QUALIPORT
Emap: Lower Profit, Greater Quality

By Maynard Paton (TMFMayn)
November 15, 2001

Carburton Street, London -- Qualiport company Emap (LSE: EMA) published its interim results on Tuesday. Following the disposal of its US operation and continuing Internet expenditure, the numbers were a somewhat complex affair.

However, a refocus on UK and French operations, further cuts in digital spend and a reduction in debt makes the media firm more appealing than it has been for some time. And while the advertising market remains tough, the company's market-leading publications remain attractive as ever.

(To provide some background to Emap, you may wish to read this review of the business and this assessment of the group's previous annual results).

Here are Emap's latest figures:

                         Six months to  Six months to  Year to
                           30/09/01       30/09/00     31/05/01

Turnover
Continuing Core (£m)         446            435          889
Continuing Digital (£m)       10              9           20
Discontinued (£m)             91            123          244
Total (£m)                   547            567        1,153

Operating Profit            
Continuing Core (£m)          88             93          197
Continuing Digital (£m)      (11)           (20)         (80)
Discontinued (£m)             15             20           37
Total (£m)                    92             93          154

Pre-tax Profit (£m)           55             51         (527)

Earnings per share (p)*     13.3           13.0         56.8

Dividend per share (p)       6.5            6.5         19.5

(*adjusted to exclude discontinued operations and goodwill)

Emap's latest performance can be split into three parts: the sold Emap USA operation, expenditure on Internet businesses, and the ongoing "core" business.

US FHM

To recap, Emap bought the US Petersen magazine business in January 1999. Including acquired debt, Emap essentially paid around £900m for company. But after various operational troubles, Emap sold the business in August this year for £366m, albeit retaining the US title of FHM.

While the final contribution from Emap USA is neither here nor there for current shareholders, the latest figures interestingly highlight the contribution from the retained FHM title. During the year ending May 2001, Emap reported US operating profits of £28m. But the restated accounts for that period, supplied in the latest set of figures, imply discontinued US profits of £37m. The American FHM therefore lost £9m during those twelve months.  That's not too worrying in itself, but it's worth noting I'd previously assumed a breakeven FHM performance in the US.

The latest results also presented welcome financial news on the group's various Internet-based ventures. Emap re-affirmed its divisional breakeven target for the year ending May 2003, while emphasising the current year would see a maximum of £20m spent. For the latest six months, a digital operating loss of £11m loss was generated.

Core

Operating profits at the Emap's core business fell from £93m to £88m in the six-month period, a performance caused by the well-documented slowdown in advertising.

A reasonably solid performance from Emap's consumer magazines, which includes such titles as heat, Max Power, Today's Golfer, and Q, was offset by a significant downturn in radio advertising. A 2% fall in underlying radio revenues equated to a 15% drop in radio operating profits. That said, aided by robust growth from the group's Kiss and Magic stations, Emap continues to gain market share.

Elsewhere, a "tough" first half was unsurprisingly had by Emap's business-to-business activities. The likes of Local Government Chronical and New Civil Engineer, combined with the hosting of various industry conferences and exhibitions, all registered an 8% overall fall in divisional profits. But operations in France remained relatively healthy, with profits keeping steady.

Attractive

Emap remains an attractive company. While investors have suffered from the Petersen debacle, with past returns on shareholders' equity being severely damaged, it's the future that counts. Robin Miller, who successfully led Emap for 13 years until 1998, is reassuringly back in the hot seat. Without the distraction of US, the resultant refocus on Emap's leading UK and French brands should prove beneficial in time.

Although recent accounts are clouded by goodwill write-offs and exceptional items, it's clear that Emap remains a company that has enticing economics. Even during the latest interim period, encompassing a relatively difficult trading environment, "core" operating margins of 19.7% were still reported.

Furthermore, Emap can generate annual operating profits of around £180m from a balance sheet containing just £34m of tangible fixed assets. Compared to most other companies, Emap has plenty of those difficult-to-replicate intangible assets to help fend off the competition. In addition, following the proceeds from the Petersen disposal, net debt is now a very manageable £331m.

Valuation

Emap has admitted that its second half should be "at least as difficult as the first". With that in mind, what price fair value on Emap shares?

Using these assumptions:

* Second half sales remain flat at £454m, taking full year sales to £900m;
* Second half operating margins are 19.7%, the level seen in the first half;
* An annual interest bill of £23m (i.e. 7% interest on net debt of £331m), and;
* A tax charge of 30%;

  ...earnings per share (EPS) for the current year comes to 42.52p. Note too, with negligible working capital and little fixed asset expenditure, Emap's earnings are essentially reflected in cash. At the current 750p share price, the forward free cash flow yield is thus 5.67%.

However, Emap's digital expenditure is not taken into account within this calculation. So, assuming shareholders have to fork out another £30m (12p per share) on Internet activities before the division breaks even, the effective free cash flow yield falls to 5.58% (42.52p/(750p+12p)). 

Overall, with risk-free government bonds currently yielding around 4.6%, I'm not convinced the present share price represents exceptional value. Although the advertising market place could be near the bottom of the latest downturn, there have been no comments from Emap nor any other major media firm concerning any imminent recovery. All things considered, a share price of 638p, equating to a free cash flow yield of 6.5%, feels like the maximum level for a further Emap top-up.

More: Emap discussion board | Emap's May annual results