QUALIPORT
Three Possible Franchises

By Maynard Paton (TMFMayn)
August 18, 2003

The media industry is a sector ripe with business 'franchises'. The sector's mainstream players -- those involved in newspapers, radio and television -- typically have sizeable moats and wonderful accounts. But some of the industry's less familiar members have attractive features, too. Identified by their high margins and distinct lack of tangible fixed assets, these three media groups could also be worthy of a quality portfolio.

1. Yell (LSE: YELL)

Yell is a leading provider of classified directory advertising and publishes Yellow Pages and Business Pages in the UK and Yellow Book in the US. The group floated in July and is currently worth £2.1b. Yell's financial history is very messy. It was bought from BT (LSE: BT.A)(NYSE: BTY) by two venture capital firms in 2001, before making a sizeable US acquisition of its own in 2002:

Year to March 31st      1999     2000     2001     2002     2003   

Turnover (£m)            469      622      774      865    1,114
Pre-tax profit (£m)      177      182      163      (13)     (53)

Earnings per share (p)     -        -        -        -        -
Dividend per share (p)     -        -        -        -        -

UK and US sales are split roughly 50:50. However, domestic regulatory issues could dog Yell. At present, the group's UK revenues are subject to a price cap agreement with the Department of Trade and Industry. From January 2002, any advertising pricing increase must be limited to the rate of inflation less six percentage points, which means Yell's rates are falling at the moment. The agreement is due for review in January 2006 and the competition, such as Thomson Local, are not constrained by similar undertakings.

Still, group operating margins are a decent 18% and UK margins are a super 25%. Yell also appears to be a very capex-light business. An operating profit of nearly £200m was generated in fiscal 2003 from tangible fixed assets of below £50m. Plenty of work is needed to suss out the accounts and the regulatory issues, but Yell could be one to watch.

2. Taylor & Francis (LSE: TFG)

Taylor & Francis is a leading international publisher and produces 800 academic journals and 2,300 new book titles a year. The company came to the market in 1998 and is worth about £450m. Over the past five-and-a-half years, £200m has been spent on an aggressive acquisition strategy, which has supported notable profit growth:

Year to December 31st   1998     1999     2000     2001     2002   

Turnover (£m)             40       96      116      137      147
Pre-tax profit (£m)        8       16       21       27       33

Earnings per share (p)   7.2     12.8     16.8     22.0     27.0
Dividend per share (p)   3.0      3.3      3.6      4.0      4.4

Unlike many other media companies, Taylor seems to have coped well with the sector's recent troubles and -- just as important -- not tripped up integrating its raft of acquisitions. Worth noting though is that long-standing boss Anthony Selvey retired last year, so it's down to new boy David Smith to ensure all the corporate activity doesn't fall apart.

Taylor's accounts exhibit classic 'franchise' traits. Group operating margins are a very attractive 24%, while tangible assets of £5m amazingly produced an operating profit of £35m in 2002. Taylor also benefits from substantial advance subscription payments: at the end of 2002, deferred income stood at £42m, or about 30% of group sales. Taylor is certainly worth further inspection; hopefully, the acquisitions have been 'value enhancing'.

3. HIT Entertainment (LSE: HTE)

HIT Entertainment is a producer of children's characters and television programmes and is famed for Bob The Builder. Also in the HIT stable are Barney & Friends, bought for £190m in 2001, Pingu, acquired also in 2001 for £16m, and Thomas The Tank Engine, purchased in 2002 for £140m. Now worth £410m, HIT gained a market listing in 1996 and profits have ballooned following all the deals:

Year to July 31st       1998     1999     2000      2001     2002   

Turnover (£m)             14       15       21       52      121
Pre-tax profit (£m)        4        3        5        7       27

Earnings per share (p)   3.7      2.3      3.4      4.5     14.0
Dividend per share (p)   0.2      0.2      0.3      0.3      0.3

There's one major issue with HIT: should investor think like television presenters and avoid working with children? HIT could be the next Disney (LSE: DIS), or may become just another one of those firms whose characters dwindle in popularity over time. All that can be said now is Bob, Thomas et al have been very reliable so far.

There's less concern when turning to the accounts. Operating margins are a great 24%, while in the year to July 2002 a £29m operating profit emerged from an £11m tangible asset base. But prospective investors should be aware company founder and chairman Peter Orton stepped into a non-executive role last December. Also, non-exec Britt Allcroft, creator of the Thomas television programmes, has recently left the boardroom.

Summary

Of the three, Taylor & Francis would be the favourite for a place on the Qualiport watch list. The publisher does have an acquisitive bent, but then again, the other two (and indeed, most firms in the sector) are not shy when it comes to corporate activity. Taylor wins out because it has reliable subscription income, provides a lot of niche, must-have content and (following a cursory inspection) has the more attractive accounts. In addition, Yell has that regulatory cloud while HIT has the old fickle kiddie bugbear.

More: Discussion boards for: Yell | Taylor & Francis | HIT Entertainment