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QUALIPORT
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Two weeks ago, the Qualiport sold £2,000 of Emap (LSE: EMA) shares to fund a purchase of PizzaExpress (LSE: PIZ). There were two simple reasons for the move: 1. PizzaExpress shares (at 676p) were cheap while Emap's (at 817.5p) were probably the portfolio's most expensive, and; This feature reviewed the investment merits of PizzaExpress. Today's Qualiport will now cover Emap (a refresher on the company can be found here). Valuation At present, Emap is in a state of flux. Last year saw the media group exit from a disastrous venture in the US (writing off £545m in the process) and substantially scale back rather optimistic (and costly) digital ambitions. Combined with a slowdown in advertising revenues, Emap's recent financials have not been pretty. However, the company does have plenty of attractive assets in the form of high profile consumer magazines and niche radio stations. In the recent past, two methods of valuation have been used when evaluating Emap: the immediate free cash flow yield and the longer-term recovery. This article from November highlighted how Emap could generate 42.5p per share of free cash in the forthcoming year. (A trading statement in March suggested overall sales and profits have not subsequently deteriorated). Taking into account an estimated £30m (12p per share) of further 'exceptional' Internet expenditure still to come, at 817.5p, Emap shares offer a free cash flow yield of 5.1% (42.5p / (817.5p + 12p)). In this October feature, written when media companies had quite bleak near-term prospects, valuing Emap on a longer-term recovery basis was proposed. The assumptions were: * It took five years for Emap to recover back to its 50.1p 'underlying' earnings per share figure of 2001; * The shares would trade on a 2006 price to earnings ratio of 20, and; * Emap would maintain a 20p per share dividend throughout that time. Under those forecasts, a total return (i.e. the share price plus accumulated dividends) of 1,120p per share could be envisaged in 2006. With the shares at 817.5p, an annual compound investment return of 7.4% could be produced over that timescale. While these recovery projections may prove conservative in time, no major media company has stated an advertising uplift will return anytime soon. Although by no means grossly overvalued, there's nothing to suggest Emap shares are undervalued at the moment. However, given that... * Emap's recent financial performance is the worst within the Qualiport; * Emap was the second largest portfolio holding, and; * In terms of free cash flow yields, Emap's valuation is the highest in the portfolio given the same, broadly flat short-term profit outlooks for the six portfolio companies. ... Emap appeared the least attractive portfolio holding. Working capital
Furthermore, it's also worth noting Emap's working capital movements within the latest set of interim accounts: Management Another question mark concerns the boardroom. After the US debacle, Robin Miller took up the role of Chief Executive following three years as non-executive Chairman. Miller, it should be remembered, was Emap's Chief Executive between 1985 and 1998 and led the group to considerable success over that time. While Miller's experienced hand looks to have stabilised the group and set it on a course for recovery, another long-term stint as Chief Executive looks doubtful. With many restrictions on the ownership of UK media firms ready to be lifted, let's hope Miller's successor avoids another ill-fated acquisition. The author owns shares in Carpetright, Johnston Press and PizzaExpress
2. Prior to the switch, PizzaExpress shares represented 11% of the portfolio while Emap represented 22%.Company Forward FCF yield Forward dividend yield
(%) (%)
Carpetright 7.2 5.2
DFS Furniture 7.0 5.0
Emap 5.1 2.3
Johnston Press 5.6 1.2
Lloyds TSB n/a 4.7
PizzaExpress 7.7 1.6 6 months to 6 months to Year to
30/09/01 30/09/00 31/03/01
Operating profit (£m) 88 93 234
Change in working capital (£m) (32) (8) 1
Converting accounting profits straight into cash has long been one of Emap's strengths. Indeed, since 1993, the largest annual outflow of working capital cash has been just £13m. However, the six months ending September 2001 witnessed a £32m outflow. While nothing concrete can be deduced from one six-month period, deteriorating working capital is traditionally a sign of trading trouble. When Emap's full-year results are published at the end of the month, evaluating this part of the accounts will be a top priority.