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QUALIPORT
By
For long-term shareholders at least, Ulster Television (LSE: UTV) is probably the best television company to sit down and watch these days. Worth £225m, the Qualiport watch list company offers reliability, simplicity, visibility as well as some reasonable accounts. The qualities stem from Ulster's ownership of the ITV (LSE: ITV) television franchise for Northern Ireland. ITV itself has some great competitive strengths, yet Ulster, with a big focus on regional programming, is a consistent out-performer within the station's network. Recent full-year results revealed Ulster's television advertising revenues had improved 2% in 2003, which contrasted sharply to an ITV average of minus 3%. Ulster's market share of ITV advertising increased to a record 2.4% last year, too. As well as commercial television, an expansion strategy has seen Ulster move into commercial radio (representing 17% of group operating profits) and various Internet activities (6%). Ulster is Qualiport material at the right price, though some aggressive acquisitions and the company pension situation do not make the company a one-way bet. Read more on Ulster Television | Read more on ITV Five-year record Ulster's five-year financial performance is summarised below:
Year to 31st December
1999
2000
2001
2002
2003
Turnover (£m)
38.3
40.8
43.0
47.3
54.0
Operating profit (£m)
11.9
13.4
13.6
14.6
15.1
Exceptional items (£m)
(4.8)
13.3
-
-
-
Pre-tax profit (£m)
7.8
27.3
13.4
13.9
Earnings per share (p)
16.0
18.3
18.4
19.0
18.8
Dividend per share (p)
7.5
8.7
9.2
9.6
10.0
Special dividend per share (p)
35.0
-
-
-
-
Total sales during 2003 jumped 14% to £54.0m. Supporting the top-line progress were underlying improvements to television and radio advertising (up 2% and 6% respectively), a full-year contribution from the two Republic of Ireland radio stations acquired in 2002, and the introduction of new Internet services.
Group operating profits edged £0.5m higher to £15.1m, although the contribution from the television division fell from £12.3m to £11.8m. In recent years, greater ITV network programming costs have restricted progress at Ulster's core subsidiary (and 2003 was no exception), but the company has confirmed the Granada/Carlton merger agreement included a provision to cap subsequent increases at no more than the rate of inflation from 2004.
Notably, each division at Ulster enjoys a high operating margin, with television reporting 29% in 2003, radio 25% and New Media (essentially Internet) 23%. Further down the profit and loss account, higher interest payments and a greater number of shares in issue caused earnings per shares to slip from 19.0p to 18.8p.
Cash flow and balance sheet
| Year to 31st December | 1999 | 2000 | 2001 | 2002 | 2003 |
|---|---|---|---|---|---|
| Operating profit (£m) | 11.9 | 13.4 | 13.6 | 14.6 | 15.1 |
| Change in working capital (£m) | (2.9) | (2.1) | (2.3) | 1.9 | (3.3) |
| Depreciation (£m) | 1.1 | 1.3 | 1.5 | 1.5 | 1.7 |
| Net capital expenditure (£m) | (2.0) | (1.8) | (0.9) | (1.7) | (2.5)* |
(* includes 'financial investment')
It has to be said Ulster's working capital isn't the greatest in the media sector. Over the past five years, 13% of group operating profits have on average been diverted into current assets. Not bad in general terms, but well above the 1-2% absorption seen at portfolio members Emap (LSE: EMA) and Johnston Press (LSE: JPR).Furthermore, net capital expenditure has exceeded the annual depreciation change by 21% since 1999. Nevertheless, Ulster does not require a heavy diet of tangible assets to maintain its competitive position. In fact, it's the purchase of goodwill that has underpinned the company's development of late. For instance, tangible assets have increased from £5.5m to just £8.9m since 1997, while intangibles have ballooned from £0 to £48m.
Debt does not appear excessive. At the end of December 2003, net borrowings stood at £29.1m, up from £27.4m twelve months prior. Gross interest cover did however come to a very decent 11 times. Another healthy cash flow sign is that, unlike many other media companies (portfolio members included), Ulster pays out most of its profits as a dividend. The 2003 payout came to 10p a share, up 4%.
Judging how efficient Ulster has been reinvesting shareholders' equity depends on the timescale. A special dividend paid out in 1999, which preceded the acquisition strategy, affects the calculations significantly. On a five-year view, Ulster's asset-light nature shines through: between 1998 and 2003, earnings improved from £5.6m to £10.0m, while the equity base (adjusted for goodwill and exceptional items) has expanded from £21.6m to £38.4m. The resulting incremental return on equity therefore comes to a delightful 26%. However, between 1999 and 2003 (whch excludes the positive effect of the special dividend and focuses more on the recent acquisitions), the incremental return comes to a measly 5%. Start from 1995 though, and the return calculation is 20%.
Ulster's results also presented further evidence that last year's stock market rebound has not helped company pensions. The group's FRS 17 shortfall at the end of December 2003 was £7.9m, up £0.6m on 2002. With after-tax profits running at £10m, no wonder 2003 saw Ulster close its defined benefit scheme to new staff, reduce benefits to existing members and re-commence funding contributions. The pension position needs to be watched carefully.
Summary and valuation
It's now been four years since John McCann became group chief executive and Ulster embarked on its expansion strategy. While the diversification into radio and online ventures has not created any operational incidents, investors should be asking questions about the prices paid: the £48m of goodwill acquired in recent years only produced a £3m operating profit last year. Going on the general pre-diversification performance, it appears the main television operation is an absolute cracker of a business, which admittedly goes a long way to balance the present low rates caused by the acquisitions.
In fact, shareholders should expect better things to come from the television subsidiary. Ulster revealed the division's advertising revenues would be up 10% in the first quarter of 2004, albeit this performance is set against a weak comparable period in 2003 (Iraq war, etc.). With ITV as a whole expecting a 2% revenue improvement for the current quarter, the chances of a fifth consecutive year of network out-performance look good.
Sadly, Ulster's share price factors in the upbeat short-term prospects. From a 226p low seen around this time last year, the shares have since rallied to 426p to give a 2003 price to earnings ratio of 23 and 2.3% dividend yield.
Free cash of 17.2p per share was produced last year, implying a 4.0% free cash flow yield. Even if Ulster's free cash were to improve 10% in 2004, demanding a prospective 7.5% free cash yield would require a 252p entry price. Needless to say, the best time to buy fundamentally great companies (such as Ulster) is when the immediate outlook is gloomy (i.e. early last year), and not bright (i.e. now).
Where next? Competition Watchdog Tips ITV | ITV's Money Programme
The author owns shares in Johnston Press.