QUALIPORT
Great News From Johnston Press

By Maynard Paton (TMFMayn)
March 14, 2002

Carburton Street, London -- Qualiport company Johnston Press (LSE: JPR) published its annual results earlier this week. Alongside the numbers, the local newspaper group also revealed the £560m purchase of industry rival Regional Independent Media (RIM). After digesting both announcements, the Qualiport remains a very content Johnston Press shareholder.

(For readers new to Johnston Press, background information on the company and the attractions of the newspaper industry can be found here.)

Results

In a year when many media companies suffered from a deteriorating advertising market, Johnston's local newspapers proved resilient. The 2001 performance continued the group's steady progress:

To 31st December           1997    1998    1999    2000    2001

Turnover (£m)             212.0   201.7   242.6   292.2   300.6
Operating Profit (£m)      45.6    51.0    65.9    85.0    90.7
Exceptional Items (£m)     (3.5)    0.7    (5.2)   (1.0)   (6.3)
Net Interest payable (£m)  (7.7)   (6.2)  (11.2)  (18.8)  (16.3)
Pre-tax profits (£m)       34.6    45.9    49.8    65.4    68.5

Earnings per share (p)     13.1    15.8    19.2    23.3    26.3
Dividend per share (p)      3.0     3.5     4.0     4.5     4.9 

Average like-for-like advertising growth of 2.4% at Johnston's 188 different newspapers helped group turnover improve 2.9% to £301m. Tight cost control pushed operating profits to £90.7m, with operating margins rising from 29.1% to 30.2%. A reduction in net debt (from £259m to £237m) and a lower rate of interest allowed net interest cover to improve from 4.5 to 5.6 times.

On the cash flow and return on equity fronts, Johnston remains an attractive company:

To 31st December            1997    1998    1999    2000    2001

Operating Profit (£m)       45.6    51.0    65.9    85.0    90.7
Working capital change (£m)  4.4     0.0    (2.6)   (2.3)   (2.9)

Depreciation (£m)            6.5     6.8     9.2    11.5    11.6
Capital Expenditure (£m)    (9.9)   (7.9)   (9.0)  (19.9)  (24.3) 

The generally low asset requirement of Johnston filters through to the incremental return on equity figures. With post-tax profits jumping from £15.9m in 1996 to £52.9m in 2001, and shareholders' funds (adjusted for goodwill and exceptional items) increasing from £201.0m to £357.7m over the same timescale, the incremental return on equity over that period comes to an impressive 23.6% ((£52.9m - £15.9m) / (£357.7m - £201.0m)). The significant use of debt, though, does enhance this performance.

RIM Purchase

In many respects, the purchase of RIM marks a bit of a coup for Johnston Press. Firstly, the company got one up on Gannett (NYSE: GNI) and Guardian Media with the deal, both of whom had also expressed an interest in RIM two years ago. Furthermore, competition issues stemming from the purchase have already been settled. The Competition Commission gave its consent to Johnston (and Gannett and Guardian Media) for the purchase of RIM back in 2000.

But perhaps more importantly, the purchase consolidates Johnston's position as the UK's fourth largest regional newspaper firm. By adding RIM (with 53 titles, it's the fifth largest UK player), Johnston can now stand alongside the three other major sector major operators (Trinity Mirror (LSE: TNI), Gannett and Daily Mail & General Trust (LSE: DMGT)), and leave a gulf between it and the rest of the sector.

With encouraging noises from the government concerning media ownership rules, Johnston's greater size will give the company a far firmer footing in the race for further consolidation. Following the purchase, the four leading players will control 61% of the regional newspaper market.

The RIM purchase is Johnston's third sizeable acquisition in five years. In 1996, Johnston bought the newspaper interests of Emap (LSE: EMA) for £213m, and in 1999, it bought Portsmouth & Sunderland Newspapers for £266m. The success of both acquisitions and resulting economies of scale are clearly shown by Johnston's operating margins; they've improved from 17% to 30% since 1996. With publication overlaps (notably in Yorkshire) and the inevitable reduction in overall printing facilities, the latest purchase gives plenty of scope for further cost cutting.

Right To Buy

Although the acquisition story stacks up, how do the RIM financials fare?

To 31st December                    1998    1999    2000    2001

Turnover (£m)                      147.3   156.3   169.3   175.3
Operating Profit (£m)               31.2    33.4    38.3    40.2
Exceptional Items (£m)              (1.3)    1.0    (1.0)   (2.5) 

Working capital change (£m)          5.3    (3.8)    1.8     0.0
Depreciation (£m)                    6.1     7.5     6.7     6.6
Capital Expenditure (£m)            (8.1)   (3.6)   (4.7)   (3.2) 

Operating margins of 23% plus relatively little in the way of working capital and fixed asset expenditure again underline the cash cow attractions of the newspaper industry. But is RIM worth the £560m price tag?

The purchase is being funded by a £220m rights issue, with the balance financed by debt. Using the following assumptions on RIM's near-term profitability...

* The £40.2m operating profit is boosted by £9m of expected synergy savings, and by a further £1.3m after the group's Internet operation reaches breakeven this year (as forecast by RIM);
* Interest on the £340m of extra debt taken on is charged at 7%, and;
* Tax is charged at 30%.

...then RIM's post-tax profit (under Johnston ownership) comes to £18.7m. Assuming also that shareholders have to fork out another £15m for 'exceptional' integration costs, the resulting return on shareholder equity comes to 7.95% (£18.7m/£235m). That figure may not sound grand, but it infers Johnston shareholders are effectively purchasing RIM for a price to earnings (P/E) ratio of 12.6 (where the earnings figure can be taken as free cash flow).

Summary

Johnston remains a solid, stable and simple company operating in a very predictable industry. In contrast to the advertising difficulties and dotcom follies seen at many other media firms, the group's robust titles and canny management team have produced another set of sound results. Furthermore, the Johnston boardroom should be applauded for its purchase of RIM. They've paid a fair price, outmanoeuvred other interested parties and notably enhanced Johnston's strategic position in the sector.

In addition, RIM should allow Johnston to continue generating superior returns for its shareholders. While those returns are generated through acquisitions and debt, the 'business franchise' nature of the two companies offsets the general risks such activities typically create. All in all, the Qualiport remains a content Johnston shareholder.  In the near future, the Qualiport will assess Johnston's valuation and the implications of the rights issue.

More: Johnston Press: What The Papers Say | Johnston Press discussion board

The author owns shares in Johnston Press