I have a long position in Trinity Mirror. I started buying at 38p and continued to hoover them up until they hit 26p. A lot of hoovering went on. TNI is about the best value stock I’ve seen for a long time. I’m long the shares for the following reasons:
- Superb cash generation. TNI generated £94m in operating cash in 2011. During its half year to July 2012, it generated a further £57m. This compares to a market cap of £107m.
- Net debt has been reduced by £197m since January 2009, to £181m in July 2012. At that rate the group will be debt free by 2014/15.
- Bid speculation cropped up a few months back and I suspect that hasn’t gone away.
- It’s ridiculously cheap. The shares trade on a consensus 2013 P/E multiple of 1.7x and price/cash flow multiple of 1.5x. This year’s free cash flow yield is likely to be c. 61%.
- New management. David Grigson took over as Chairman in May. He has form.
Cash, cash and more cash
Despite TNI’s revenue having fallen by £225m (23%) during 2007-11, TNI chucks off cash by the bucket load. Since January 2008, the group has generated £461m of operating cash. That’s 4.3x its current market cap of £107m. By way of comparison, during the same period, the FTSE 250 company, MITIE (MTO), has generated marginally less in operating cash. However MITIE has a market cap of £1bn.
Where the concern lies for TNI is in its gearing, pension deficit and the outlook for newspapers.
At the end of 2008, TNI had £378m in net debt; equivalent to 3x EBITDA. Net debt is now £181m, as at the end of June 2012; equivalent to 1.3x EBITDA. Even accounting for a further decline in revenue going forward, TNI is likely to be debt free by 2014-15. As I expect newspapers to still be around for at least another decade (although circulations may have more than halved), the group is likely to be capable of generating c. £50m in free cash flow pa until 2022. After discounting, I reckon that’s worth more than its £106m market cap. Probably at least four times as much. It’s worth bearing in mind that when debt free, it will also be free of its net interest cost. In 2011, net interest alone was equivalent to 5p/shr. At today’s price that would be equivalent to a 12% dividend yield.
The group does have a sizeable pension deficit of £210m (down from £230m in Dec 2011). However, TNI has structured a deal with the pension trustees to limit overpayments into the pension fund at £10m pa over the next three years. Prior to this, the group had paid an average of c. £38m pa into the pension fund. This will help to allow the debt to decline. Moreover, the group also retains land and property assets on its balance sheet, valued at £177m. There may be an opportunity to transfer these assets to the pension to help offset the pension deficit.
New management and the outlook for newspapers
David Grigson took over as Chairman in May 2012. He has previous in that he helped to steer Reuters back on course, which culminated in its merger with Thomson in 2008. He was quick to transition the former CEO, Sly Bailey, out of the picture and is currently looking for a new CEO.
I fully expect newspaper circulations to more than halve over the next decade and margins to decline. But even so, I reckon at 42p/shr, TNI still appears to present incredible value.
So for the reasons above, I may add to my long.
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|TNI 2013 consensus valuation|
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