Love it or hate it, the UK newspaper industry is a bastion of British society that has survived the severest of recessions and wars. The first national titles were sold on London street corners in the 18th century and today three-quarters of UK adults read at least one of the dailies, with 84 million sold every week.
Trinity Mirror (TNI), rated as OUTPERFORM by Cazenove
However, the latest threat faced by the industry has been the phenomenal popularity of the internet, which has sucked away valuable advertising revenues from traditional media. Newspapers have seen their share of the UK advertising market slowly eroded from 29.6% in 2001 to 24.6% by 2006.
Over the same period, online commercials have rocketed from a 1.0% to a 10.6% share of the market. Now, though, the large media groups have started to fight back, and the anecdotal evidence this year from key protagonists suggests that the trend is improving.
Take Trinity Mirror. It is the UK’s largest newspaper publisher, owning the Daily Mirror and the Sunday People, which collectively account for about 15% of the national market. It also owns the Daily Record and Sunday Mail in Scotland, along with a plethora of regional titles, including the Liverpool Echo and the Birmingham Post. In total, its papers are read by around 20 million people each week – offering advertisers a quick way to achieve mass-population coverage in an increasingly fragmenting industry.
Last week, Trinity Mirror issued a trading update that came in ahead of City estimates. Like-for-like advertising revenues rose by 2.7% in the four months to October, which compares favourably to a decline of 1.5% in the first half (H1’07), after hitting a low point of –10% back in August 2006. Trinity Mirror’s finance director noted that “we have experienced a gradual improvement in advertising conditions during 2007… and are encouraged by the trends that are emerging”. He added that the board remained confident that its 2007 performance will be in line with expectations. Additionally, chief executive Sly Bailey added that although the outlook may be “stormy” next year, “we’ve weathered previous storms and the fundamentals of the business are good”.
So is this the time to buy back in? After all, the shares have fallen around 40% since June. Undoubtedly, there are concerns about how an economic slowdown might hit income, particularly as proforma net debt is still a chunky £233m (including recent disposals, but also a £154m pension deficit). But even so, I believe the answer is yes for long-term investors. Let me explain why.
Firstly, although circulations are in gradual decline, newspapers remain an important medium and continue to attract a significant share of advertising spend. Furthermore, National Readership Survey figures show that the Daily Mirror and The People are read for longer than their rivals – thus being more attractive to advertisers. Secondly, the company is building a multi-platform media business, with rapidly growing internet sales now accounting for around 5% of total revenues. Lastly, with City sentiment so downbeat on the sector, the stock trades on a 2007 p/e ratio of just eight and pays an attractive 6.7% dividend yield. Frankly, this looks far too cheap, especially as turnover is stabilising.
Moreover, the strategic value of national titles can be huge, as recently demonstrated when News Corp purchased Dow Jones (owner of The Wall Street Journal) for an eye-popping $5.6bn in August – equating to a p/e multiple of 38 times. Sly Bailey seems to agree – she bought £49,000 worth of shares at 416p last month. The next trading update is due out on 13 December.
Recommendation: LONG-TERM BUY at 329p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments