Tuesday, October 16, 2012


Good afternoon! Happy days, as Trinity Mirror (TNI) continues its fantastic bull run. Every time my finger is drawn towards the sell button, I double-check the figures and see that it's still incredibly cheap (in my opinion. DYOR as usual!).

Broker consensus is 26p EPS forecast for this year and 25.5p next year, which might now be a little low, due to the latest cost cutting in the pipeline with the restructuring announced yesterday. So that puts the shares on a PER of below 3!

Also, by my calculations, TNI will have potentially repaid all its net debt at some point in mid 2014. The interims (announced on 2 Aug), which triggered this huge rally, showed that net debt fell by £40.3m to £180.9 in just 6 months to 1 July 2012, from normal cashflow! Hence with cashflow forecast to be stable at around the same level, that should mean TNI reduces its net debt by 4*£40.3m = £161.2m within 2 years, resulting in net debt of just £19.7m by 1 July 2014.

What excites me, is that means TNI will then have a massive ongoing cashflow from 2014 which will be available for expansion & development of their digital business, which has to be the way forward - especially if they hit onto some areas with major potential.

Hence in reality, TNI could be seen as a sort of venture capitalist, with say £40-80m p.a. cashflow to invest in new ventures from 2014 onwards. If they spend that money wisely, the results could be pretty spectacular.

Of course the newspapers will gradually decline, but in my opinion there is far more life left in newspapers than some people think.

For example, just look at this colossal pile of Evening Standards that had just been delivered to Green Park tube station when I was passing a week or so ago - 3 deep, 4 wide, and waist height, just for ONE tube station, on one side of the road (there's another entrance on opposite side of Piccadilly)! Sure the Standard is free, but some of TNI's regional papers are successfully using a free model in city centres (and charging in the suburbs).

What this picture tells me is that there's still huge demand for decent newspaper content (the Standard is going from strength to strength in terms of content, in my opinion), and advertisers will pay to access this. After looking at a screen all day, the last thing commuters want is to be peering at a tiny smartphone screen on the train home - a newspaper is a far more efficient, disposable way of absorbing a lot of content - providing that content is interesting. You don't have to charge it up, or worry about it being stolen either.

Also I note that the Standard have today announced a move back into profit, so their free model is working. In 20 years' time, who knows, maybe all newspapers will be free? But seeing as people pay £2 for a coffee without qualm, a few pence for a paper seems insignificant.

To my mind the figures are saying that it makes no sense at all on fundamentals to even consider selling my TNI shares below 100p (a PER of 4!), and even then it would only be to top-slice.

OK, turning to today's announcements, retailer N.Brown Group (BWNG) has released interims which the market seems to like, with the shares up 11% to 299p (mkt cap of £764m, so above my remit really as a mid cap).

Staying with retail, Carpetright (CPR) has issued an in line trading statement, with a reasonable performance in the UK, but awful sales decline of 12% in Europe. Broker consensus is for EPS of 10p this year, and 17p next year, so at 690p these shares are on a lunatic PER of 69 times this year's earnings, and over 40 times next year's earnings. WHY?! Nobody seems to be able to explain the reason why Carpetright shares are so ridiculously over-priced, and remain so, year after year.

CPR is one of the most heavily shorted shares in the market, with 9.5m shares out on loan, of a total issue of 67.6m, so that's a 14% short position. Yet despite this, the shares remain on an astronomical PER, and nobody seems to know why! Anyway, it's a bargepole stock for me at this valuation.

Software company Accumuli (ACM) has issued an in line trading statement for the 6m to 30 Sept 2012. Shares are unchanged at 11.1p (£16m mkt cap).
Broker consensus is for 1.3p EPS this year, so that's a PER of 8.5, probably about right for something this small.
Balance sheet is negative once you remove goodwill & intangibles too, so doesn't appeal to me.

Shares in Driver Group (DRV) rose 5p to 73p (£19.3m mkt cap) today on a strong trading update which says the company will exceed management expectations for y/e 30 Sep 2012. Broker consensus is 5.1p EPS for this year, so difficult to say whether shares are cheap or not, as we don't know by how much they are going to beat that figure. But certainly worth looking out for their results when they come out.

Smiths News (NWS) is the UK's largest distributor of newspapers & magazines, and other products, has put out decent results for y/e 31 Aug 2012.
Underlying EPS is up 28% to 19.9p, so with the shares at 141.5p I make that a PER of 7.1.
8.6p divis produces a very nice 6.1% divi yield.

Net debt is not insignificant, and due to acquisitions is up 59% to £100.5m (compared with a mkt cap of £260m).

The balance sheet looks pretty ropey, with net liabilities of £51.8m, and that includes significant goodwill. Strip out the intangibles and you get net tangible liabilities of £118.9m. Hmmm, not good.

Combined with the likelihood of print income reducing due to structural changes from digital, I don't think there's anything here to get excited about. Although it should be said they have a diversification strategy.

There seems to be a pension deficit too, as the cashflow statement shows £6.8m in pension funding, but I couldn't see that on the balance sheet. Having a quick look at the notes reveals the usual inpenetrable mess that is pensions accounting. They seem to be showing an unrecognised pension asset of £40.3m in one note, but then say there is a £50m deficit in another! Bottom line is they are having to make cash overpayments of £6.8m p.a., so there has to be a big deficit in real world tems that I would understand. Another reason why I'm beginning to reach for my bargepole with these shares.

A high divi is all very well, but if it's being paid on the back of a weak balance sheet, then it's high risk. If something goes wrong, the first thing to go will be the divi. Fairly high bank debt with little asset backing also worries me, so this one gets a thumbs down from me I'm afraid.

OK, that's it for today. Apologies for this being so late, will try harder tomorrow, just been so busy today that, well you know what it's like sometimes.

Regards, Paul.


  1. N Brown Group's rise today might be related to IC recommending it a buy today.

  2. Paul,

    Don't worry if your report is a bit late. Always good to read.


    Mark :0)

  3. Jeffrey - possibly, but I'd say that with N Brown having a mkt cap of £852m, IC recs probably are a drop in the ocean.

    Mark - thanks! I love writing these reports, but seem to be pulled from pillar to post during the day. Also, it was such a nice day today & my bike came back from the repair shop with new gear cables, I took it for a spin in a big circuit around Brighton on the South Downs, amazing views!

    Also, I'm properly launching www.SmallCapValue.co.uk on 1 Nov, which is a project I've been working on all year, in collaboration with an eminent UK Business School Professor. The site is not ready yet, and some content is draft, but do let me know what you think (pls don't link anywhere else, as it's not ready yet!). But it's fine for a few people here to see it & send some feedback.

  4. Love it. Minor feedback - where it should say FAQs in the top menu, it has RAQs.