QUALIPORT
Profiting From Commodities

By Maynard Paton (TMFMayn)
March 27, 2003

Metal Bulletin (LSE: MTLB) published its annual results on Tuesday. Like many other media businesses, the Qualiport watch list member reported a gloomy 2002 performance. Even with the benefit of acquisitions, sales and profits still edged lower. Nonetheless, Metal Bulletin remains a decent business and the shares aren't bad value, either.

Intellectual property

To recap, Metal Bulletin describes itself as an "owner of valuable intellectual property and the provider of must-have information to niche business marketplaces". Those marketplaces cover financial products and commodities such as metals, textiles, minerals and energy. The information comes in a variety of formats (e.g. journals, directories and statistical analyses) and via a variety of media (e.g. hard copy, CD-ROM and Internet). The subject matter contained in Metal Bulletin's news publications also includes specialist industry reports and all-important commodity prices. In general, Metal Bulletin's titles are pretty much the Financial Times of their particular markets.

In February 2001, Metal Bulletin purchased BCA Publications, a private Canadian business for up to £32m. BCA owns a handful of leading North American finance journals, including Bank Credit Analyst, Fixed Income Analyst and Emerging Market Strategist. During May 2001, Metal Bulletin paid £8m for three titles, including American Metal Market, considered to be Metal Bulletin's main competitor in the metals industry. AMM is deemed a 'Bible' to its North American readers, while Metal Bulletin's eponymous journal is the European and Asian equivalent.

Five-year record

The following table shows Metal Bulletin's progress since 1998:

To December 31st             1998    1999    2000    2001    2002

Turnover (£m)                28.3    30.0    36.3    45.9    44.6
Operating Profit* (£m)        6.2     6.4     7.7     8.8     7.8
Exceptional Items (£m)          -       -       -    (3.8)   (1.2)
Pre-Tax Profit* (£m)          6.8     6.9     8.2     4.2     5.7

Earnings per share* (p)       8.4     9.3    11.1    10.8     8.0
Dividend per share (p)        5.4     5.5     5.7     5.9     5.9

(*adjusted for goodwill)

Metal Bulletin endured 'very challenging market conditions' in 2002, with the acquisitions made in 2001 supporting the overall financial performance. Although group turnover slid 3%, underlying sales slumped 12% to £30.6m. Advertising revenues fell 10%, with the worst performers being metals, minerals and mining publications, where revenues plunged 21%. Excluding exceptional items, operating profits fell 11% to £7.8m. Yet even in a depressed market, Metal Bulletin still commands margins of 17.5%. The full-year dividend was maintained at 5.85p per share.

Reassuringly, progress at BCA is going well. It registered double-digit growth last year and remains on track for a repeat performance in 2003. Progress at AMM wasn't so positive; although re-launched in April, advertising sales fell 36% in the second half.

Cash flow

The latest results emphasised Metal Bulletin's low requirement for current and tangible assets:

To December 31st             1998    1999    2000    2001    2002

Operating Profit (£m)         6.2     6.4     7.7     8.8     7.8 


Working Capital Change (£m)  (2.6)   (0.5)   (1.0)   (0.1)    1.8 

Depreciation (£m)             0.7     0.7     0.6     0.6     0.8 
Net Capital Expenditure (£m) (0.6)   (0.7)   (0.5)   (0.7)   (1.3) 

Over the past five years, just 6-7% of operating profits have been absorbed into working capital (since 1993, Metal Bulletin has on average generated a small working capital surplus). On the balance sheet, some £11m of 'income received in advance' was recorded at the end of December; getting money upfront in the form of subscriptions (about 25% of group revenues) does wonders for cash management! There's no real problem with excessive capital expenditure either. Net expense on fixed assets has been 13% greater than depreciation on average since 1998 (6% higher since 1993).

Borrowings don't present too much trouble. Including a notional cost on the deferred consideration for BCA, net interest payments were covered over 8 times in 2002.

Between 1997 and 2002, Metal Bulletin's earnings inched up from £3.9m to £4.3m as the company's equity base (adjusted for goodwill and exceptional items) increased from £9.8 to £29.1. The resulting incremental return on equity figure thus comes to a piddling 2.0% -- a dire performance.

Two factors contribute to this under-performance. Firstly, poor trading conditions have caused earnings to decline over the past two years; secondly, intangible assets (mostly goodwill) have ballooned from £9m in 1998 to £43m in 2002, signifying acquisitions not coming up to scratch.

Metal Bulletin did not provide a FRS17 pension update with its preliminary update, which is bad form these days. At the end of 2001, the company had a £1.5m pension shortfall. Something to look at when the annual report is published

Valuation and summary

Of the five media shares on the watch list, Metal Bulletin is probably the weakest. While the company's history and accounts signify a 'franchise' in operation, it's difficult for the ordinary investor to ascertain exactly the popularity of Emerging Market Strategist and all the other publications. That's unlike radio, television and newspapers, where listening, viewing and readership numbers are regularly publicised.

Another point not in the company's favour is its involvement with commodity industries, notably steel and textiles, whose participants tend to be perennial strugglers. Not a massive issue if you're the de facto news channel for such sectors, but nevertheless, Metal Bulletin remains somewhat reliant on traditionally under-performing industries for revenues, rather than a broad spread of mainstream businesses.

Like many other media firms that have embarked on acquisition sprees, Metal Bulletin's equity reinvestment performance has been dismal of late. (No surprise to see the shares de-rated from a price to earnings ratio of 40 over the past two years!). That said, Metal Bulletin has inherently attractive financials and, assuming the publications sustain their competitive positions, it remains above-average company. (In the go-go 1990s, Metal Bulletin's incremental return on equity regularly came in at 15%-plus.)

Assuming capital expenditure runs 13% higher than depreciation and accounting for interest payable on deferred considerations, Metal Bulletin generated 7.8p per share of free cash in 2002. Demanding a historic 7.5% free cash flow yield thus requires a 104p entry price, some 10% lower than today's 116p.

More: Metal Bulletin Annual Results 2001 | Interim Results 2002 | Discussion Board