QUALIPORT
Media Shares On The Road To Recovery

By Maynard Paton (TMFMayn)
September 18, 2003

Media shares have had an exceptional run over the past six months. The FTSE All-Share Media index is up 30% since mid-March, with watch list shares Emap (LSE: EMA), Johnston Press (LSE: JPR), Capital Radio (LSE: CAP), Scottish Radio (LSE: SRH), Ulster Television (LSE: UTV) and Metal Bulletin (LSE: MTLB) all recording sizeable gains.

Sadly, if the ratings of Ulster Television and Metal Bulletin are anything to go by, obvious value has all but evaporated from the sector. Still, both companies provided glimmers of a recovery, giving good reason for the market's present enthusiasm.

Ulster Television

Ulster Television holds the ITV broadcasting licence for Northern Ireland and also has radio interests in the Irish Republic. The company is a textbook example of what long-term investors should seek: a proven, reliable, understandable and visible business. Read more.

Ulster Television published half-year figures on Monday:

Six months to June 30th           2003        2002

Turnover (£k)                   25,674      22,536
Operating profit (£k)            7,038       6,935
Pre-tax profit (£k)              6,266       6,814

Earnings per share (p)            8.55        9.12
Dividend per share (p)            4.10        3.95

(All figures adjusted for goodwill)

Operating profits were flat at £7m, as higher television programming costs were offset by recent radio acquisitions and greater Internet profits. Upbeat comments about the near future were supplied, too. After a slow summer, an improvement in ITV revenues is forecast for September and October, while radio advertising revenues were up 12% in the third quarter.

In the twelve months to June 30th, Ulster produced 17.1p per share of free cash. If the company's positive outlook translated into a 6% free cash improvement, today's 337p share price offers a forward free cash flow yield of 5.1%. Requiring 7.5% needs a 241p entry price.

Metal Bulletin

Metal Bulletin is a leading publisher of newsletters, directories, journals, and statistics that cover commodity markets such as metals, minerals, textiles and energy. The company's titles, including Industrial Minerals Directory, Utilities Purchaser's Handbook and Nonwovens Report International, may not be familiar to most, but many are the equivalent of the Financial Times to the ordinary stock market investor. Read more.

Metal Bulletin announced its interim figures on August 26th:

Six months to June 30th           2003         2002

Turnover (£k)                   19,215       20,881
Operating profit (£k)            2,478        2,813
Pre-tax profit (£k)              1,978        1,857

Earnings per share (p)            2.78         3.63
Dividend per share (p)            1.90         1.90

(All figures adjusted for goodwill)

A 'difficult economic environment' created an 8% sales shortfall and sliced 12% from operating profits. A lower number of conference attendees and a poor uptake in metal, minerals and mining subscriptions were among the factors cited. Earnings per share increased because of the utilisation of tax losses in 2002.

Metal Bulletin claimed this year's performance would be weighted more towards the second half, with a recent restructure giving the group 'cautious optimism' for a near-term performance improvement.

In the twelve months to June 30th, Metal Bulletin produced 8.0p per share of free cash. If the positive outlook again translated into a 6% free cash expansion, today's 180p share price would present a forward free cash flow yield of 4.4%. An entry price of 113p would thus give a 7.5% prospective yield.

Pricing in a recovery

Gazing at the current valuations of Ulster Television, Metal Bulletin and all the other watch list media shares, it's not difficult to deduce the market is pricing in a sector recovery. To get anywhere near the Qualiport's 7.5% free cash flow benchmark, rosy growth assumptions have to be applied. And if the tech/media bubble emphasised anything, it was optimistic forecasts lead to trouble.

However, is it right to reject paying up for upbeat forecasts because of what happened four years ago? Not entirely, because conditions have changed. These days, the market isn't predicting healthy media companies will grow ad infinitum. This time, the market is assuming a beaten sector will return to health -- a very different proposition, and one with a more likely outcome.

Investors should also recognise the high operational gearing possessed by many media companies, and the cost cutting measures they've implemented during the downturn. The market, quite rightly, believes any recovery in media revenues will have an amplified effect on profits. Investors should therefore not be surprised to see firms such as Ulster Television and Metal Bulletin report significant earnings U-turns as and when sales revive.

More: Ulster Television Annual Results 2002 | Metal Bulletin Annual Results 2002

The author owns shares in Johnston Press.