QUALIPORT
The Share Making All The Headlines

By Maynard Paton (TMFMayn)
August 28, 2003

Newspaper publisher Johnston Press (LSE: JPR) is the share making all the headlines in the Qualiport. The portfolio is up around 70% on its three separate purchases and it's not difficult to see why. Yesterday's interim results from Johnston emphasised the successful integration of a large acquisition and the continuation of robust profit growth. Though the shares offer no value at present, Johnston remains a great business for buy and hold investors. Read more | more.

Half-year update

The table below summarises Johnston's six-month performance:

Six months to June 30th          2003         2002

Turnover (£k)                  248,456      193,564
Operating profit (£k)           84,069       61,131
Exceptional items (£k)            (882)      (6,313)
Pre-tax profit (£k)             66,699       44,272

Earnings per share (p)            16.8         14.3
Dividend per share (p)             2.0          1.8

The £560m purchase of Regional Independent Media during April 2002 bolstered the overall performance. Group sales jumped 28% to £248m, though turnover was up only 3% on a like-for-like basis. Significantly, operating profits surged 35% to £84m as once again Johnston commendably kept a firm control on costs. Operating margins at the ongoing business edged up from 32.1% to 33.8%, while margins at RIM leapt from 26.8% to 32.6%. Earnings per share increased 18% to 16.8p and the dividend was raised 11% to 2p per share.

Other points to note from the results included net debt falling from £503m to £463m, a £13m one-off contribution to the company pension scheme and a proposal to build a new printing centre for 'in excess of £40m'.

All in all, Johnston presented a very respectable set of results. RIM has so far exceeded expectations and its successful incorporation is a real testament to the quality of Johnston's management. Though organic progress is pedestrian at the group's vast array of local newspaper titles, there's no sign they'll lose their 'franchise' status any time soon.

At today's 456.5p, Johnston shares aren't cheap. Assuming flat operating profits and maintenance capital expenditure running 33% higher than depreciation, the twelve months to June 30th 2004 could see 28.3p per share of free cash generated. The prospective free cash flow yield thus comes to 6.2%; demanding 7.5% requires a 377p share price. Though modest advertising growth and margin improvements are expected in remainder of 2003, it's difficult to view Johnston shares as anything other than a 'hold' at present.

Trinity Mirror

Fans of Johnston Press may also want to keep any eye on Trinity Mirror (LSE: TNI). The national and local paper group has struggled over recent years as the boardroom failed to get to grips with the 1999 merger that created the group. Pricey acquisitions and reckless Internet spending did shareholders no favours either.

However, the appointment of a new chief executive and finance director earlier this year appears to have heralded a turnaround -- half-year results in July showed Trinity raising its dividend (albeit by 4%) for the first time in three years. Some titles are up for sale and the company is currently undergoing a three-stage plan to unlock its 'hidden potential for growth'. Given the competitive barriers that surround most newspapers, a full recovery is distinctly possible at this mismanaged franchise.

Six months to 30th June 2003        Regional         National

Turnover (£m)                         257.6            244.3
Operating profit (£m)                  64.8             38.2

Operating margin (%)                   25.2             15.6

Despite the past problems, Trinity's regional papers have done well over the years. Margins were a sound 25% in the first half of the year, leaving some scope perhaps to get to Johnston's 33% standard. Trinity's nationals though are more troublesome, with the Daily Mirror having been involved in a costly price war and suffering declining readership levels. But even so, some resuscitation work on the ailing tabloid recently helped generate divisional margins of 15%.

If you believe the broker forecasts for 2003, Trinity's 514p shares stand on a price to earnings (P/E) ratio of 13.3 and carry a 3.6% dividend yield. If an earnings revival is forthcoming, the opportunity to profit from the legacy of bad management could be at hand.

More: Why Buffett Buys Newspapers

The author owns shares in Johnston Press.