Elite Client Idea #10

Reach plc (LSE Ticker: RCH; Price when published: £0.76)

Reach (‘company’) is a UK newspaper and magazine publisher, which owns 130 brands and serves 25% of UK households. It owns prominent national brands such as Daily Mirror, Daily Express, Daily Star, etc. It generates revenues via print (75%) and digital (25%) segments.

The industry suffers from a secular decline in the print business, which it is attempting to offset with digital segment growth – where success is not assured. Currently the industry is exposed to increased newsprint costs and reduced advertiser demand.

The company has specific issues with ongoing lawsuits from the phone hacking scandal in 2011; and legacy pension liabilities.

In the six months to June 2022, the company reported revenue declines of 4% in the print segment, partially offset by growth in digital. Normal operating profit fell about 13%.

It reported TTM revenues of £610.9m (FY21: £615.8m), ebitda of £150.7m (FY21: £152.2m), and net profits of £62.9m (FY21: £2.9m). Operating cash flows (after pension payments) averaged £60-£65m in the recent past, and TTM operating cash flows exceeded £100m.

The balance sheet is clean with net cash of £44m and net assets of £647m (excluding goodwill but including publishing rights of £819m) after impairment charges. The company has access to drawdown facilities of £120m.

The market is currently valuing the equity at less than £250m i.e., ~4x operating cash flows and <40% of net assets.

The publishing rights are assumed to have indefinite lives but discounted at a reasonable 10.8% after-tax rate with conservative growth assumptions of 1.1% over the next decade, and 0% thereafter. Discount rates have to increase 550 bps to impair it.

The net pension liability was a matter of concern but is currently recognized at £91m (£2.15b of gross liabilities offset by assets). Therefore, this is very sensitive to changes in interest rates – and is expected to reduce materially with the current rising rate environment.

Management’s best estimate for lawsuit obligations is ~£41m – though negative surprises can’t be ruled out.

They are also committed to steady and growing dividends – last amounting to £22m and yielding 9% plus another 2% including recent buybacks.

Furthermore, the Chairman purchased stock on the open market at £1.22 in May after the stock was dropped from the FTSE 250 and 350 indices.

Though this company operates in a declining industry, the current price appears to offer a substantial margin of safety and seems to us an attractive purchase.