QUALIPORT
Media Firm In Shock Profit Rise

By Maynard Paton (TMFMayn)
August 29, 2002

Qualiport member Johnston Press (LSE: JPR) delivered its interim figures yesterday. In contrast to the advertising difficulties and hefty write-offs seen at many other media firms, the local newspaper publisher produced another positive performance.

The main area of interest within Johnston's results concerned the progress of Regional Independent Media (RIM). To recap, Johnston purchased RIM in April for £560m, the price tag being partly funded by a rights issue. For those wanting a refresher on Johnston's business and its recent progress, this article outlines why the company made it into the Qualiport, this feature reviews the RIM purchase, while this piece explains the mechanics behind the rights issue.

The upshot from the latest results? Johnston remains a solid, stable and simple company operating in a very predictable industry. And at 348p, the shares are bordering on the attractive.

Interim results

Here's a summary of Johnston's interim figures:

Six months to June 30th              2002              2001

Turnover
  Existing (£k)                    155,159            153,935
  RIM (£k)                          38,405                  -
                                   193,564            153,935
Operating profit
  Existing (£k)                     52,057             48,513
  RIM (£k)                          10,278                  -

Exceptional items (£k)              (6,313)            (5,251)

Pre-tax profit (£k)                 44,272             35,195

Earnings per share*(p)               14.26              12.22
Dividend per share (p)                1.80               1.65

(* adjusted for exceptional items)

Like-for-like advertising revenues increasing 1.2% during the half-year helped Johnston's 'existing' businesses improve sales by just £1.2m to £155.2m. Although top-line growth was anaemic, Johnston continued its long tradition of reducing costs. Operating profits from existing operations and associates improved 7% as margins edged up from 31% to 33%.

Between its purchase on April 12th and the June 30th half-year end, RIM generated sales of £38.4m and operating profits of £10.3m. On an annualised basis, that roughly equates to sales of £175m and operating profits of £46.9m.

Looking back at its performance for 2001 (sales of £175m, operating profits of £40.2m), RIM provided a similar interim story to Johnston's existing operations: flat underlying sales and higher margins. Indeed, RIM's operating margin under Johnston's ownership is now 27%, as opposed to the 23% before the takeover. At the time of purchase, Johnston expected £9m of annual 'synergy' savings to be generated from RIM. Judging by the initial 11-week RIM performance, that target looks very achievable.

Johnston also included a handful of minor exceptional items within the latest results. Redundancy and reorganisation costs stemming from the RIM purchase created an exceptional £4.8m charge. With such items becoming a somewhat regular feature in Johnston's accounts, it's debatable whether they're truly that exceptional.

To finance the RIM acquisition, Johnston took on another £340m of debt. Although net borrowings currently stand at £557m, interest payments were covered a decent 5.3 times during the first half. That said, interest cover looks set to fall for the full year (see below).

Valuation

Given the part-contribution of RIM, determining Johnston's ongoing free cash flow is a little convoluted.

However, amalgamating the following facts and assumptions...

* For the year ending June 2002, Johnston (excluding RIM) generated operating profits of £94.7m. Forthcoming profits from the existing businesses are assumed to remain flat at this level;

* RIM contributes annual operating profits of £49.2m (i.e. the expected £9m synergies come through as expected);

* Johnston (this time including the 11-week contribution from RIM) spent £21.2m on fixed tangible assets during the year to June 2002. The depreciation charge was £13.6m;

* During the latest half-year, interest payments of £11.8m were paid on weighted net average borrowings of £374m. The effective interest rate of 6.3% on the current £557m net debt implies annual interest payments of £35.1m (and interest cover of 4.1 times);

* Tax is charged at 30%, and;

* 282.6m shares are in issue.

... a Johnston/RIM combine should generate free cash flow of 25.0p per share. Demanding a 7.5% fee cash flow yield requires a 333p share price. Assuming shareholders have to fork out another £10m (3.5p per share) for exceptional charges relating to the integration of RIM, the target buy price is lowered slightly to 330p.

The author owns shares in Johnston Press.