300m from the forced sale of a handful of its leading Irish papers. Was the cash pile just too tempting?

Overall, I'd say Johnston is very suitable for investors seeking solid, stable media franchises. And assuming these calculations and forecasts remain intact, at 267p, the shares remain attractively valued too.

More: Finding Value In Media | Johnston Press: What The Papers Say | Johnston Press discussion board

The author owns shares in Johnston Press