(*adjusted for goodwill, exceptional items and write downs)

Overall progress in fiscal 2004 was largely down to the net £59m acquisition of Excelsior Publications and some favourable currency movements, which combined to add the best part of £50m to sales and £10m to profits within the French magazine division.

Emap's business-to-business activities (trade journals and exhibitions) made good headway, while a more sedate performance was experienced within the UK consumer magazine subsidiary. Elsewhere, expense relating to digital broadcasting held back radio, while the fledgling television and Internet ventures provided another £4m of profit.

Though the divisional performances were not spectacular, the results continued to emphasise Emap's attractive operating margins. The group margin came in at 20%, with magazines (UK and French) producing 18%, business-to-business 27%, radio 25% and television/digital 33%.

Cash flow and balance sheet

As well as the superior margins, cash flow is another Emap charm. In fact, Emap is probably the best company on the Qualiport's watch list in this respect:

Aided by upfront magazine subscriptions, cash diverted into working capital was minimal in 2003/04. Indeed, since 1999/2000, stocks, debtors and creditors have only absorbed a net £3m.

Expenditure on tangible fixed assets was also a small fraction of operating profit in 2003/04. In fact, during the past five years, capital expenditure has on aggregate exceeded the accounting depreciation charge by just £2m. Astonishingly, while operating profits have jumped nearly five-fold in the last ten years to £212m, reported tangible fixed assets have increased by only £1m to £31m. It's clear Emap is a business that relies on precious, difficult-to-replicate intangible assets for its money.

Following the Excelsior acquisition and the £92m purchase of a 28% stake in Scottish Radio (LSE: SRH), net debt during the year went from £211m to £268m. Interest cover, however, was very comfortable at over 11 times, and the year's expenditure still allowed the dividend to be raised 9% to 23.5p per share.

One feature that isn't as clear-cut as the super cash flow is the return on equity performance.

Following the 2001 accounts, which contained a £545m write-off relating to the ill-fated Petersen acquisition, calculating any sort of return on equity figure has become a rather academic exercise. Assuming the current management don't make a similar corporate blunder, all that can be said at this juncture is that shareholders ought to have faith in Emap's low asset requirements and high margins, which should in theory generate superior returns over time.

Emap once again failed to provide an FRS 17 update on the company pension scheme -- bad form really. However, it's quite unlikely the £23m net deficit that stood at March 2003 would have been transformed into a more significant shortfall in the past twelve months.

Valuation and summary

Sure, Emap's results surprised investors on current trading. But although the revolution among French television listing publishers is 'impacting the profitability' of the Continental division, the company is not entirely toast just yet.

First off, the French market in question contributed annualised revenues of €161m in 2003/04, or about 11% of Emap's overall top line. In addition, a continued 'strong performance' is expected from the company's UK operations. Considering the part-contributions from associates and acquisitions purchased in the year too, it's fair to interpret the overall prospect of 'reasonable progress' in the current twelve months as profits to be maintained at worst.

Down from 856p last week to today's 750p, the full-year figures place Emap's shares on a price to earnings ratio of 13.4 and dividend yield of 3.1%. With earnings a genuine proxy for free cash flow (and applying a standard 30% tax rate rather than the reported 25%), 51.5p of free cash was generated in the year to March 2004. Requiring a 7.5% historic free cash flow yield therefore needs an entry price of 686p.

So to summarise: business quality remains high, progress was steady if unspectacular, the stock market over-reacted and, with further share price weakness, a possible buying opportunity beckons.

Where next? Five Years On, Emap Still Appeals | FREE Emap Annual Report