Trinity Mirror (TNI) key points

Please note: I prepared this note on Trinity Mirror (TNI) for my own reference in late May 2012, now updated with current share price. I have posted it previously on advfn's bulletin board, but thought it would be useful to re-publish it here for anyone who hasn't seen it, and also to keep it in a handy place for reference. Usual disclaimer - this is not advice, but just for information & opinions are mine.

Trinity Mirror plc (TNI)

Key points

258m shares in issue, 10p ordinary

Fully Listed, LSE

Current share price = 25p

Market capitalization = £65m

Potential upside share prices/mkt caps;

60p = £155m

80p = £206m

100p = £258m

150p = £387m

200p = £516m


Here is the chart for the last 6 months, courtesy of MoneyAM.com

And the longer term (5 year) chart - pls note the 20p to 200p move in 2009!

Activities

1. Nationals Division - newspapers (Daily Mirror, Sunday Mirror, The People, and 2 Scottish titles – Daily Record & Sunday Mail)

The most important division, both in turnover (61% of 2011 total), and operating profit (69% of total, before central costs)

Very high operating profit margin: £83.1m op profit divided by £453m turnover = 18.3% profit margin (before 15.1m Group costs), not bad for a declining business!

Circulation revenue is the largest part, at 57%, with advertising lower at 30%, and other at 13%.

2. Regionals -– local newspapers and digital operations.

Note how, despite long-term decline in turnover, profitability has been stabilised by cost-cutting, and efficiency measures (e.g. TNI owns modern, full colour presses, and back office software, so little capex now required).

Debt & covenants

Market perception is that TNI is highly geared, however the debt actually appears manageable in the light of cashflows.

All TNI’s outstanding debt is private US loan notes, with repayment schedules which broadly match TNI’s cashflows. A large repayment was made in Oct 2011, and further repayments are due as set out below, from the 15 March 2012 RNS on refinancing; 

“The new bank facility and reduced pension contributions ensure that the Group has sufficient financial flexibility for the foreseeable future.  The cash flow of the Group coupled with the flexibility of the new bank facility ensures the Group can repay £168 million of maturing US$ private placement loan notes which are due as follows:

 ·June 2012:         £69.7 million

·October 2013:    £54.5 million

·June 2014:         £44.2 million”

 (note: my bolding)

 The most recent announcement, IMS dated 10 May 2012 said, inter alia;

Strong cash flows enabled net debt reduction of £24 million to £197 million during the period and we anticipate a further decline in net debt for the remainder of the year. We anticipate repaying the £70 million of US Private Placement loan notes maturing in June 2012 through a combination of cash balances held at the period end, further cash generated during May and June and a drawing on the Group's existing bank facility.”

The 2011 Annual Report shows that TNI has ample headroom on its loan covenants (see note 34 in the AR, available online at TNI’s website).

TNI also has a recently renewed bank overdraft facility, of £110m to Aug 2015.

NB. Both the US loan notes, and the overdraft facility are UNSECURED.


Most recent IMS is here;
http://www.investegate.co.uk/Article.aspx?id=201205100700140291D


Most recent results (Prelims to 1 Jan 2012) are here;
http://www.investegate.co.uk/Article.aspx?id=201203150700193872Z


2011 Annual Report, presentations, webcasts, etc are here;
http://www.trinitymirror.com/investors/financial-information/

Freehold property

TNI’s Balance Sheet shows net book value of £176.8m for freehold property, as of 1^st January 2012.

This property does not appear to have been revalued, hence is assumed to be included at cost. It is not known how far market value deviates from book value, and the Chairman was charming but evasive on this issue when asked at the AGM. He did however indicate they have considered sale and leaseback type arrangements, but had decided against it. However, this is a substantial asset which any potential acquirer may be able to leverage or sell in future, so more enquiries are needed to determine the current value and use of the freeholds.


Note the redevelopment of the freehold site in Coventry, with a hotel, residential, shops & student accommodation - good to see the value in the property being unlocked;
http://www.holdthefrontpage.co.uk/2012/news/regional-daily-to-move-offices-after-55-years/

Deferred taxation liability

TNI’s Balance Sheet contains large intangible assets and related deferred taxation liabilities. In my opinion these are neither real assets or liabilities, and both should be ignored in valuing the company.

Current trading

This is detailed in the IMS dated 10 May 2012, and shows Group revenues down 1% for Jan & Feb (flattered by closure of NoW against prior year comparatives), and down 6% for Mar & Apr (due to competition from Sun on Sunday launch).

Hence revenue trends on both circulation and advertising are still downwards, although it is expected that advertising revenue should recover somewhat once the economy is growing again (since not all the fall is structural, some is also cyclical).

Opportunities

Whilst managing the profitable decline of the newspapers well, most investors seem to believe that Sly Bailey failed to deliver a convincing digital strategy. A new, digital focused CEO could potentially change the stock market perception of the Group, triggering a re-rating.

Given the problems at the Murdoch’s newspaper empire, it is perplexing as to why TNI has failed to aggressively take advantage and grow its own circulation at Murdoch’s expense. This is surely a major opportunity for the UK’s only Left-leaning tabloid, at a time of an increasingly anti-Government mood of the public, tired of recession and “austerity”.

Takeover potential as acquiree and acquirer. TNI has already done a spectacular deal in recent years to acquire the local GMG Media titles such as Manchester Evening News, and then restored them quickly to profitability. Such further opportunities must also exist with so many other distressed competitors, especially the highly indebted Johnston Press.

At this ultra-low valuation (compared with cashflows) TNI is surely also a takeover target? Interesting to note that Warren Buffett has recently bought some US local newspapers, stating that they still have a near monopoly on local advertising, despite the internet.

Pension fund

TNI is responsible for several large pension funds, with total assets of 1.4bn at the most recent Balance Sheet date, and total liabilities of £1.65bn. However this deficit shrank sharply in the first 3 months of 2012 to £176m.

Over-payments (above the P&L charge) of £33m p.a. were being paid, but a reduction to 10m p.a. has been agreed with the pension fund trustees for 2012-2014, which assisted in the renewal of the bank facilities.

An article appeared in the Financial Times in Mar 2012 sabre-rattling about the potential for the Pensions Regulator to over-turn this agreement, however at the AGM the Chairman refuted such a suggestion, making clear that the deal was done.

Given that this is a long-term liability, and hence overpayments will be phased over many years, a deficit of £176m, whilst substantial, does not look insurmountable given the business is generating over £100m p.a. in operating cash flow. In my opinion (and that of the Chairman) the stock market has exaggerated fears about the pension issue, which may be creating a buying opportunity in the shares.

The pension deficit is arguably being inflated artificially by QE pulling down Gilt yields to historic lows – since these yields are used to discount pension liabilities, thus increasing them. As interest rates normalise and equity markets rise, the pension deficit may simply melt away. But clearly it is a risk factor.

Valuation

For such a highly cash generative business, TNI shares look extraordinarily cheap. Broker consensus is for around 27p EPS in 2012, therefore the shares trade at a little under a PER of 1. Given the likely resilience of earnings this seems a ridiculous under-valuation, even allowing for the pension fund problem. Net debt will be largely cleared by 2014, and the run-off of the newspapers is expected by the Chairman to be 10 years+. Therefore there is an opportunity for excess cashflows to be used to develop a serious digital business, something which has not been achieved so far.

There is also the potential for significant dividends to be paid from 2014 onwards.