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QUALIPORT
By
Of all the shares on the Qualiport's watch list, Ulster Television (LSE: UTV) ranks among the best. The firm is a textbook example of what long-term investors should seek: a proven, reliable, simple and visible business. Ulster is a demonstrable 'consumer franchise' and annual results out today underline the shareholder attractions. Key features The key features of Ulster's business are: Five-year record The table below shows Ulster's progress: The aforementioned radio acquisitions helped buoy the 2002 numbers. Overall, sales jumped 10% to £47.3m, pre-tax profits improved 4% to £13.9m and the full-year dividend increased 4% to 9.6p per share. * Television: Turnover managed to improve 4% to £37.2m while additional programming costs caused operating profits to slip £0.1m to £12.3m. However, even in the present subdued economic environment, operating margins remain a very attractive 31%. * Radio: A full contribution from County Media and the purchase of Treaty Radio boosted radio sales by 58% to £6.3m, though underlying sales fell 2-4%. An operating profit of £2.0m was produced, creating a 33% operating margin. * Internet services: A profitable dotcom, generating profits of £0.3m on sales of £2.0m. Cash flow Ulster's cash flow profile remains impressive: At the end of December, net borrowings stood at £27.4m, up from £10.7m twelve months prior. Annualised interest payments (of about £0.9 to £1.0m) though are covered a very healthy 14 times by operating profits. Ulster continues to report attractive returns on equity. Between 1996 and 2002, earnings improved from £4.7m to £10.0m. Over the same time, the equity base (adjusted for goodwill) has expanded from £12.7m to £30.8m. The resulting incremental return on equity comes to a very respectable 29%. Apart from an admission that a previous surplus was now likely to be a deficit, no firm details were supplied concerning FRS17 and the company pension. A little alarming perhaps is Ulster discussing with staff a possible reduction in benefits to existing scheme members. Ulster will re-commence pension contributions in 2003. Valuation and summary There are two general investment risks to Ulster: * ITV: A lot rests on how the ITV network (mostly owned by Granada (LSE: GAA) and Carlton Communications (LSE: CCM)) performs. Programming content and decisions are not entirely in the company's own hands. Following ITV's recent decline in popularity, Ulster's peak-time market share has fallen from 42% in 1998 to 34% in 2002. * Acquisitions: Similar to many media companies, chunky acquisitions are a staple diet at Ulster. There's been no great disaster yet, but then again, the mastermind behind the purchases, managing director John McCann, has only been in charge since late 1999. Offsetting the acquisition blunder though is the chance that Ulster itself may be bought. The forthcoming Communications Bill will relax media ownership rules and a £132m market cap makes Ulster a very digestible target. Using the 2002 figures, Ulster shares (at 253.5p) stand on a price to earnings ratio of 13.3 and offer a dividend yield of 3.8%. Assuming earnings are a genuine proxy for free cash, the 2002 interest payment is annualised and some 1.6m convertible shares are converted, a historic 7.0% free cash flow yield is currently available. Demanding a 7.5% free cash flow yield would require a 238p share price.
Year ending 31st December 1998 1999 2000 2001 2002
Turnover (£m) 37.2 38.3 40.8 43.0 47.3
Operating profit* (£m) 8.3 11.9 13.4 13.6 14.6
Exceptional items 2.4 (4.8) 13.3 - -
Pre-tax profit* (£m) 12.5 7.8 27.3 13.4 13.9
Earnings per share* (p) 10.6 16.0 18.3 18.4 19.0
Dividend per share (p) 6.3 7.5 8.7 9.2 9.6
Special dividend per share (p) - - 35.0 - -
(* excludes goodwill)Year ending 31st December 1998 1999 2000 2001 2002
Operating profit (£m) 8.3 11.9 13.4 13.6 14.6
Change in working capital (£m) 1.3 (2.9) (2.1) (2.3) 1.9
Depreciation (£m) 1.0 1.1 1.3 1.5 1.5
Net capital expenditure (£m) (1.5) (2.0) (1.8) (0.9) (1.7)
On average, Ulster has seen just 6% of operating profits diverted into working capital over the past five years. However, net capital expenditure has exceeded the depreciation charge by 20% since 1998. Generally though, Ulster has a very low appetite for tangible fixed assets. The company managed to produce an operating profit of £14.6m from fixed assets of just £8.0m in 2002. From the findings of this study, it's clear that Ulster relies on precious, intangible assets. It's difficult to imagine Ulster as an inherent guzzler of cash.