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QUALIPORT
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Qualiport watch list members Capital Radio (LSE: CAP) and Scottish Radio (LSE: SRH) remain sound businesses. Both published half-year results in May and, though the figures showed Scottish Radio doing well and Capital doing not so well, the two radio broadcasters do possess similar attractions. Key features include: 1. Commercial radio is great for the buy and hold investor. A requirement for a license limits competition while regulators require diversity. Read more. 2. Both companies operate radio stations that have established, market-leading positions. 3. Following imprudent acquisitions and/or tough advertising markets, both have provided shareholders with mediocre returns on reinvested profits in recent years. However, the two businesses have the inherent financial qualities -- high margins, relatively few fixed assets and no great need for working capital -- to produce attractive returns in the future. Unfortunately, both Capital and Scottish Radio have share prices that offer no margin of safety. Capital Radio Capital's interim results are shown below: A 'challenging' first half saw revenues fall 5% to £56.9m and operating profits reverse 18% to £11.8m. Capital confirmed advertising demand in June was 'weak' and expects the market to remain 'under pressure' for the rest of the financial year. Though 95.8 Capital FM remains the leading commercial station in London, a 'highly competitive market' continues to erode the advantage: For the twelve months ending March 31st 2003, Capital generated earnings per share of 21.5p and paid out a dividend of 18.5p per share. At 515p, Capital's shares thus trade on a historic price to earnings (P/E) ratio of 24 and offer a 3.6% dividend yield. With the company's earnings backed up by cash flow, Capital shares provide a historic free cash flow yield of 4.2%. Demanding a 7.5% free cash flow yield would require a 287p share price, though such a price would also carry a rather implausible 6.4% dividend yield. Scottish Radio The table below shows Scottish Radio's interim results: Though clouded by acquisitions and the sale of the firm's outdoor advertising business, Scottish Radio presented a more optimistic set of results. Radio revenues and profits both jumped 33%, to £24.4m and £6.8m respectively. Sales of the group's newspapers improved 21% to £16.2m, though profits surged 33% to £4.8m (Read more on newspapers). On an underlying basis, radio turnover increased by 5% while newspaper revenues increased by 8%. Scottish Radio confirmed second-half trading had 'started well', with a 'good result' expected for the full year. Though its Clyde and Tay stations have lost a little ground of late, Scottish Radio's operations remain in strong positions: For the twelve months ending March 31st 2003, Scottish Radio generated earnings per share of 36.3p and distributed a dividend worth 18.5p per share. At 847.5p, the shares thus trade on a historic P/E of 23 and offer a 2.2% yield. With the firm's earnings also backed up by cash, Scottish Radio shares provide a historic free cash flow yield of 4.3%. Demanding a 7.5% free cash flow yield would therefore require a 484p share price. Issues As well as the subdued advertising market, radio investors ought to be aware of the following two issues: 1. Communications Bill: Forthcoming legislation will relax media ownership rules and should trigger another round of industry consolidation. Capital has said the Bill will present 'transforming opportunities' within the sector, and both Capital and Scottish Radio have stated they are placed 'to take advantage' of any 'opportunities'. Though shareholders of the two companies will know all too well the perils of ambitious acquisitions plans, both Capital and Scottish Radio are just as likely to be hunted (Capital by a big foreign player, Scottish Radio by a larger domestic rival) as the hunter. 2. Revised audience data: Industry body RAJAR is contemplating whether to change its audience monitoring system. For the past 11 years, millions of advertising pounds have rested on 130,000 listeners using a paper diary system. However, trials using more reliable electronic pagers and fancy wristwatches have recently been carried out. There has been no formal news of whether a new system will be introduced and how the audience ratings will change, but the talk is of niche players such as The Wireless Group (LSE: TWG) benefiting at the expense of mainstream operators like Capital. Offsetting any prospective shortfall, however, is the possibility of new listeners via emerging digital radio networks, of which the mainstream players dominate. More: Capital Radio Research | Scottish Radio Research | RAJAR Six months to 31st March 2003 2002
Turnover (£m) 56.9 60.0
Operating profit (£m) 11.8 14.4
Pre-tax profit (£m) 12.0 14.2
Earnings per share (p) 10.1 12.1
Dividend per share (p) 6.0 6.0
95.8 Capital FM Q1 2003 Q1 2002
Weekly listeners (k) 2,413 2,695
Weekly reach (%) 23 26
Total hours (k) 17,967 23,256
Market share (%) 8.1 10.0
Commercial share (%) 15.5 17.2
Capital Radio Group Q1 2003 Q1 2002
Weekly listeners (k) 7,738 8,066
Weekly reach (%) 27 28
Total hours (k) 73,891 78,605
Market share (%) 11.9 12.4
Commercial share (%) 23.9 25.0
Six months to 31st March 2003 2002
Turnover (£m) 42.3 39.4
Operating profit (£m) 9.6 5.5
Pre-tax profit (£m) 9.2 5.8
Earnings per share (p) 18.9 12.1
Dividend per share (p) 6.5 6.0
Radio Clyde Q1 2003 Q1 2002
Weekly listeners (k) 877 933
Weekly reach (%) 47 50
Total hours (k) 10,977 12,265
Market share (%) 30.9 34.5
Radio Forth Q1 2003 Q1 2002
Weekly listeners (k) 411 345
Weekly reach (%) 37 31
Total hours (k) 4,788 3,932
Market share (%) 21.1 18.3
Radio Tay Q1 2003 Q1 2002
Weekly listeners (m) 197 203
Weekly reach (%) 54 55
Total hours (m) 2,685 2,748
Market share (%) 33.0 36.0