Wednesday, July 18, 2012

Mecom Group (MEC)

Mecom Group (MEC) cropped up on one of my value filters over the weekend, so I've been researching it & present my findings here for your general interest.

As always please remember that this is a personal interest shares blog, and nothing written here is intended as a recommendation or advice, so please always do your own research. I hold a small number of shares in Mecom Group.

Mecom describes itself as a "major European consumer publishing group", with several hundred paid for and free newspaper titles in Denmark, Holland, and Poland.

I like the print sector right now, because stock market valuations are unbelievably low, yet these businesses are still highly profitable, although in long-term decline as circulations gradually fall, and ad revenues migrate to the internet. Hence with careful selection, there is a chance to pick up highly cash generative businesses at rock bottom valuations.

Also consider that with ageing populations, many of whom eschew the internet,  a reader aged 70 could well be a customer for another 20 years. So the run-off of these print assets could be highly profitable for another couple of decades. They also typically have a variable cost base, hence reductions in circulation and ad revenue can simply be matched by reductions in costs, as Trinity Mirror has successfully shown, remaining remarkably profitable & cash generative.

The problem with Trinity Mirror is that it's going to spend the next 2-3 years paying off its remaining debt, and the overhang of their pension deficit limits their ability to pay dividends. So whilst I still hold TNI, and think it's an extraordinarily cheap value situation (especially when you consider that their freehold property is worth the same as the pension deficit, yet is ignored altogether by the stock market), I came across Mecom as a similar situation which may have more immediate upside. Hence I have split my investment in TNI into Mecom too, to hopefully get 2 cracks at the same opportunity.

Mecom shares have collapsed in the past year by around three quarters, and are now sitting at a recent low of 51p, giving a mkt cap of just £57m.

But this is a big business. 2011 figures showed turnover of E1.06bn, and adjusted EBITDA of E113.6m, so a healthy 10.8% EBITDA margin (see what I mean about print media being highly profitable still - which is probably why Warren Buffett is a buyer in the sector).

Moreover, Mecom paid out a whopping E15.4c in divis in 2011, and this is what makes the company interesting - they cleared the way for dividend payments some in Sept 2011 by reclassifying the share premium account as a distributable reserve. So there are now no barriers to substantial continued dividends.

Net debt was down by E52.2m to E259m on 31 Dec 2011, so still a big chunk of debt there.

However, this is where it gets doubly interesting. Mecom recently (28 June) completed the disposal of its Norweigan business for an astonishing E190m, the proceeds of which should eliminate most of their net debt!

This will be reflected for the first time in their next set of Interims, due out next week on 25 July 2012.

Therefore, despite the poor trading announced on 6 June 2012, we should now have a largely de-geared, highly cash generative group, committed to considerable cost-cutting and further dividend payments.

On brokers consensus the forecast divi yield is 9.3%, so it's a real cash cow. The forecast PER is just 3.4 (figures from Morningstar brokers consensus).

Check out their investor presentations here;

I think the Stock Market has thrown out the baby with the bathwater here, and that this share is looking irrationally cheap both on a PER and divi yield basis, but as always please do your own research. I've been buying these shares recently between 51-56p.

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