QUALIPORT
Five Years Of Improving Value

By Maynard Paton (TMFMayn)
November 17, 2003

Bought originally in April 1998, media group Emap (LSE: EMA) is the Qualiport's oldest holding. Since then, this portfolio has learned many investment lessons, not least 'valuation counts'. Indeed, the four subsequent purchases of Emap illustrate how the portfolio has improved the 'attractive valuations' part of 'buying great companies at attractive valuations and holding for the long term'.

Though it's had a few ups and downs, Emap remains an great buy and hold business. Last week's half-year results from the publisher of heat, Empire, FHM, MCN and Match revealed steady progress. Here's a review of those past Emap trades, followed by a rundown of those results. (Refreshers on Emap's recent past can be found here, here, here, here and here).

Past purchases

The five Emap purchases highlight the Qualiport's greater focus on 'obvious value'. Different earnings growth projections have been used since 1998, ranging from 16% down to 0% per annum. It's especially useful to look back at the first and fifth 'buy reports' and compare them with how things actually turned out:

1. April 1998: 337 shares at 1,185p
The initial Emap purchase. No clear margin of safety was present (in hindsight), with a price to earnings (P/E) ratio of 26 and earnings projected to grow by 16% per annum. Since 1998, earnings have actually compounded at an average of 2.2% a year. Read more.

2. January 1999: 33 shares at 875p
Related to the rights issue that funded a disastrous £900m purchase of Petersen, a US magazine publisher. The then Emap management admitted they were 'paying a full price' at the time, which probably indicated not much share price value was to be had. Read more | more | more.

3. October 1999: 99 shares at 787.5p
A top-up. The earnings yield was used this time, which showed 6.5% (i.e. a P/E ratio of about 15) and was about equal to the then return from gilts. Not mega-cheap, but certainly not expensive. More like 'reasonable value'. Read more.

4. September 2001: 168 shares at 582p
Another top-up, prompted by widespread stock market panic. However, Emap had just sold off the troublesome Petersen subsidiary and re-appointed legendary ex-boss Robin Miller as chief executive. At 582p combined with zero profit growth expectations, the shares offered a generous free cash flow yield of over 8%. Read more | more | more.

5. September 2001: 147 shares at 529p
Another top-up as the market panic deepened. This time, a 'recovery' methodology was used, which suggested Emap shares could double within five years. A forecast of earnings regaining their 2001 level of 51p per share by 2006 was applied. Earnings per share of 54p are presently expected in 2004. Read more.

Given the stock market's performance since 1998, the Qualiport has overall done quite well with its Emap purchases --.the shares are now 833.5p, with the average buy price including costs being 797p. Of course, the better investments were trades four and five, which were made when cautious growth forecasts still indicated obvious value was at hand.

Of the five purchases, perhaps the one made during October 1999 is the most enlightening. The FTSE 100 has fallen 28% following that trade, but Emap shares have gained 4%. This emphasises that you don't always need bargain prices to outrun the market. Over the years, buying good quality companies at reasonable valuations can still produce superior returns.

So, what can be said of Emap's valuation now?

First-half results

A summary of Emap's six-month results is presented below:

Six months to September 30          2003            2002

Turnover (£m)                        509             477
Operating profit (£m)                103              95
Exceptional items (£m)                 -               1
Pre-tax profit (£m)                   94              86

Earnings per share (p)              26.7            24.2
Dividend per share (p)               7.6             7.0

(All figures adjusted for goodwill)

During a 'very tough environment' for the media sector, Emap reported a solid performance. All group divisions (consumer magazines, trade publications, exhibitions, radio, television and Internet) maintained or increased revenues, with the £59m acquisition of French publisher Excelsior and favourable currency movements supporting a 7% top-line improvement.

Operating profits increased by 8% to £103m, which took the group's operating margin to an attractive 20.2%. Save for the international magazines subsidiary, which broke even over the latest six months, Emap's media formats all produced margins of 18%-plus.

Emap's cash flow remained impressive and allowed the interim dividend to be lifted 9% to 7.6p per share. Over the twelve months to September 2003, just £1m of working capital and £13m of capital expenditure was funded from a £199m operating profit. Though net debt moved from £211m to £268m in the first half, interest payments were covered a very comfortable 11 times.

Sadly, Emap isn't obviously cheap. At today's 833.5p price, the shares stand on a forward price to earnings (P/E) ratio of 15.2 and carry a 2.7% dividend yield. Assuming standstill profits, Emap could generate 49.3p of free cash in the year ending September 2004 to offer potential shareholders a free cash flow yield of 5.9%. Bargain hunters demanding a 7.5% free cash yield thus require a 657p buy price. Nonetheless, assuming Emap retains its quality, a case for 'reasonable value' could well be made at the moment.

More: Emap Website | Emap Financial Announcements | FREE Emap Annual Report | Full Qualiport Trade History