Trinity Mirror is Britain biggest newspaper publisher and this has no meaning to their shareholders. The share price has falling so much that it’s a PE Ratio of less than 3 times with a market value below £200m.
Despite having a £800m worth of 250+ newspaper titles and £170m in freehold properties.
It looks like Trinity Mirror is facing challenges, but what could this be?
How is this level of valuation possible when the firm continues to make a profit?
To answer in a fruitful manner, I’m going to share some obvious and some shocking facts about Trinity Mirror.
So, are you ready?
Reason 1: Acquiring businesses to “make up” for lost Sales
When Group sales are falling 9% per year, in Like-for-Like terms, investors need to pay careful attention. It means sales are declining by £60m per year (2016’s turnover of £700m+).
That’s why management in 2014 acquired an 80% stake in Local World for £187.4m, which values Local World at £220m.
Today, the whole group is valued less than £200m.
And it also explains their pursuit to acquire Northern & Shell, the owner of the Daily Express and is bought by media tycoon Richard Desmond for £125m in 2000 and is demanding £130m.
This suggests that Trinity Mirror is misallocating capital to maintain sales, rather than focusing on making it a sustainable business.
Overall, shareholders don’t trust management with their capital to improve business fundamentals. Or, in the words of Warren Buffett, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
Instead, I think Trinity Mirror should be focusing on acquiring digital media businesses to stop declining advertising and circulation revenue.
Furthermore, I think they need to focus on quality rather than quantity. And should hire experts to write detailed op-ed pieces.
Reason 2: The continued dominance of physical over digital
Trinity Mirror still has 85% of group sales relate to physical copies. That leaves 15% of sales from digital giving it £92m.
Investors are wary and scared that a sudden drop in newspaper sales (i.e. 30% in a year) would greatly reduce the intrinsic value of newspaper titles.
Reason 3: Back into debt
With £7m in the bank and £110m in revolving credit, investors know if the latest acquisition of Northern & Shell gets made, then Trinity Mirror will see an increase in financial leverage.
Not only are you seeing sales collapsing that debt will rise, therefore putting pressure on its equity value.
Reason 4: Pension
Another growing problem is Trinity Mirror huge pension deficit.
The size of this deficit is forcing their hands to increase the annual contribution by £8m to £44m.
And this will be seen as another expense to dampen profitability.
Reason 5: Net Cash Profit to trend lower
Since net cash flow peaked at £230m back in 2007, the years that followed haven’t been kind.
The average net cash flow between 2008 and 2016 is roughly £60m.
With the continuous fall in sales, Trinity Mirror may see a step-down in net cash flow as interim results showed cash profit fell 60% to below £30m.
Double-digit decline from advertising
Unnecessary purchase of other failing newspaper titles
Extra pension contribution
Falling net cash flow
Investors have to balance £800m worth of intangible assets and £170m (or more) of freehold properties (the real value) vs. Total Liabilities of £800m and rising.
Faced with the above prospects, I can see why the shares are under pressure.
Share Price Forecast and Risk vs. Reward
A market capitalisation of £200m looks expensive.
To balance risk: reward at 50:50, investors should look for a valuation of £100m.
For me, I would speculate if the share price collapses because Trinity Mirror is facing this problem:
“How do I stop sales from collapsing?”
Their answer is to buy other media publications, who are seeing falling sales and profits.
And at the rate that sales are falling, any acquisition would be meaningless in two to three years’ time because the business is shrinking.
Instead, they should concentrate on optimising their digital platforms and partner up with writers who will add value to the business.
If Trinity Mirror continues their same old strategy, then avoid this stock in the medium and long-term.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.