The Guide to Investing in Stocks and Shares

Shareworld - City Confidential - April 2010

City Confidential - A Shareworld Contributor

April 2010

MECOM (MEC) – 192p

 

Recommendation – BUY 

Mecom is a European media group with operations in the Netherlands, Denmark, Poland and Norway.  Although historically the focus of the operations has been on regional newspapers in these countries, the group is now looking to move away from traditional print media as it expands its digital offering as well as providing more content on-line.  The group has endured a difficult time as its rapid expansion led to large levels of borrowings, but serious management action has been taken to reduce debt levels and further falls in debt are expected going forward.  The group has established a number of operational and financial targets for the next three years and if these are achieved then there is significant scope for the shares to recover.

Mecom was founded in 2000 by the highly experienced David Montgomery, the current chief executive, who is probably best-known as the former CEO of The Mirror Group.  Mecom joined AIM in 2005 through a placing of shares at 50p.  From its early days as an investment vehicle, the group has now expanded so that it is now a European media group owning over 300 printed titles and more than 200 websites in its four countries of operation.       

ACTIVITIES 

Mecom has operations in the Netherlands, Denmark, Norway and Poland, operating websites, mobile sites and printing plants, printing both Group and third-party publications.     

The Dutch division comprises Limburg Media Group and Wegener, of which Mecom owns 86%.  Wegener is the largest publisher of regional daily newspapers and free door-to-door newspapers in the Netherlands. It is hoped that these two businesses will merge in the current year.   Operating under the name Berlingske Media, the Danish division is the largest publisher of national and regional daily newspapers and free door-to-door newspapers in Denmark.  Edda Media is the third largest newspaper publisher in Norway with very strong market positions in the regional markets in which it publishes.  The Polish division comprises the Media Regionalne regional newspaper and content business, and 51% owned Presspublica.  Media Regionalne is the second-largest regional daily newspaper publisher in Poland, and Presspublica is the owner of Rzeczpospolita, a much respected title.    

There have never been more possibilities for media companies to develop new products across new technologies and on new platforms for the global audience they have served for centuries.  The aim is to use Mecom Group’s vast readership base to create a modern content and consumer business which is not reliant on printed products.   Mecom currently has 32m unique users of its on-line content and they expect this to rise dramatically to 58m in 2012.  Importantly, there is a global trend that media companies will, in the future, charge for content: Mecom is very well positioned to benefit from this trend.   

FINANCIAL 

The severe downturn in consumer advertising took its toll on the 2009 results, although the group remained profitable helped by a successful cost cutting programme.  The group also took action to strengthen its balance sheet, making a series of disposals, raising €156m through a rights issue and renegotiating its banking facilities.  

In 2009, group revenue on continuing operations, at constant currency, declined by 12% to €1.41bn (2008: €1.59bn), mainly due to advertising revenue falling by 18% compared with the previous year.  Although the group reduced its costs at constant currency by 10%, pre-tax profits before exceptional items fell to €23.3m (2008: €66.4m).  Earnings per share on the same basis fell to €0.07 (2008: €2.60) with the large decline being due to a substantial increase in the number of shares in issue following the 6 for 1 rights issue last summer.  Net debt at the year end had fallen to €373.4m (2008: €682.5m), helped by the divestment of all the German operations, together with the operations in north western Norway and the 37% stake in a Dutch newspaper business.

OUTLOOK 

Mecom demonstrated its resilience last year by maintaining profitability and a successful cost-cutting programme, together with the debt reduction measures, have left the group in excellent shape to move forward.  The group expects an improvement in profitability in the current financial year, even without any significant recovery in the print advertising markets.  

The group continues to invest in digital development with a range of products that will drive revenues in the economic recovery.  Having said that, the traditional view that printed newspaper readership is falling is not true - Mecom has maintained readership levels by launching new titles as well as by re-launching and enhancing existing ones.  There is also increasing demand to view content on-line, especially with younger readers.    

These moves should allow margins to increase, whilst it is also the group’s plan to continue to reduce its debt.  The final completion of the major investment in printing facilities in the Netherlands together with the end of the restructuring programme will undoubtedly help cash flow and debt levels are expected to fall going forward.  

Although no dividend is likely before 2012, based on our forecasts the shares appear materially undervalued compared with similar stocks in the sector and we believe that they are a buy.                 

   

Share Price – 192p              Market Capitalisation - £211m

12 Month Adjusted Price Range – 200p – 82p    Next Results Due - August

* - continuing operations at constant currency  ** - adjusted  *** - assuming €1/£0.9 

FT Sector: Media

Address: 5th Floor, 70 Jermyn Street, London SW1Y 6NY

Telephone: 0207 925 7200  

Website: www.mecom.co.uk